Businesses are generally said to have four options when it comes to dealing with risk: avoid, reduce, transfer, or accept.

Increasingly, they are opting for the last.

Indeed, according to the website money.co.uk, a growing (and worrying) number of small-to-medium enterprises (SMEs) are failing to insure any part of their operations.

In 2022, 44% didn’t have coverage, up from 40% in 2021.

The reasons they give for their remissness include: they believe their outfit is too small to warrant cover (47%), they work from home (42%), customers aren’t received at the premises (34%), and there is too little of value to insure (33%).

A similar number of businesses are leaving themselves – sometimes intentionally, oftentimes not – underinsured. Almost 40% of SMEs are believed to find themselves in this situation.

Allianz, an insurer, puts this down to the cost-of-living crisis, with energy bills, supply chain problems and tardily settled and unpaid invoices adding to small companies’ woes.

They note that as a result of a squeeze to bottom lines, a fifth of the SMEs they surveyed have opted to slim down their policies over the past 12 months, leaving them undercovered in important areas.

Research by the British Insurance Brokers’ Association (BIBA) confirms these findings.

Its 2023 Manifesto suggests that 51% of British businesses have given up at least one insurance recently. One in five has kept its insurance but reduced its level of coverage.

Most surprisingly, the survey found that a quarter of SMEs have forgone employer liability insurance, which is compulsory in the UK.

Those failing to find cover are liable to a hefty fine by the Health and Safety Executive (HSE).

What Does a Changing Business Landscape Mean for Business Insurance Cover?

Businesses may be increasingly adopting a more devil-may-care attitude when it comes to risk, but the case for offloading it to a third party remains solid.

Insurers pay out around £22m each day in business insurance claims, with £7.6m of that sum shelled out on business liability policies.

Insurance claims are likely to rise going forward given that the risk profile businesses face continues to diversify and expand.

A raft of new risks associated with doing business in cyberspace means that defending and insuring against cyber criminality is becoming more urgent for many companies.

In a recent poll, over a third of respondents said the threat of cyberattack worried them most, just ahead of supply chain disruptions and business continuity issues.

In this article, we take a look at some of the different types of business insurance, what they cover, and why they are important.

Employer Liability – The Compulsory Business Insurance

Of the different types of insurance available to UK-based businesses, only one is required by law: employer liability. A look at the number suggests why this type of insurance is compulsory.

The HSE’s most recent report says that British workers sustained 565,000 workplace injuries in 2021/22, leaving insurers on the hook for employer liability claims that averaged 1.8 million per day.

Employer liability pays out should a current or ex-employee win personal damages, claim compensation costs and legal fees due to an illness or injury that he has suffered as a result of working in your business.

Exceptions to this law are few.

Limited companies where the owner is the sole employee don’t need to bother with it. Nor do unincorporated family businesses in which all the employees are closely related.

For most other businesses, employer liability is a must.

The HSE imposes fines of up to £2,500 each day a business goes uninsured and levies a £1,000 fine if an EL certificate isn’t displayed or produced when inspectors visit a work site.

Premium charges or employer liability insurance depend on the number of staff in a business and the type of work they are engaged in. Naturally, the more employees a business has on its books, the greater the risk of an employee making a claim and therefore the higher the premium.

Again, a company plying its trade in a traditionally high-risk industry (think construction and the extractive industries), where accidents are common and sometimes catastrophic, will face higher premiums than a company with desk-bound staff.

UK law stipulates that a business must be insured for a minimum of £5m, but seven-figure policies are not unknown for more risk-laden businesses.

Price of Employer Liability Insurance Cover

Simply Business says 10% of its customers paid up to £33.12 a year for employer’s liability insurance between 1st April – 30th June this year.

This is equivalent to just £2.76 a month when paying for the policy in one annual payment.

Toolbox by Admiral says that a claim-free business that has been a going concern for at least five years can find cover of up to £10m for just £20.51 a year when paying for the policy in one annual payment.

However, to qualify for this price, the policy must be purchased in conjunction with public liability cover (see next section).

Public Liability – Insurance Cover for Businesses Working with the Public

Unlike employer liability, public liability insurance is optional for businesses. But in effect, if a company wants to work in certain industries or for certain clients – especially governments and local authorities – this type of insurance is a must.

Local authorities and government bodies will often require anyone working for or with them to be covered by a public liability policy to the tune of £5m or £10m.

As the name suggests, public liability covers a business should a court order it to pay out damages to a member of the public whose person or property has been damaged as a result of the business’s operations.

This type of insurance is a de facto requirement for all businesses that routinely deal with the public or work with or on their property.

Lloyds Bank suggests businesses in the following sectors are most likely to need public liability insurance:

• Building and construction.
• Electrical.
• Carpentry.
• Gardening.
• Home decoration.
• Plumbing
• Signwriting.

Price of Public Liability Insurance Cover

According to the insurer Simply Business, 10% of its customers paid up to £38.32 a year for a public liability insurance policy between April 1, 2023, and June 30 2023.

This is equivalent to £3.19 a month when paying for cover in one annual payment.

Paying monthly is usually more expensive as interest accrues.

Cyber Insurance – Cover for Businesses with an Online Presence

According to Hiscox, an insurer, UK SMEs are on average targeted by cybercriminals 65,000 times every day.

As such, it is perhaps understandable that cyber insurance bucks the general trend as far as business insurance is concerned, with companies clamouring to sign up to insure against the threat.

According to the latest UK government stats, 37% of SMEs say they have taken out some kind of insurance against cyber threats, a figure that rises to 63% for medium-sized businesses and 55% for the largest companies.

This is understandable now that businesses are migrating more of their operations online, especially to third-party clouds.

Cybercrime can take many forms – from data breaches and privacy invasions to extortions and assorted hacks.

A business should have a cyber security insurance policy if any of the following applies:

• Take credit and debit card payments.
• Hold sensitive customer data on a computer or server.
• Have a website or app.
• Have staff who regularly use email.

Business Interruption Insurance – Cover for the Unpredictable

The world’s becoming a more unpredictable place.

War, climate change, virus pandemics and even errant ship containers in the Suez Canal have all knocked supply chains sideways and put paid to the best-laid business plans recently.

Having the right amount of cover that’ll get a business back on track and allow it to weather the storm involves a calculation that involves two important variables: the sum to be insured and the indemnity period.

Arriving at these two figures can be tricky.

It is not helped by the fact that the accountancy definition of gross profit differs from the insurer’s definition. This often means that businesses leave themselves uninsured because they have failed to adjust for price increases and asset price inflation.

If an insurer believes that a policyholder has deliberately understated their risk exposure, the policy can be voided.

In the worst-case scenario, this may cause the company to break the law if it grossly misrepresents the value of its assets.

Under the Insurance Act of 2015, a business continuity policyholder must always fairly present their risks.

The example below gives an idea of how a company might calculate its gross profit on an insurance policy.

How to Calculate the Sum to be Insured

The above example assumes the company’s gross profit grows by 5% annually; that is, it adds £15,000 (2.5%) over the first six months of the year, then £30,750 (5%) for the insurance year and a further £32,288 (5%) for the 12-month indemnity period.

This gives a total projected gross profit of 678,038, the sum that the business should insure if it is to cover itself adequately.

Indemnity Period: Points to Consider

• The indemnity period should be long enough to put the adversely affected business back to where it was before disaster struck.
• It is easy to underestimate the time it takes to get a business back on its feet – a 12-month indemnity may seem plenty, but it can often take much longer to get back to business.
• A recent analysis of large claims (greater than £100,000) settled by the insurer Aviva between 2018 and 2021 found that a claim had an average lifecycle of 385 days. However, SMEs said, on average, it would take a little under six months for their business to get back on its feet following a disaster such as a fire or flood. This discrepancy is significant and one that could see SMEs face a shortfall in cover in the event of a major disruption.
• If an architect or surveyor is required to redesign and rebuild damaged buildings, this often involves a lengthy tendering process and local authority requirements and planning permission sometimes need to be had before the re-building can start.
• If the premises are old or listed, this becomes more of a concern.
• If new machinery is needed, lead times and delivery times need to be considered, especially if it is a specialist or custom-built apparatus.

Underinsurance – How to Avoid Losses with Business Insurance Cover

Failing to account for either of the above variables properly – indemnity period and insured value – can leave a business underinsured and out of pocket.

The Chartered Institute of Loss Adjusters estimates that underinsurance is a feature of over 40% of all insurance claims.

A recent piece of research by Aviva, an insurer, found that 28% of SMEs hadn’t reviewed their valuations for insurance purposes in the last year.

However, the same research reports that 91% of businesses said they were “confident they have the right cover in place”.

This discrepancy is worrying but not unsurprising.  It is not always easy to value assets and arrive at an appropriate figure, especially in the context of the UK’s recent runaway inflation.

“The rapid increase in inflation this year means that the value of businesses’ sums insured may need to be updated to ensure they have cover suited to their needs,” notes the Aviva report.

Prices rose by an average of 8.5% over the past 12 months. Had we used that figure in the calculation above, the gross profit needing indemnification would have risen to £736,354.

This would have left the company underinsured to the tune of £58,316.

In this case, the insurer is likely to apply the average clause; that is, had the business claimed for the inflation-adjusted amount, its payout would have been £624,340, not the £678,038 it had sought to insure.

As this example demonstrates, perhaps the biggest risk a business may face is not fire or flood, but its inability to price its insurables properly.

So, if you’re still asking yourself if you need business insurance, you’re better off questioning which and how much business insurance cover is right for your company.

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