Paying a premium?

Introduction

There were 5.6 million private sector businesses in the UK at the start of 2021, of which 5.5 million have between 0 and 249 employees. Small businesses, micro businesses and the self-employed play a crucial role in the UK economy and insurance is an integral part of business resilience. An uncertain trading environment continues to threaten small firms’ long-term sustainability, with the Coronavirus pandemic, the end of the transition period and the cost-of-living crisis all contributing to the financial squeeze for small businesses. In addition, the lack of availability of affordable and adequate insurance cover has been raised by small businesses as a significant barrier to their growth and innovation.

Many small businesses are reporting an increase in premiums, including on compulsory types of insurance cover, meaning that many firms have no option but to swallow the costs. Insurance is often missed from the cost of doing business debate, but it shouldn’t be. Alongside increasing insurance premiums, small firms continue to deal with surging input price inflation, rising energy and fuel costs, the start of emergency post-COVID-19 debt repayments, tax increases, and labour shortages.

Small and micro businesses act more like individual consumers in the way that they buy insurance and the knowledge they have of insurance products and law. It is therefore unsurprising that many find it difficult to interpret policies as they don’t have in-house insurance expertise. A lack of clear information and complex language in policies are detrimental to their ability to assess the value of the cover that they are getting for their business. It is evident that a collaborative approach is needed between the insurance industry and small business representative bodies to improve understanding through the use of plain and intelligible language, to help small firms receive quality products that are value for money.

Resilience must be built through planning for the future by learning the lessons from the COVID-19 pandemic. During the pandemic there was significant uncertainty for small firms about whether business interruption insurance would pay out, and it took the decision of the Supreme Court to determine that it should. It is critical for improvements to be made to avoid this in the future. The Government must work together with FCA as the regulator and the insurance industry itself to reduce the likelihood of businesses experiencing such uncertainty again.

For economic recovery to continue, small businesses need support to access affordable insurance. Any insurance requirements, whether in public sector contracts set out by Government or Local Authorities or as set by sector-specific regulators or professional bodies, must be proportionate. A one-size-fits-all approach risks small businesses overpaying for insurance in circumstances where many are already struggling, or policies being inappropriate with a possible impact on future claims. The risks that small businesses face continue to change, and whether it’s terrorism, cybercrime or climate change, there is more work to be done to support small business understanding and awareness of the associated risks and effective resilience measures.

We propose that governments across the UK raise awareness through key stakeholder bodies on cyber risk and signpost to relevant information, and that the insurance industry should play a role in raising awareness and helping small businesses to reach their net zero goals.

Key Findings

[Image Text] 11% of small businesses report making an insurance claim in the last 12 months

[Image Text] 13% of small businesses say that their cover has been reduced (e.g flood or other type of event cover withdrawn)

[Image text] 16% of small business owners say that their cover has been restricted (e.g. higher excess or a lower indemnity limit)

[Image Text] 16% of small businesses say their premiums have increased by more than 25 per cent in the last 12 months

[Image Text] 24% of small business owners report that the premium increases have led them to asses and/or reduce their expenditure

[Image Text] 30% of small businesses say that they find it difficult to understand what their policy offers in relation to each of their business risks/activities

[Image Text] 37% say that they have experienced at least one issue with professional indemnity insurance.

[Image Text] 38% of small businesses that have cyber insurance do not know what their policy includes

[Image Text] 69% of small businesses purchase their policy through a broker

Recommendations

Securing adequate cover

UK Government should work together with the insurance industry to agree the conditions under which a Government announcement or action would trigger a joint response, with clear conditions and expectations agreed taking into account any impact on small businesses. Building on the work of Pandemic Re, planning ahead on any measures and conditions under which an intervention would take place would help to mitigate the risk of uncertainty for businesses and facilitate a unified and swift response. A response for an unprecedented event should continue to be explored and must be supported by the development of a clear framework for a publicprivate partnership, identifying exactly how such a scheme would be triggered, for example, where market-wide restrictions or reductions of cover threaten business sustainability.

The Financial Conduct Authority (FCA) should be explicitly required to consider intervening in a market if it becomes clear that there is a segment/sector of businesses that are unable to obtain insurance. Establishing a mechanism to consider intervening in a market would help to identify and act on issues as early as possible, as well as helping to reduce the impact on businesses if there is a lack of suitable cover available in the market. If the decision is made not to intervene, then for the purpose of transparency and accountability a statement should be provided outlining the reasons why.

Understanding of insurance policies

The insurance industry should work together with small businesses through relevant representative bodies to help to improve the understanding of insurance products. This could encompass improving the clarity of policy wording and including a clear breakdown in the policy of the assets/risks covered, to help display information in a comprehensible manner. A significant proportion of small businesses find it difficult to understand what their policy offers in relation to their business risks/activities, regardless of whether they have used a broker to purchase or renew their insurance. FCA rules already state that a customer must be given appropriate information in a comprehensible form about their insurance policy, so they are able to make an informed decision. A collaborative approach between the insurance industry and other representative bodies would help to facilitate a better understanding of small businesses and offer solutions, for example through guidance or codes of practice for the insurance industry on small businesses’ needs.

Business interruption insurance

UK Government should work together with insurers and the FCA as the regulator to agree specific conditions for forms of Government support that should not be taken into account when calculating business interruption insurance (BII) claims. During the pandemic, a number of insurers had deducted Government-backed loans and grants from BII pay-outs, leading to a period of uncertainty for small businesses. While there is understanding across the insurance industry on the forms of support that should not be taken into account normally, during unprecedented events and particularly in situations where grants could not have been anticipated there should be clear guidance issued to avoid inconsistency. This could be mitigated in the future by agreeing to conditions under which support should not be taken into account by insurers when calculating claims.

Professional indemnity insurance

The FCA should launch a market study into PII and consult on the proposed remedies. This could help identify problems and remedies in relevant sectors. The market study could explore the reasons for market hardening, whether these reasons impact some businesses more than others, and examine the value of offering PII on a losses occurring rather than claims made basis. Our research shows that those small businesses that buy PII because it is a requirement are almost twice as likely to report overly expensive premiums than those that buy it for other reasons. This highlights the need for an assessment of the market in more detail, including whether there is a disproportionate size penalty when it hardens.

The FCA should extend its general insurance value measures reporting requirements to PII, and consider extending them to a wider selection of commercial insurance products bought by small businesses. In addition to this, reporting requirements should be expanded to include information about the nature of the claims, so that insurers, brokers and their customers can better assess the state of the market. Current reporting requirements apply to the consumer home and motor insurance markets, and some associated products. We believe that there would be value in extending reporting requirements to commercial products as well as providing more detailed information on claims. While this will not resolve hard market issues on a broader scale, this measure might help prevent blanket exclusions and prevent insurers pulling out of whole markets.

UK Government should convene discussion with relevant sector-specific regulators and professional associations, to ensure that PII requirements that are imposed as a condition of being able to practise are assessed so they do not disadvantage small businesses. Mandatory minimum levels of PII cover can act as a barrier to entry for small firms, and PII premiums will often make up a bigger proportion of their turnover than for larger firms. Minimum requirements set by sectoral regulators should be stress-tested on a regular basis to assess their impact on small businesses and their ability to compete.

UK Government should use the Procurement Bill to remove barriers for SMEs in accessing public procurement opportunities. This should include commitments not to impose unlimited liability for public contracts, to share risk reasonably, and to ensure that both PII and public liability insurance requirements in public contracts are proportionate to the size of the contract. With the majority of small businesses bidding for lower value contracts, proportionality to the size of the award is key. Small businesses should not be discouraged or disadvantaged by requirements set out in public sector contracts.

UK Government should take a shared risk approach with suppliers in relation to public contracts, and ensure that requirements are not simply passed down the supply chain. This would also help smaller firms innovate in the public sector, by giving them more freedom and lower levels of risk to find new solutions to old problems. Currently, small businesses are sometimes prevented from taking on additional commercial activity indirectly where requirements are passed down regardless of the fraction of the work being undertaken by the small business in question.

Terrorism insurance

UK Government should assess whether to extend the Pool Re cover to include intangible assets in the event of a terrorist cyber-attack. With the increasing number of small businesses increasing their online presence during the pandemic, an extension to the PoolRe cyber trigger to cover intangible as well as tangible assets in the event of a terror-driven cyber-attack should be considered. It could help to protect small businesses, bring the scheme in line with the cyber risks that businesses face, and improve business engagement and awareness. This may require collaboration with insurers which provide existing cyber policies to understand better how such a risk could be incorporated into policies.blanket exclusions and prevent insurers pulling out of whole markets.

Trade credit insurance

The insurance industry should continue to develop flexible trade credit insurance options for small businesses, and work together with a range of stakeholders including FSB to help raise awareness of and access to such options. Only 2% of small businesses report buying trade credit insurance. While there are some options in the market for small businesses to cover lower invoice amounts, for example pay-per-invoice policies, more focus on simplifying and developing more flexible options as well as raising awareness would improve access to trade credit insurance for small businesses.

Cyber insurance

Governments across the UK should raise awareness of the cybercrime risks to small businesses through campaigns similar to Cyber Aware, and help signpost to relevant information through support services like Business Wales. The 2022 National Cyber Security Strategy sets out the government’s plan to mitigate the risk of cyber-attacks on individuals and businesses. For small businesses, the strategy recognises the need for tailored and targeted guidance and tools to be made available in order to improve understanding and awareness of cyber security. While the tools and guidance are available, our data shows that very few small businesses access this information. Some of the reasons cited for this are lack of awareness of the available information and understanding of cyber risk.

Net zero

The insurance industry should have a role in raising awareness and incentivising businesses to make sustainable choices. For example, lower premiums or excesses could be deployed to encourage businesses to act on climate change, and information could be provided to small businesses on the steps they can take to reduce their climate risk. This would be in line with the model used for cyber insurance where insurers reduce premiums for good cyber hygiene. This would help to reduce the cost for small businesses in transitioning to net zero, thereby tackling some of the financial barriers that small businesses experience in relation to making more sustainable choices and aiding their future resilience.

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