SMEs are a key part of the UK's economic landscape, racking up an annual turnover of £1.8 trillion in 2016 (1) and set to contribute more than £217bn to the economy by 2020 (2). But, while an element of risk-taking is essential for some of these small businesses, many are taking chances with their insurance that could prove catastrophic.
The FCA's Thematic Review into the handling of insurance claims for SMEs found that as much as 40% of them could be underinsured, potentially putting their business on the line in the event of a loss. A few may have been underinsured intentionally to save money but, given the consequences of underinsurance, we believe that most do so unwittingly.
Determining sums insured isn't easy, especially for someone who may be focusing on growing their own business. There can be confusion between the market value of a property and its rebuild value and, without any prior experience, few business owners appreciate how long their business might be affected in the event of a loss.
Removing the average clause can help and this is a step taken by a few insurers, including Allianz who were the first in January 2016. As part of this exercise, and in keeping with the Insurance Act, we also emphasised the need for a fair presentation of risk when disclosing information at inception, renewal or variation.
But, while removal of the average clause improves transparency, giving the SME access to the full sum insured in the event of a claim, it's only a partial solution to the issue of underinsurance. With a shortfall in the amount needed to cover the loss, an underinsured SME could still struggle to get back on its feet.
Subsequently, we have now introduced a further initiative to address underinsurance among SMEs. By modelling data such as building details and claims information, we can identify SME customers that are potentially underinsured. This information is then shared with these customers' brokers, allowing them to take any remedial action that may be required.
Interestingly, although there are variations across different areas and sectors, this data also supports the FCA finding that around 40% SMEs could be underinsured.
With the SME sector key to the UK economy, the insurance industry must do everything it can to support these businesses. By cutting through the confusion and insurance jargon, and creating greater transparency, we can help to tackle the issue of underinsurance and ensure that no business fails because it unwittingly took out the inadequate cover.
David Martin, director of SME and corporate partnerships, Allianz