Navigating the confusing world of business insurance

  • 21 Apr 2021

The events of the past year have highlighted just how volatile the world can be, underlining the need for small firms to have effective insurance policies in place. But navigating the myriad options can be daunting, 
as Peter Crush explains.

No one ever said running a small business was easy. Many fail in their first year, and it’s thought that around half won’t make it past their fifth birthday. This means it’s even more important that small business owners take the simple steps that could prevent this – including taking out appropriate insurance for their business.

 

Correct insurance is literally an SME-saver. With almost 10,000 cyber-attacks on small firms every day, according to FSB, cyber-insurance 
is now an essential part of the insurance mix. Redemption costs are usually fully covered, as are any costs arising from litigation customers may bring against SMEs for data breaches. Some providers will even throw in the services of a PR agency to deal with any reputational management issues such an attack creates. FSB members have access to cyber-insurance as part of their membership; see fsb.org.uk/benefits for more information. 

The protection doesn’t stop there. Even prior to Covid-19, SMEs were suffering the scourge of late payments – but research by invoice insurance provider Nimbla estimates the pandemic is magnifying this problem. It polled 2,000 SMEs in October and found that 38 per cent were still waiting to be paid an average of £59,013 for work they completed before the first lockdown. Without credit/invoice insurance, a fifth fear they won’t be paid any time soon, with three in five (60 per cent) worrying they won’t be paid at all due to insolvencies. 

These are just two elements of the burgeoning SME insurance market; 
more well-known insurance types include public liability insurance (providing cover against claims made by a member of the public who has been injured or had their property damaged); employers’ liability insurance (providing cover against claims made by employees suffering an injury or illness during the course of their employment); professional indemnity insurance; buildings insurance; and product liability insurance (covering property damage or illness caused by selling a product to a customer). 

So far, only employers’ liability insurance is a legal requirement,although growing numbers of procurement departments and professional bodies and associations now require that firms take out professional indemnity insurance to protect their organisation from any financial or reputational damage that could occur from an SME’s activity with them. Beyond this, though, insurance can be a minefield when it comes to knowing what is appropriate or necessary.

 

“Jargon in the sector makes things incredibly difficult for most SME bosses to fully understand,” says Ben Rose, chief underwriting officer at challenger business insurance provider Superscript. “Insurances tend to be overly complex, hard to navigate or difficult to add in a way SME owners feel suits them. The upshot is that many can take a calculated risk not to even bother. Given many entrepreneurs are risk-takers by nature, cover that doesn’t seem contextual to them is often ignored.”

Confusing territory 

Low engagement with insurance is borne out by data revealing SMEs are unconvinced that what is out there suits their needs. Insurer RSA finds that apart from cost of cover (the top buying factor for 61 per cent of SMEs it polled), lack of broker understanding about their business, plus scope of cover (by 58 per cent and 38 per cent of those polled respectively) were the two biggest blockers preventing them buying. 

It’s an issue Matt Pilling, founder of Suffolk-based Owl Book Binding, knows only too well. Thanks to an eclectic customer base, he’ll handle exceptionally rare books for rebinding – everything from 17th century Bibles to one of his more recent projects: a rare first edition, first impression of Ian Fleming’s debut James Bond novel Casino Royale. “Most insurance providers can’t even categorise my business properly, which isn’t a good start,” he says. 

“Currently I’m classed as being in the printing industry, but I don’t print 
a thing! Then there’s often nothing specific to what I do, so you’re forced to decide whether to take a calculated risk or not.” In the end, he opted for a ‘business from home’ policy, which covers him for damage and loss from theft, fire and explosion of up to £25,000 (he hasn’t yet had a book that exceeds the value on-site). 

The other issue is that there are now so many insurances out there that they overlap, while some SMEs might need something that is more industry-specific. For instance, separate vehicle and goods-in-transit insurance would suit those predominantly on the road, while plant and machinery insurance clearly supports those in manufacturing or factory settings. 

Specific insurance might also be needed for the particular stage a business is in – for instance, directors’ and officers’ insurance. This protects the individual officers of a firm against a wide range of personal liabilities, including health and safety breaches, breach of duty, negligence and defamation, says David Perry, co-founder of FSB Insurance Service. This might be needed if a firm is raising funds for angel investment, or management buyouts. Then there’s personal cover, such as for being unable to work due to illness – particularly useful for sole traders.

 

Unwelcome interruption 

One type of insurance that’s come into focus during the Covid-19 pandemic is business interruption insurance. Many policyholders who were forced to close their businesses completely believed they could claim on their insurance, using infectious or notifiable diseases and denial-of-access clauses. Insurers disagreed, so the Financial Conduct Authority (FCA) referred 17 policy wordings from eight different 
insurers to the High Court. 

One of the lawyers working on behalf of SMEs was Catrin Povey, solicitor at Capital Law. She says: “In September, the High Court finally gave its mixed-bag response – on the one hand agreeing that the wording of policies was vague, but not entirely on the side of SMEs either.” In January, the Supreme Court ruled in favour of policyholders in a landmark FCA business interruption insurance test case – a move welcomed by FSB. 

“All valid claims will be settled as soon as possible and in many cases the process of settling claims has begun,” says Huw Evans, Director General of the Association of British Insurers. “We recognise this has been a particularly difficult time for many small businesses and naturally regret the Covid-19 restrictions have led to disputes with some customers.”

While this is good news for small firms, this sort of spat does nothing for the insurance sector’s reputation. “It’s bad publicity for insurers, at precisely the time they should be engaging more with SMEs to raise confidence in their products,” says Ms Povey. “When SMEs are already struggling financially, the ever-expanding range of insurances out there will be a harder sell.” 

Lowering the risk

However, she believes that anyone who chooses not to cover themself is taking a very big risk. Ewan McConnell, director of precision tooling manufacturing firm Magor Designs, confesses he was very glad he had taken out personal guarantee insurance when his business – which had been trading for six decades – went into administration in December 2019.

Personal guarantee insurance protects SME owners and directors from losing their house and home if they have signed a personal guarantee-backed loan for their business and it subsequently fails. The insurance Mr McConnell had taken out meant 80 per cent of outstanding loans, totalling £72,000, were settled through his provider Purbeck Insurance Services. 

 

“Running a small business is stressful enough without shouldering all the financial risk at a personal level too,” he says. “Nothing can make up for the loss of the business and the impact this had on the people we employed. The dawning realisation that we would have to close was softened by the fact that we knew we were in part protected by the personal guarantee insurance. We can now move on personally and professionally.”

Although suspicion around insurers paying out will arguably never go away, more reassuring is research by GlobalData, which finds a third of medium-sized businesses are more likely to purchase cyber insurance 
since Covid-19. Meanwhile, data by Allianz – despite being a couple of years old – finds that 80 per cent of the SME senior decision-makers would be prepared to pay more for their insurance if they were advised that their existing cover was inadequate. 

Ultimately, how much insurance an individual business takes out is down to the owner and their risk appetite. 

Nic Redfern, finance director of Know Your Money, believes that now is a good time for owners to review just what they have in place.

“Because of their experiences this year, more business owners may weigh up whether it is worth paying the premiums for additional insurance, or whether they should focus on other types of insurance that may be more relevant and useful for their specific sector needs,” he says. 

Experts all agree on one thing: not being covered could be costly. Peter Taylor, managing partner at law firm Paris Smith, concludes:

“Now, more than ever, businesses should engage with their insurers, with the help of their professional advisers, to have a comprehensive and honest conversation about the extent and terms of the cover required.” 

 

At least that way, small firms can make informed decisions and make sure they aren’t leaving themselves overly exposed. 

FSB Insurance Service

FSB Insurance Service (FSBIS) was established in 2018, partly to help address insurance complexity. Part-owned by FSB, it was set up by members, for members, and provides insurance advice (whether you use FSB-provided insurance or not) as well as additional services such as business continuity planning, business valuation services and policy reviews. 

Longstanding FSB member and FSBIS co-founder David Perry says: “Insurance was becoming too commoditised for SMEs, at a time when they were increasingly needing better advice. SMEs naturally adapt to survive, but insurance is slower to respond. 

“Take a firm that starts off selling garden supplies but moves into making ornaments (manufacturing) and offering landscaping (professional services). It’s hard getting insurance for a shop which is also a manufacturer, which also offers off-premise services. This is when more tailored conversations are needed.”

According to Mr Perry, it’s best for SMEs to take a layer-by-layer approach. “There’s the stuff you legally need – employers’ liability, motor insurances and specific-sector ones like engineers inspection insurance. After that should come the things that suppliers insist on.

Then it’s things that are sensible – building insurance, business interruption insurance – and then there are ‘extras’ – things like whether you feel your suppliers are themselves under threat of going under, where invoice insurance might be needed. The key is dealing with the ‘what matters’, and then looking wider afield.” 

So far, 40,000 members have registered with FSBIS, gaining access 
to more than 60 different insurance providers. As well as traditional providers, there are newer, more innovative players represented – such as Nimbla and Purbeck (which supply specialist invoice and business loan insurances respectively), as well as Floodflash, which provides a parametric product in flood risk areas. FSBIS has already won the 2020 UK Broker Start Up Award and is a finalist in several Insurance Times category awards.

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