In the UK, it’s estimated that a staggering 80% of SMEs are underinsured. With this in mind, James Barwell – Insurance Director at Bionic – has prepared a guide on how SMEs can make sure they are fully covered.
“Estimating the value of business assets and understanding policies can be exceedingly difficult and is something many small business owners try to navigate alone. But unfortunately when estimates are inaccurate it could lead to an insurance package that doesn’t cover all business assets. This is called underinsurance and it can lead SMEs being out of pocket if they make a claim or a claim is brought against them.
Potential consequences of being underinsured include, not receiving adequate compensation when a claim is made, business owners having to pay the rest of an insurance claim out of their pocket and in some cases even an insurance policy being made void for breach of policy terms – which could potentially have legal and financial repercussions.”
What are some of the most common reasons underinsurance can catch business owners off guard?
- Incorrect estimates – “estimating the amount of cover a business needs without a thorough assessment can easily lead to underinsurance. If a business owner is concerned I recommend hiring a professional valuator to ensure that insurance coverage matches the business’s actual needs.”
- Not factoring in inflation – “Not factoring in inflation can mean the amount a business owner was insured for might not cover the full cost of replacing or repairing an asset today.”
- Selecting the wrong cover – “Selecting the wrong level of insurance — potentially because it’s a cost-saving option — can cost a business more in the long run if it doesn’t fully meet business needs. An insurance broker can help small businesses find the right level of insurance cover.”
How can a business calculate if they are underinsured?
- Calculate the value of your business and assets – “The idea is to note down every part of a business that adds value – from cash registers to the stock in the warehouse and even intangible assets – like intellectual property. It’s best to do this every few years to get a fresh view of your business’s value.”
- Review business value against current policy – “If you find there’s a mismatch it’s the right time to contact your insurer and broker to adjust your existing policies or compare business insurance to make sure you’re properly covered. Policies come with limits and you might find that you need a more comprehensive policy as your business grows.”
What are some top tips to avoid underinsurance?
- Keep stock inventory up to date – “Stock value can change a lot over time. Regularly checking and updating inventory records helps make sure that insurance cover reflects the current value of stock. As businesses grow, naturally, so do assets. New equipment, technology or even simple things like your office furniture can significantly increase the total value of business assets. Regularly updating your policy to include these new purchases ensures that they are covered.”
- Access the indemnity period of your policy – “This refers to the timeframe within which an insurance company will cover business losses following a claim. It’s important that business owners carefully assess this period to ensure it aligns with the realistic timeframe their business would need to recover from a major loss or disruption.”
- Invest in an industry-specific policy – “Specifically tailored policies offer coverage that’s more in line with a particular business’s unique risks and requirements. For example, tradies will need cover for tools and machinery as well as cover for apprentices on site. On the other hand, a takeaway will need a takeaway insurance package, that covers everything from the risks of food poisoning to fires caused by fat fryers.”
What are some of the most common business areas at risk of underinsurance?
- Business interruption – “Business interruption insurance aims to protect a business when certain events mean it’s not able to operate normally – this could include a natural disaster or a global pandemic. If a business is underinsured for this cover it could struggle to cover ongoing expenses without the usual income.”
- Equipment – “Equipment is the backbone of any business operation. If underinsured, it might mean that a business can’t replace or repair vital equipment quickly or in full after a loss, potentially leaving a business struggling along with a patchwork of temporary solutions.”
- Cyber – “As cyber threats evolve, the cover a business initially set up might no longer fully protect against the risk of potential damages from data breaches or ransomware attacks. In fact, over 560,000 new cyber threats are discovered daily, and 81% of UK businesses that suffer from an attack are SMEs. Underestimating the financial impact of an event of this magnitude can leave a business exposed to costs for recovery, legal fees and even more.”