"At a time of need, insurance can be the difference between make and break."
Harriet Conway, SME customer experience manager, Allianz.
Underinsurance is a major issue for SMEs, with studies indicating that up to 70% of business premises may not be insured for their total value. Of course, not all of these businesses will need to make a claim; but for those who do, the shortfall due to underinsurance will have to be made up by the business owners themselves, and could reach into the hundreds of thousands of pounds. This could be enough to put any company out of business.
Underinsurance is when you take out insufficient insurance cover to protect your business needs. The SME market is varied and diverse, with each business being totally unique, so there is no 'one size fits all' approach when it comes to insuring your business. Your premium will depend on your business assets, property, stock, as well as the level of cover you choose. So with so many factors, it's easy to see why business owners can sometimes misjudge their insurance needs.
Property and buildings insurance
Property is one of the most likely areas where businesses are underinsured. In today's tough economy it can be a struggle for SMEs just to survive, so ways to cut costs are sought at every opportunity and, unfortunately, getting proper valuations and risk assessments have become less of a priority.
One of the traps that many business owners fall into is to use the current market value of the property for insurance purposes; rather than the overall cost to rebuild the property. The rebuild cost is dependent on a number of factors, including raw material costs, labour, fees and regulation compliance. In the past decade, building costs have increased due to regulations for safety and energy performance, and costs can also fluctuate from year to year, depending on the prices of raw materials. So it really is important to have a professional valuation carried out annually.
Here are just some of the variables that should be taken into account when insuring your property:
- The age of the building, and whether it contains any hazardous materials such as asbestos.
- Building location and site accessibility. Is your building in an urban or rural situ, is it located within close proximity to water, or near a nature conservation area?
- The height of the building
- Is it a listed building?
- Quality of the ground/geological conditions
- Type of construction materials required and availability
- Cost and availability of labour
- Professional fees including any consultancy fees or local planning permission
- Compliance with building regulations, landlord responsibilities etc.
Insurance of stock
It is important to update your insurance policy if the level of stock held by your business changes drastically. For example, many new businesses just starting out will have a small, limited stock which increases as the business grows. Imagine that your entire business stock was stolen and you had to make a claim. You can only claim based on the figures you provide to the insurance company; so that's why it's vital to inform your insurer regarding any major changes. Of course, no business owner ever wants to fall victim to theft, but being underinsured can leave you vulnerable to losing almost everything.
Business Interruption (BI) insurance is another problem area for underinsurance, as there are two ways in which business owners can miscalculate the levels of insurance required:
- The level of insurable gross profit is often misjudged as it differs from an accountant's definition of "gross profit." For insurance purposes, "gross profit" is a complex calculation that takes into account production levels, turnover, and uninsured business expenses such as staff wages and heating/lighting.
- Indemnity periods are another common area for underinsurance, as many business owners simply take out a 12-month maximum indemnity period for their business, believing this to be adequate. In reality, an 18 or 24 month indemnity period would be more appropriate. Imagine there was a fire at your premises, and everything burned to the ground. Your buildings insurance would cover the rebuild of the property itself, but having only a 12-month indemnity period for business interruption would mean you would have to be back up and running at previous output levels within the year.
Machinery & Plant
If your business relies on bespoke manufacturing equipment, or highly specialised plant and machinery, then this will also be a huge consideration when insuring your business. If an important item of machinery is lost, broken or damaged, then the time to replace or repair the item can be significant, resulting in loss of output and loss of custom for your business. The costs can also vary depending on overseas markets, shipping costs, set-up time etc. Plant and machinery can often be underinsured if business owners and insurance brokers do not fully understand the complexities of insuring and replacing such equipment.
How do I know if I'm underinsured?
In a nutshell, you may be underinsured if you have not informed your broker of a significant change to your business.
Chris Knight, of the Insurance Knight Consultancy, says:
"It's important to regularly review your insurance to make sure you have the necessary cover in place for your business."
He also points out some of the main issues when it comes to underinsurance:
- Customers do not know the replacement value of items and underestimate this.
- They underestimate the value of the stock they hold.
- They forget to inform their broker when they make new/additional purchases to plant & business equipment.
- If they have Business Interruption cover they opt for the lowest indemnity period (12 months) but often the cost to extend this to 24 months is very low, and they don't check the sum insured to ensure this is in line with their growing Gross Revenue or profits.
- They underestimate the cost of a Public Liability claim (new Government action has increased the likely level of payments to claimants, so £1m may now not be enough even for the lowest risk activities).
Your insurance broker's advice is invaluable when it comes to selecting the correct level of cover for your business. Recent changes to the law mean they are now obliged to take reasonable steps to ensure customers fully understand the meaning of key terms, prior to selecting an insurance policy. A good broker will be able to explain how insurable gross profit is calculated and point out any areas where you may have underestimated the value of your business.
If you think your business may be underinsured, or if you wish to discuss any aspect of your business insurance, please contact us today
Allianz: Expertise from A-Z/029-030_POST_OCTOBER_2016.pdf