Underinsurance

Here's how you can help customers avoid these three pitfalls and ensure suitability of products and adequacy of cover

For SMEs facing squeezed margins, insurance premiums may seem like a grudge purchase – particularly in a hard market. Some products may be regarded as a discretionary overhead among those who don’t fully understand their risks or how being underinsured could prove catastrophic to their business. Yet insurance can be key to SMEs’ ongoing survival by providing a financial safety net in unforeseen circumstances, since these businesses are the least able to withstand substantial losses.

Having weathered two years of pandemic-related disruption, and now facing further economic stresses and strains, it’s more important than ever for SMEs to avoid the three pitfalls that can lead to underinsurance. This article explores each in turn and looks at how together, we can help time-pressed business owners to be confident that their policy will perform at a time of need.

Pitfall number 1: Not buying adequate cover

Ensuring a business is adequately covered involves making accurate judgements about the amount insured and the cover required. A rough estimation or out-of-date valuation of, for example, commercial property, stock, contents, plant or equipment, could mean that in the event of a claim, the actual losses exceed the maximum limit that the insurer will settle and the business will be left out of pocket. It’s important to insure plant, machinery and equipment for its current replacement value (i.e. on a new-for-old basis), to avoid a protection gap, as well as the potential for operational disruption if the equipment is business-critical. 

When it comes to property, it’s vital to insure for the rebuild cost, rather than market value, should the premises be severely damaged or destroyed. Listed or heritage buildings often have a higher reinstatement cost due to the need to adhere to traditional forms of construction and specialist materials.

While underinsurance is typically due to an innocent oversight, a small minority of policyholders may look to reduce their premium by failing to declare an accurate sum insured. This not only increases the risk of a shortfall but can also void the cover altogether. 

Pitfall number 2: Lack of awareness of specialist cover

SMEs are not always aware of the existence or relevance of specialist, non-mandatory covers, so the onus is on you to draw these peripheral risks and requirements to their attention. For example, the pandemic prompted businesses of all kinds to adapt to remote working and arms-length customer interactions, accelerating the digital shift already underway. As a result, businesses are increasingly reliant on the resilience of their IT and more vulnerable than ever to attack by cyber-criminals and fraudsters. It’s in customers’ best interests to explore their cyber exposures and consider how insurance can protect their operations, their customers’ privacy and their brand reputation against the growing threat of information security breaches.

Directors and Officers Liability can seem like a difficult conversation to introduce, since the perceived need for cover is low: many directors erroneously assume they’re protected by their company’s limited status, or that the business would automatically foot the bill for defence costs if action were taken against them. However, as environmental, social and governance requirements grow more stringent and our society becomes increasingly litigious, now is the time to remind senior decision-makers of the liability attached to their role, and that their own cash, house, pension pot or even their liberty could be at stake in the event of a claim – even if their moral hygiene is beyond reproach.

Smaller firms can really benefit from a broker who acts as a business advisor and educates them on potential exposures, rather than simply selling them insurance. By taking the time to truly get under the skin of your customer’s business, you’ll be better placed to offer insight on products they may not even realise they need.

Pitfall number 3: Not updating cover as needs change

As dynamic entities, a lot can change for SMEs within a single 12-month policy window, and the risk and quantum of claims that could be brought against a business can alter accordingly. This is reinforced by the findings of our recent study of owners and leaders of over 200 UK SMEs, in which respondents reported that their biggest opportunities over the next two years will stem from diversification of products, services and the customer base, incorporating new ways of working, and increasing digitisation. 

The pandemic prompted many SMEs to reinvent their operating models – for example, shutting retail outlets in favour of online trading, or downsizing their office footprint as hybrid working becomes the new norm. Many who reduced their coverage during the pandemic may have neglected to revise it upwards when business activity picked up again, so policy limits may no longer be in line with turnover, profit or payroll. If businesses resort to stockpiling goods or materials in anticipation of shortages due to geopolitical events and increased trading friction, elevated stock levels can also have an impact on insurance requirements.

New or wider types of cover will be required for those who have changed the use class of their premises or have modified or diversified their commercial offering. To illustrate, a restaurant operator starts offering food deliveries. It hires an owner-driver and expects the employee to arrange adequate cover by extending their own private vehicle insurance for business use. However, the employee’s policy excludes use for ‘hire and reward’, which applies to food delivery. The restaurant finds itself on the receiving end of a claim from the employee for injury sustained while driving on business. Because the restaurant failed to advise their Employer’s Liability insurer of the material fact that the business now delivers food, the insurance company seeks a recovery from the restaurant for monies it has had to pay to the employee in compensation.

That’s why the key message for you and your customers is “don’t just renew – review”. Encourage customers to let you know of any significant changes to their property, assets, stock or activities straight away, rather than waiting until annual renewal looms.

The role of brokers in closing the protection gap

Brokers generally have a duty to customers to ascertain their insurance needs – whether by instruction or by undertaking reasonable enquiries. If you fail to make your customer aware on obtaining appropriate or adequate insurance and a claim is avoided or reduced by the insurer, you could find yourself open to litigation for professional negligence.

Conversely, when probing for evolving exposures and requirements, you may face resistance from customers who are looking to take out the bare minimum cover to reduce costs. It’s important to show how this approach could be costly in the long run and discuss how a policy will respond in the event of a claim and potential negative outcomes for the business.

If your contact is typically limited to renewal and claim stages, it’s worth knowing that in our study, almost a third of SMEs said they would like to hear more often from their broker. The key is to marry the method and frequency of contact to the individual’s engagement preferences to actively strengthen the business relationship. Transparency and simplicity in communications are fundamental to building trust, and you can help avoid customer confusion or overwhelm by explaining risks and cover options in layman’s terms.

How RSA supports you and your customers

We know how important insurance can be in helping smaller businesses to get back on track quickly. But we also recognise that one size does not fit all – not every business has significant stock or a fleet of vehicles, for example. So, in addition to our combined packages for SMEs, we have developed a range of flexible, modular products, available to quote and bind online, giving your customers top-quality cover to fit their needs with no unnecessary extras.

A recent key area of focus for us in closing the protection gap is the clarity of documentation, such as policy wordings and overviews. Our study revealed that only 7% of broker customers read insurance literature in full, and a quarter of businesses with 10+ employees put complete faith in their brokers and don’t read their policy at all. At the comparison stage, customers can’t always be expected to analyse the jargon and small print for subtle variations in cover that could make a big difference to the outcome of a future claim.

That’s why we have been working hard to make our SME products not just even more comprehensive and competitive but clearer, too. As a result, we’ve achieved 5-star Defaqto ratings for 10 of our e-traded products, so customers can make an informed decision based on what they offer, not just how much they cost. This trusted, independent rating means you can confidently recommend and sell our solutions as ‘Best in Class’, and customers can be assured of quality cover with the right features, benefits and terms for their needs.

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