Small firms call for action as insurance premiums rise

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Date: 19 July 2022

A high street has been flooded by rain

A new report has found that many small businesses in the UK are having to pay higher insurance premiums for less generous cover.

Research by the Federation of Small Businesses (FSB) has found that many UK small firms are encountering problems in their dealings with the insurance market. Its report, Paying a premium? Reforming the insurance market to work for small firms, has investigated the cost of insurance and looked at whether the products on offer are suitable for small business customers.

The findings show that a clear majority of small businesses (60%) have seen their insurance premiums rise in the past year. Over half (52%) of those say that the rise is 11% or greater, while some individual businesses have seen cost rises far in excess of that - particularly following a claim.

Worryingly, many firms are finding that their insurance policies are now offering less protection than before. One in six (16%) who have renewed or switched their policy in the past year say that their cover has been restricted. In addition, three in ten say they find it hard to understand what their insurance covers.

The FSB report points out that the pandemic brought many underlying problems with insurance into sharp relief, as many small firms had to fight hard for their business interruption insurance to be honoured. Other types of insurance, particularly professional indemnity insurance (PII), have seen their markets harden, restricting access to cover and the protection afforded to customers in the wake of COVID-19.

FSB national chair Martin McTague said: "Cover for risks of all kinds - from fire to flood to less tangible dangers - is vital to small businesses’ continued ability to trade, but our report indicates that there are problems lurking under the surface which, if left unaddressed, could further hamper small firms’ ability to compete on an equal footing.

"Rising cover prices leave firms caught between a rock and a hard place, forced to pass on higher costs to customers, or to cut back on investment and expansion - or even to risk opting for a lower level of cover, which may leave them painfully exposed if the worst should happen.

"Long, complex contracts present difficulties to smaller businesses without a whole department dedicated to deciphering legalese, and runs the risk of small business customers believing they have purchased adequate policies, when in fact they have not."

The report has made a number of key recommendations:

  • The government should work with insurers and the Financial Conduct Authority (FCA) to agree specific conditions for forms of government support that should not be taken into account when calculating business interruption insurance claims;
  • The FCA should be explicitly required to consider intervening in a market if it becomes clear that a sector or segment of businesses cannot get insurance;
  • The government should work with relevant regulators and professional associations to ensure that PII requirements that are imposed as a condition of being able to practise do not disadvantage small firms;
  • The government should use the Procurement Bill to remove barriers for SMEs in accessing public procurement opportunities. Both PII and public liability insurance requirements in public contracts should be proportionate to the size of the contract.

Martin McTague said: "Procurement processes which mandate unnecessarily high levels of insurance for relatively small contracts put them out of the reach of small businesses, once again leaving them on an uneven playing field.

"Our recommendations, taken as a whole, will help to make insurance easier and more cost-effective for small businesses to access, allowing them to be sure that, by paying for a premium, they are getting a premium product in return, one suited to their business’s particular needs."

Written by Rachel Miller.

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