Donna Smith, former Small Business Team Underwriting Manager at Allianz, tells us about the issue of business interruption and underinsurance in the SME sector, the impact it has and what can be done about it.
I am Underwriting Manager for the Small Business Team but my key area of expertise is business interruption (BI).
I started my insurance career in 2000 working for a small insurance broker in Kent as a graduate trainee account handler looking after personal and commercial clients. As I’d always wanted to work for a large multinational insurer, I joined Allianz in 2002 as an assistant underwriter working in the small business team in Maidstone. I got my head down, ploughed through the ACII and Underwriting Academy and progressed through the underwriting ranks to Small Business Team Underwriting Manager.
What is Business Interruption, and why is it of such interest?
Whether it’s caused by fire, technical error or any other event, a business interruption is a significant risk to every company. Any disruption to a business’s activities can result in lost income, with some firms even going bankrupt if they’re unable to recover from the initial event.
Unsurprisingly, it’s a risk that concerns many businesses, topping the Allianz Risk Barometer in 2019, for the seventh year running. Claims figures from this report also show they have good reason to be concerned. The average business interruption property claim is £2.7m, 39% higher than the average property damage loss of £1.9m.
Why is there so much underinsurance in the SME sector?
Businesses don’t take out cover for a variety of reasons. Some mistakenly think these losses are covered under other policies while others don’t think they need cover. Unlike employers’ liability and motor insurance, there’s no legal requirement to take out business interruption insurance so some SMEs view it as a luxury purchase. Some SMEs don’t even know this type of insurance exists.
Even where businesses do take out cover, the complexities of the product can result in underinsurance. Figures from the Chartered Institute of Loss Adjusters suggest that 43% of those with cover have inadequate sums insured.
What does Business Interruption underinsurance mean for businesses and the broader economy?
It’s bad news for businesses. If they suffer a business interruption, having inadequate or no cover will, at best, make a tough financial situation tougher. At worst, it could put them out of business altogether.
Losing a business, whether permanently or temporarily, can also have serious ramifications for the local community. As an example, say there’s a fire in a shop in a village and it’s forced to close. Villagers might have to travel for their shopping, which might not be easy for those without their own transport. It could also affect other businesses in the village if it means customers no longer come for their shopping.
This could also impact the supply chain as businesses often have customers and suppliers and a disruption in this chain can have a knock on impact to numerous businesses in the area who rely on that business to trade themselves. Often this is an area where businesses have no or inadequate business insurance protection.
How can SMEs ensure they have the right level of cover?
Many SMEs underestimate how long it will take to get back up and running again, only thinking about the time it might take to dry out their premises if it flooded or rebuild it following a fire.
However, if you have to factor in additional steps such as decontaminating a building, getting planning permission or ordering specialist equipment it can take much longer.
Also, there may be potential for loss of customers as people choose to go elsewhere with their custom whilst you are closed. It can take a long time to rebuild your customer base if this does happen and get back to pre-loss trading figures if this happens.
So, businesses should carefully consider the risks they face and how they might recover if something did happen.
The sum insured can also present issues, with many businesses taking their accountant’s gross profit figure as the basis for cover. But this is rarely appropriate, and businesses can find themselves unable to meet contractual costs such as the rent, utilities and employees’ salaries.
Although it can vary between businesses, the sum insured is usually the sum of turnover, closing stock and work in progress minus any uninsured working expenses, opening stock and work in progress. These uninsured working expenses could include purchases, such as raw materials and components, but also packing materials, carriage and commissions.
The sum insured may also need to take into account any future business and economic trends. For example, a growing business may want to take out a higher level of cover to account for future growth.
Determining the right level of cover is complicated but, as it’s so important to get it right, it’s an area where an insurance broker can provide valuable support.
What emerging risks do SMEs need to be aware of when it comes to Business Interruption insurance?
There are traditional perils include fire, flood and explosions but SMEs also need to be aware of other risks such as cyber and terrorism. In today’s connected world, the risk of suffering a cyber breach or attack is high, with government figures showing this happened to more than four in 10 of all UK businesses in 2017/18[1]. Where this happens, an SME can find itself unable to access its computer systems or data, causing serious problems if it’s dependent on them.
How can a business protect itself from a business interruption loss resulting from terrorism?
In the UK, most cover for terrorism is provided through a government-backed scheme, Pool Re. This was set up in 1993 by the insurance industry when, following the bombing of the Baltic Exchange in 1992, reinsurers withdrew cover for terrorism-related damage. This arrangement enables members of Pool Re, which include Allianz, to offer terrorism cover within their commercial property and business interruption policies.
The cover available through Pool Re has also evolved since 1993 in response to changes in the nature of terrorism. As an example, when it was set up, it would only cover business interruption losses if the company’s premises had been physically damaged by terrorists. But, following the experience of businesses such as those in Borough Market that suffered no physical damage but were unable to trade as a result of the police cordon, it was amended to cover losses incurred if a business couldn’t trade or is prevented from accessing its premises following a terror attack.
This means that SMEs are able to protect themselves from this type of risk.
What can brokers do to better inform their clients?
Brokers have an important role to play in helping SMEs to protect themselves from the risk of a business interruption. As well as raising awareness of the risk and the insurance that’s available, brokers have the expertise to help their clients determine the right level of business interruption cover.
There’s also an opportunity to offer risk management advice to support these clients. Business continuity planning can help a client identify the risks they face and ensure they’re prepared if they do happen.
This advice is especially crucial for SMEs. Without the luxury of an alternative site or the financial reserves of a large parent company, a well-thought out business continuity plan and the right insurance can make the difference between survival and failure if they suffer a business interruption.
Donna also took part in an episode of our podcast series, Insurance Tomorrow, discussing business interruption with other experts and our host, Nick Hewer.
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