SME - overcoming underinsurance

Posted on: 31 July 2018

By Harriet Conway, SME business insight manager

Cheapest is not necessarily best. That’s certainly the message coming through from SMEs when it comes to their insurance needs.

A 2018 report of 500 SME business leaders commissioned by Allianz revealed that 75% prioritise breadth of cover above price and other factors such as claims handling, when choosing their insurer and product. Further, most decision makers expressed they’d be happy to pay more for their insurance if they were advised their existing cover was inadequate. It seems that more often than not, this is the case. A review led by the Financial Conduct Authority (FCA) in 2015 found that in a number of cases SMEs’ sums insured were inadequate to cover the loss sustained.

This issue is seen primarily in the area of business interruption insurance, where terminology can be confusing and the calculation of the ‘gross profit’ sum complicated. Crucially, an insurer’s definition of gross profit differs from that of an accountant’s, and needs to consider turnover over a fixed time period and projected revenue, plus any future trends, such as inflation and interest rate changes. Undervaluing the gross profit sum can be detrimental to a company in the event of a business interruption event; potential consequences include a slowdown or complete halt in business operations, loss of revenue and reputational damage.

Another pitfall is opting for too short an indemnity period; the period of time an insurer will pay for losses following the event which gave rise to the claim. With many businesses choosing a default indemnity period of 12 months, SMEs are also urged to consider longer periods, such as 24-36 months.  The indemnity period needs to allow for any repairs and rebuilding, for sourcing equipment and recruiting any additional staff. It may also take time to re-establish a pre-loss customer base. 

It’s recommended for SMEs to regularly assess their existing cover against emerging risks and discuss potential loss scenarios with their broker or insurance professional. Undertaking risk assessments and implementing pre-loss measures is also important, and using these in conjunction with a robust business continuity plan. 

No SME wants to experience an event which disrupts their business. However, having confidence that adequate insurance is in place for such a scenario can offer considerable peace of mind.


This article was originally published in Modern Insurance Magazine (Issue 32). It may not be replicated in any other publications.