Business from the SME sector is a lifeline for many regional brokers and, on the whole, intermediaries do a great job for their clients. However, lack of clarity on underinsurance and reputational risk, along with market-shaking issues such as IPT and Flood Re, can all impact on the local broker. Sam Barrett finds out more

Tackling underinsurance

Failing to take out adequate insurance can have dire consequences for businesses and their brokers, with both parties potentially putting their livelihood on the line. But, although there’s much at stake, underinsurance is alarmingly common in the SME sector.

According to Insurance Age’s Spring Sentiment Survey, more than 85% of brokers have taken on new clients who were underinsured. “We do see instances where a new client has a sum insured that’s too low or they’re missing areas of cover altogether,” says Chris Wilde, head of commercial at Higos Insurance Services.

“This can leave them seriously exposed. Average could be applied and, if they have a loss, they might need to find the money themselves. SMEs struggle after a loss but this can easily put them out of business altogether.”

Brokers can also find themselves in the firing line when a client doesn’t receive the settlement they expected for a claim. As well as reputational damage, it can even result in legal action.

Dumbing down
Part of the problem is a general dumbing down of the insurance industry according to Wilde. “Over the last 25 years there’s been a reduction in skills across large parts of the industry,” he says. “In some areas, rather than a team of underwriters supporting clients, most queries are dealt with through call centres or online. It’s a serious mistake.”

This shift, coupled with an increased use of technology, has also lead to a greater focus on price. Being able to access prices quickly online means that many SMEs will have a rough idea of the cost of insurance, and won’t accept a higher premium even if it’s for a more appropriate level of cover.

Unfortunately, Robin Thomson, regional managing director at Bluefin, says this can often lead to misunderstandings. “I do worry where clients are obtaining their own quotations online,” he says. “There can be confusion between market value and rebuilding costs, reinstatement and indemnity cover and how a business interruption policy actually performs when a loss occurs.

“There are so many additional factors to be considered when calculating sums insured and indemnity periods.”

Product design doesn’t always help either. As an example, take public liability. While an SME package product might include £1m of cover, this can be insufficient, as Gareth Hemming, commercial lines director at Aviva, explains: “If a member of the public is injured and the SME is found to be liable they could face a claim for a few million pounds. We’re encouraging our underwriters to quote for higher levels of cover as well as the standard £1m. The cost differential isn’t significant.”

Tough decisions
But even where it’s only a small increase, telling a client they need to pay more for their cover doesn’t always go down well. While some will accept it’s important for the future of their business, others won’t shift. For example, where a client decision is determined by price rather than the breadth of cover, Wilde says it can leave his firm in a difficult position. “If a client isn’t interested in taking out adequate insurance we will refuse to cover them. We don’t want to be party to this type of activity,” he explains.

Although there will always be SME clients who want to cut cover corners, an education process is required to ensure they understand how and why they should avoid underinsurance.

Some support for this is coming from the insurers. For example, on the property front, Aviva is running a pilot with a couple of brokers to provide access to a reinstatement calculator from valuation experts Barrett Corp & Harrington. Similarly Axa has recently launched an online tool to help brokers calculate the business interruption risk for their commercial clients.

Brokers are also playing a part in this. Bluefin’s Thomson says his staff will draw clients’ attention to the risk of underinsurance. “We encourage our staff to confirm sums insured are accurate, indemnity periods are understood and ask clients where their valuation came from and when it was last reviewed,” he explains.

“We can also provide access to organisations that will complete professional valuations to give them the reassurance that they have the correct level of cover.”

Product design is also coming under greater scrutiny. Aviva’s Hemming says the insurer is trying to make its policies as transparent as possible. “Over the years the addition of inner limits and new areas of cover has made policies too complicated,” he explains. “Removing these limits will help to make cover easier to understand and reduce the risk of underinsurance.”

IPT Pressure

With two increases to insurance premium tax (IPT) announced over the last 12 months, taking the rate from 6% last year to 9.5% now and 10% in October, concerns are growing about how this will affect SMEs, their insurers and brokers.

For Brett Hill, director of The Health Insurance Group, the timing of the increases couldn’t be worse. “With many SMEs reaching their staging dates for the auto-enrolment pension changes, they’re not in a position to take on additional costs, even when they’re crucial to the running of their business,” he explains.

Additional costs
Certainly, having to stretch the budget to cover the additional IPT charge can lead to unfortunate consequences. Ashwin Mistry, chairman and managing director of Brokerbility, says that when premiums increase, some SMEs will look to reduce their cover. “Many SMEs won’t have the spare cash to cover the additional costs so they’ll either shop around for a cheaper premium or look to reduce their cover. It’s not good news for these businesses.”

The additional tax burden also means that brokers have even more on their plate. “An SME will tell you it only has a limited budget to spend on insurance so we have to negotiate that much harder with their insurers in order to mitigate the increased premiums,” says Hill. “Thankfully insurers are competing hard for business and market competition is helping to absorb the increases.”

Despite this helping SMEs and brokers, insurers are also facing tougher market conditions. With policyholders feeling the effects of the additional IPT charge, it becomes much more difficult to push through market hardening measures.

Changes to broker remuneration may provide some relief for SMEs. But, while larger corporates can reduce the effect of the IPT increase by moving to a fee-based rather than commission-based relationship with their broker, Mistry says this isn’t really an option for many SMEs. “If an SME is paying a premium of £10,000 to £15,000 for their insurance it’s difficult to justify a £2,000 fee. They’re much happier swallowing it when it’s commission; it’s human nature.”

Taking the hit
Instead he expects to see brokers having to take a hit in the form of reduced levels of commission. “There will be pressure to drop commission rates and we could even see it becoming uneconomical to service lower level clients. This isn’t good news but it’s exactly what’s already happened in financial services,” he adds. And, with IPT regarded as a soft target, and many pointing to the fact the UK still has a lower rate than many of its EU peers, further increases will only exacerbate these trends.

Product design doesn’t always help either. As an example, take public liability. While an SME package product might include £1m of cover, this can be insufficient, as Gareth Hemming, commercial lines director at Aviva, explains: “If a member of the public is injured and the SME is found to be liable they could face a claim for a few million pounds. We’re encouraging our underwriters to quote for higher levels of cover as well as the standard £1m. The cost differential isn’t significant.”

Flood cover blight?

While the prospect of more affordable home insurance may have boosted the industry’s popularity among those living in areas at risk of flooding, the exclusion of SMEs from Flood Re’s remit has caused plenty of consternation.

Figures from the Federation of Small Businesses (FSB) suggest that 9% of SMEs at risk of flooding, equivalent to around 75,000 firms, have struggled to find adequate flood insurance. This, its vice chairman Sandra Dexter says, has the potential to lead to flood blight, where whole communities are damaged as a result of the SME infrastructure disappearing.

Can’t get cover
It’s something that James Sharp, director at TEn Insurance Services, has seen too. “It’s all very well having communities where the households can access flood insurance but if you’re running the corner shop or a local business and you can’t get cover, your only option might be to relocate,” he explains. “This can have a devastating effect on the community.”

Relocation isn’t always possible either. While some SMEs may be tied to long leases, for others, such as farms and restaurants, the investment in the premises may mean that moving simply isn’t an option.

Investing in flood resistance and resilience measures could help some businesses survive but Sharp says this can be costly. “There are plenty of things that a business can do to reduce the impact of a flood on their property but tend to be expensive,” he says. “For many SMEs, if they can’t get flood insurance, they can’t trade.”

The situation may worsen too, with Tim Ryan, executive chairman of Una Alliance and deputy chair of the British Insurance Brokers’ Association (Biba), predicting that the number of SMEs unable to obtain cover will grow over the next few years. “As flood mapping becomes increasingly sophisticated, more businesses could be regarded as too high a risk to cover. The government needs to find a way to ensure they can access fair insurance cover,” he explains.

Options on the table

Several options are being put forward. For example one of Biba’s manifesto commitments is to develop a commercial insurance solution for SMEs that are at risk of flood and the FSB is working with the government and the insurance industry to find ways to help businesses increase their resilience to flood damage. This could see reduced insurance premiums being used as an incentive to invest in flood resilience measures.

But while SMEs may currently be excluded from Flood Re, David Sweeney, insurance managing director at Brightside Group, believes the fairest solution would be to allow them access at some point. “This was rejected as ‘too difficult’ during the Flood Re negotiations,” he says. “But I suspect it will happen once the fund has some experience of dealing with homes.”

Reputational risk

Whether it’s a building firm, a digital marketing company or a cafe, reputation is everything. And, with a survey by GE Capital showing that 81% of consumers conduct online research before purchasing, it’s never been more important to protect that reputation.

Unfortunately, although reputation can make or break a business, very few SMEs are actively protecting it. In its SME Risk Index survey published in June 2015, Zurich Insurance found that 39% of SMEs don’t bother to check their social media presence, leaving them at risk of losing business as a result of a poor or malicious review.

The need for more focus on reputation in the SME sector was also picked up by the Chartered Insurance Institute. In a report published in April, Reputation Risk in a Social Media Culture, its Broking Faculty New Generation Group 2015 highlighted a need for more insurance products and advice in this area.

Big and small
Michael Brett, broker with TEn Insurance Services and a member of the CII’s New Generation Broker Group 2015, explains: “There are products geared towards larger companies with turnovers in excess of £50m but there’s a real gap in the market for SMEs. While no business wants to have its reputation tarnished, smaller businesses arguably have the most to lose.”

Unfortunately, when it comes to selling this type of cover, brokers find they’re often meet with resistance. “SMEs don’t think it will happen to them,” says Scott Williams, account executive and head of professional indemnity at First Insurance Solutions. “They are aware of the implications but they only think it’s happening to large companies.”

In addition, with many other forms of cover competing for an SME’s attention, brokers can struggle to get reputational risk protection on to the agenda. For example, Williams says it can be difficult to convince some SMEs of the importance of directors’ and officers’ cover. “A director can protect their own assets for as little as £250 a year but it’s still seen as an afterthought by many SMEs,” he adds.

Confusion over cover
The insurers must also take some of the rap for the low penetration. As well as targeting their reputation risk products to larger companies, there’s plenty of confusion around what cover is available on other products.

“The market is continuing to develop so this risk can be associated with all sorts of terminology including cyber, reputation and security and privacy,” says Anne Griffiths, director of SME propositions at Zurich Insurance. “The insurance industry needs to bring more clarity to these products so that customers can better understand both the risk and how we can reduce their concerns.”

Some reputation risk solutions are already available for SMEs. Earlier this year, RiskEye launched Online Reputation Protection. This offers businesses access to online monitoring with insurance built in to provide up to £50,000 of funding for PR and legal assistance. Cover costs from £1 a day and the insurance element is underwritten by AIG.

Zurich is also dipping its toe into this market. Although it hasn’t launched an insurance product, it has put together a package of services to help raise awareness of the importance of reputation management. “We’re offering SME customers a free service that will assess their online reputation and benchmark it against their peers and other companies. They can also receive monitoring reports and have access to online support,” says Griffiths.

While it’s positive that products are beginning to emerge in this area, Brett says future success will be dependent on how cover is packaged. “When a broker sits in front of a client they only have a finite amount of time to discuss their insurance options so it would make sense to include reputation risk as an extension on a package product,” he says. “This would make it much easier to include reputation risk in the conversation.”