In a world that is constantly changing it is perhaps unsurprising that 73% of small to medium sized enterprises (SMEs) recognise that there are new potential risks to their business that were not present when they first started out. What is surprising is that 82% of them failed to alter their insurance cover to defend against these risks. In fact, only 14% of SMEs plan to increase their amount of cover in the next 12 months.
And whilst SMEs identified the following as their top three risks, only 42% are insured against them:
- Economic uncertainty
- Increasing market competition
- Cash flow
What’s the risk?
The problem is if you fail to take out the correct amount of insurance for your business you are underinsured. If you suffer a claim you will be insufficiently covered, and any pay-out will fall short. Unfortunately this can result in the closure of a business if there is a significant shortfall.
This is obviously a concern particularly as 28% of SMEs say they would go out of business if faced with an unexpected bill of £50,000. According to PricewaterhouseCoopers the average cost of a small business’ cyber security breach is £75,000-£310,000 well above the £50,000 that would put more than one-quarter of SMEs out of business.
Is your business underinsured?
A business can be underinsured for a variety of reasons including:
- A belief that a major loss could never happen to them. However inclement weather, a cyber-security hack or a fire can impact any size business.
- Failing to review cover. For example if you fail to review your property cover you may only be insured for the price you originally paid for your property, rather than how much it would cost to rebuild it.
- Reducing the amount you are insured for in the mistaken belief it will save money. Any short term savings can never compensate for the out-of-pocket payments required to make up the shortfall in the event of a claim.
Failing to update your insurance cover as your business grows or changes i.e. purchasing new equipment, taking on new contracts etc.
To prevent your business from being underinsured you can take the following steps:
- Get advice from a professional broker
- Conduct regular, accurate valuations of your business and property and provide the cost of rebuilding the property
- Calculate and use your actual total revenue
- Consider how long it would take your business to recover from a potential disaster. An inadequate period of time may cause insurance payments to stop before your business is fully recovered
- Review your policy wording regularly to make sure it is still providing the cover your business needs
- Review the amount you are insured for as your business and external factors such as inflation change.
Understanding and acknowledging the reality of the threats facing your business is important. More important though is addressing these risks once identified. Your business is your lifeblood, and you should do everything you can to protect it—this includes properly insuring it against any possible damage.