Clive Lewis, head of enterprise, ICAEW on why cutting back on insurance can prove fatal for your business
This article is brought to you in partnership with ICAEW
‘Good news George Osborne, no triple dip recession!’ screamed newspaper headlines earlier this month when the Office for National Statistics revealed that the GDP grew by 0.3% in the first three months of this year. However, hold the hurrahs and high fives – we all know that the economy is far from being “out of the woods”.
According to a survey by researchers TNS Global, just over half of SMEs (54%) have confidence in the future of the British economy, with 46% dubious about key concerns such as currency volatility, Eurozone crisis, and government austerity measures.
Combine the snail-speed growth and somber business confidence, SMEs are still very conservative with their spending.
So, one of the first costs to get the axe is insurance protection. Why? Well, for years it’s been considered a public liability despite it being a legal requirement in many areas.
In fact, non-compulsory cover is one of the first areas cut by SMEs when the going gets tough.
As firms tighten their belts to adjust to more challenging times, inevitably some have to take tough decisions and this can include not insuring certain risks or eventualities. Some “nice to have” covers which aren’t compulsory have been scaled back or not renewed, for example, personal accident cover is now considered a luxury for some firms.
Now is the time for SMEs to acknowledge that apart from the compulsory covers, businesses should hold the “core” cover of property, business interruption, employers, public and products liability and in the case of professional firms who give advice, they definitely need professional indemnity insurance.
Can you cut back insurance too far?
Inevitably, if insurance coverage is cut back there is a chance of a loss which is no longer insured. Although insurance intermediaries are very well placed to recommend and advise clients of the types of insurance to have, in difficult times some SMEs will forfeit cover. This could be false economy as in times of austerity there will be more claims for things like theft from premises and theft of goods and money by employees.
Insurance premiums – why cheap is not always best
The insurance market is generally cyclical. Although there is evidence of reasonably large rate increases, particularly for motor insurance, the market generally remains competitive. Insurers are keen to retain good quality profitable business and will hold premium increases in order to remain competitive. Insurance is very similar to buying tangible goods in that often customers “get what they pay for”. Many SMEs are advised by an independent insurance broker who knows the marketplace and will only place business with reputable, well established and well known Insurers who have a proven track record of paying claims fairly and speedily. Often cheaper cover can be obtained elsewhere but would they deal with a claim or try to riddle out of it?
We also need to bear in mind that when money is tight and the economic situation is unstable, there will be more claims especially resulting from risks such as arson and theft. There is an increased likelihood people will seek to make third party claims through solicitors who offer “no win no fee” contracts.
Insurance company v/s broker
In many areas the internet is having a major effect. Whilst cutting out an insurance intermediary and buying direct online may save a bit of money, it is not something to be recommended for commercial insurances. Following the debacle over mis-selling of products like pensions, endowments and payment protection insurance, the insurance market is, quite rightly, far more regulated and supervised.
As a result, very few Insurers allow clients to arrange commercial insurances direct without going through an authorised insurance intermediary. Unlike motor, home and travel insurance which can be readily purchased online or through a call centre, arranging appropriate commercial insurance for a client needs the skill, expertise and experience of an insurance intermediary. A decent insurance broker should know what covers to recommend and have access to the markets to obtain the best cover at a reasonable cost so as to ensure their clients receive value for money.
To find an insurance broker near you contact the British Insurance Brokers Association at www.biba.org.uk
Clive Lewis is the head of enterprise at The Institute of Chartered Accountants in England and Wales (ICAEW)
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