The majority of small businesses have seen a spike in insurance premiums in the last year, after a surge in claims when they could not operate during the Covid-19 lockdown.
The Federation of Small Businesses has found that two-thirds of small firms have seen their insurance premiums rise in the last year, with over half saying they had risen by more than 11 per cent.
Small firms were forced to fight hard for their business interruption insurances to be honoured during the pandemic, which lead to significant uncertainty at a time when new and small businesses were already fighting to survive.
Reportedly, two-thirds of small businesses have seen their insurance premiums rise upwards of 11 per cent in the last year, despite the declining services following the Covid-19 pandemic
The FSB said its report’s findings laid bare the cost squeeze facing small businesses, which usually cannot operate without various forms of cover.
Of the businesses whose premium costs had risen, 52 per cent said that they went up by 11 per cent or more – but while some individual businesses have seen cost rises far in excess of that, especially following a claim.
The insurance market itself has also been hit hard by the Covid pandemic, resulting in restricted access to cover and protection for a wide range of businesses.
The restrictions and price creeps have been most prevalent among mandatory insurances, such as professional indemnity insurance which is a trading requirement for advice-giving firms in industries such as accounting or architecture.
The basics of business insurance
Business insurance offers financial protection from everyday risks to large compensation claims.
Every business is different so it’s important to evaluate your businesses needs, what can go wrong, and how much cover you would need.
A business insurance policy usually includes public liability, professional indemnity, and employers’ liability and contents.
Employer’s liability insurance: the only legally required insurance to operate a business with one or more employees.
Public liability insurance: covers accidental injury to a member of the public or staff, or business property.
Professional indemnity: covers legal compensation costs if your business offers a service or advice to clients.
The average cost of business insurance is around £120 a year for public liability cover, with employer’s liability costing between up to £210 per employee.
FSB national chair Martin McTague said: ‘Cover for risks of all kinds – from fire to flood to less tangible dangers – is vital to small businesses’ continued ability to trade.
‘But our report indicates that there are problems lurking under the surface which, if left unaddressed, could further hamper small firms’ ability to compete on an equal footing.
‘Rising cover prices leave firms caught between a rock and a hard place, forced to pass on higher costs to customers, or to cut back on investment and expansion – or even to risk opting for a lower level of cover, which may leave them painfully exposed if the worst should happen.’
The FSB is arguing that the Financial Conduct Authority should be required to intervene if it becomes clear that there are businesses that are unable to obtain insurance.
The firm also argues that the FCA should carry out a market study of professional indemnity insurance given recent price increases.
McTague added: ‘Our recommendations will help to make insurance easier and more cost-effective for small businesses to access, allowing them to be sure that, by paying for a premium, they are getting a premium product in return, one suited to their business’s particular needs.’
Edward Halsey, the Co-Founder of hubb, a commercial insurance broker firm, said these problems were just the beginning for small businesses.
He said: ‘The reality is that this is not a problem on the horizon – it’s already here. And it’s only going to get worse.
Halsey claimed that around 40 per cent of businesses had no insurance at all, and that of those that did, roughly the same amount did not have adequate cover in place to survive a ‘catastrophic loss’.
He also estimated that 80 per cent of commercial property is under-insured, describing this as a ‘lethal cocktail that is getting deadlier for businesses by the day’.
Cutting cover: Businesses could be ‘painfully exposed’ if they opt for less comprehensive insurance in order to reduce costs, according to the Federation of Small Businesses
He said that the commissions charged by business insurance brokers had steadily increased, leaving businesses paying over-the-top costs for their essential insurance.
Halsey added: ‘Business owners are paying almost as much to brokers and aggregators as they are for the actual insurance policy itself.
‘If this continues, businesses will simply be unable to afford insurance.
‘This will lead to many going bust and more distrust in the insurance industry – which is already at all time lows.
‘In other cases, people will make the choice not to disclose negative risk features to insurers, which may seem clever at the time to get a lower premium, but as soon as a claim occurs and the non-disclosure is uncovered, the claim will be repudiated.’
How can you reduce business insurance premiums?
To reduce your insurance premiums, Halsey suggested that business owners should shop around and speak to different brokers to make sure they are getting the best deal, and that the commission they are being charged is reasonable.
He said: ‘If a broker gets you a better price, you pay them less, whereas the higher a premium they can convince you to accept, the more they earn.
‘There are serious question marks over how such a practice has become so normalised; it’s non-sensical.’
Halsey suggested that three-quarters of business insurance customers have no idea what they’re paying their broker for advice, urging them to start asking more questions.
He also said that business owners needed to leave plenty of time to renew their policy when it was coming to an end, allowing them to explore different options.
‘The key is to engage an alternative broker silently and early, around six weeks before renewal, to truly test the market on a level playing field and obtain the best possible price,’ he added.
‘Don’t wait until you get your renewal terms and let that dictate the baseline for your insurance – it’s an irrelevance.’
10 tips to get reduce the cost of your business insurance
1. Minimize risks and improve your commercial building security
2. Don’t downplay the dangers to staff working in high-risk positions
3. Begin evaluating your policy six weeks before your renewal date
4. Pay your premiums up front to get a discounted overall price
5. Increase your deductibles to lower the cost of your premium
6. Shop around and barter with brokers to get the best deal
7. Build a no-claims discount
8. Avoid unnecessary add-ons
9. Be accurate and don’t over-insure
10. Buy sufficient insurance coverage in case you need to make a claim