Small business, big risk
I've just completed research for the ABI that shows how hundreds of thousands of UK small businesses are going without insurance for the risks they face
When I went freelance in 2024, I didn’t think at all about insuring my new business. I only bought a policy when a client told me I needed professional indemnity insurance as a condition of a contract.
It turns out I was not alone. For the last six months I’ve been leading an inquiry into insurance for SMEs and sole-traders - and have uncovered a tide of ignorance and huge gaps in protection.
The Public First report Small Business, Big Risk was commissioned by the ABI who asked us to look at the problems of uninsurance (where SMEs do not have insurance for a risk they face) and underinsurance (where an SME’s cover is less than their full potential liability).
We found that lots of self-employed workers have even less protection than freelance me, with my single policy. In a survey of over 1,000 business decision-makers, more than a quarter of sole-traders said they did not have any insurance at all. Other self-employed workers said they bought the bare minimum they needed, either because the law or a customer made them. And some spoke about only getting cover for risks that would be catastrophic for their business, like the freelance photographer who had just enough insurance to replace the minimum equipment he’d need to keep trading.
Price is the main consideration when sole-traders are buying (or not buying) insurance. But low levels of cover are also driven by lack of awareness and understanding: very small businesses do not know what insurance products are out there and relevant to their needs. And few go to insurance brokers who can suggest personalised packages of cover.
The story is only a little better for firms with employees, with even medium-sized businesses often going without insurance for significant risks they face. Firms with 10 or more employees are more likely to have some insurance, but they often lack packages tailored to their unique circumstances or fail to keep their protection under regular review.
So what?
Why does this matter, if you’re not someone trying to sell insurance policies? For a start, each year catastrophic incidents shut down numerous businesses with little or no insurance. We heard about hospitality and IT businesses closing because their cover was insufficient. Jobs are destroyed and economic output suffers.
In particular, before I started work on this review, I had no idea that ‘underinsurance’ was such a big problem, with SMEs frequently buying too little cover, relative to their potential liability. This places a cap on maximum payouts for insurance cover on premises, contents, business interruption and cyber attacks. It also means that a proportionate slice will usually be taken off a claim of any size.
Even where incidents do not put business survival at risk, they have a big impact on SME resilience, cashflow and potential growth. For many firms it will be good financial management to pay regular insurance premiums, with the expectation that they will then make claims from time-to-time.
So insurers, brokers, comparison websites and business advisers should do more to promote the types of insurance that are available, explain how they are relevant to firms’ needs, and help SMEs access personalised packages of cover.
In all the review makes nine recommendations for action to improve levels of protection - and I also helped the ABI develop new insurance guidance for SMEs.
SME compliance
Surprisingly, SMEs reported incomplete take-up of two insurance products that are compulsory (depending on an SME’s circumstances). In our survey many employers with staff said they did not have employee liability insurance; and many company’s owning vehicles said they lacked third party motor insurance.
We are pretty sure that some of these businesses were under-reporting the cover they have - part of the problem of researching this topic is that small business owners know so little about it. But our review and previous studies indicate that coverage of these mandatory products is far from universal.
This is not the only research I’ve conducted recently where I’ve found SMEs struggling (or just failing) to comply with regulation. You see the same with the boundary between employee and contractor and on compliance with pension auto-enrolment rules. Similarly, HMRC has been sounding the alarm on SMEs paying less tax than they owe.
Across these compliance issues, some firms are trying but making mistakes, some are ignorant, and some are willfully evading their obligations. We need simpler requirements, better communication and visible compliance activity that drives behavioural and cultural change.
With implementation of the Employment Rights Act about to begin, the government should take a holistic approach to SME compliance - including helping small businesses meet their compulsory insurance obligations.
The Public First report Small Business, Big Risk: Tackling SME Underinsurance and the ABI’s SME Insurance Guide: What Every Business Needs to Know are both published today.