The Hidden Risk of Underinsurance for SMEs

Introduction

Underinsurance is a silent, yet costly risk for UK small businesses, with an estimated 80% of SMEs underinsured.* The percentage of small and medium-sized enterprises (SMEs) without any insurance rose to 44% in 2022 from 40% in 2021. Why? Many business owners underestimate their needs, assuming their operation is “too small” (47%), they work from home (42%), or they lack significant assets to protect (33%). But when unexpected events happen, the gaps in coverage can have devastating consequences. These business owners don’t know what coverage they need and will often underestimate it. It’s also not easy these days to get quotes and compare coverage.  Overall, owners don’t necessarily know (or care!) what they have, until they need it. Education is most definitely needed.

Understanding the Underinsurance Problem 

Underinsurance occurs when a business does not have sufficient insurance coverage to fully protect against potential losses. This can lead to significant financial strain or even business closure in the event of a claim. For SMEs, the impact can be particularly severe, as they often lack the financial resilience of larger companies. This isn’t a new problem, but it is growing, and cost pressures on these businesses mean that they will often opt for the lowest/cheapest coverage level.

Why Are SMEs Underinsured?

Avoiding underinsurance is vital to the sustainability of SMEs. At present, the industry is not meeting the needs of this demographic, contributing to a growing underinsurance crisis. Several factors contribute to the underinsurance problem among SMEs, including:

• Misconceptions about risk: Many business owners believe their operations are too small to warrant comprehensive insurance
• Home-based businesses: Those who work from home may assume their home insurance covers business activities, which is often not the case
• Perceived lack of assets: Some SMEs think they don’t have enough valuable assets to justify insurance, overlooking the importance of liability and business interruption coverage
• Incorrect estimates: Estimating the amount of coverage a business needs isn’t an easy task. Business owners may not be able to accurately calculate this for themselves
• Selecting the wrong coverage: Selecting the wrong level of insurance is often a short-term cost saving option but can cost a business more in the long run if it doesn’t meet the business needs

The Role of Prevention in Insurance 

To avoid the pitfalls of underinsurance, SMEs can take preventative to better protect themselves and ensure they have adequate coverage. Here are five approaches to consider:

1. Accessible quotes: Utilizing advanced quoting tools powered by AI and ML can help SMEs obtain accurate and comprehensive insurance quotes tailored to their specific needs. This ensures they are not underinsured and have the right coverage in place.
2. Clear education on coverage requirements: Many SMEs may not fully understand the importance of insurance or the types of coverage they need.  Educating about the different coverage available and the risks of underinsurance is vital.
3. Improving engagement: Post-pandemic, more SMEs are actively seeking insurance coverage. Insurers can improve engagement with these businesses by offering tailored, clear communication and support, ensuring that their specific needs are met.
4. Regular reviews and updates: Keeping in touch with SMEs to regularly review and update their insurance policies ensures that their coverage keeps pace with their evolving business needs. This proactive approach helps prevent gaps in coverage and reduces the risk of underinsurance.
5. Incentivizing Risk Management: Insurers can encourage SMEs to adopt solid risk management practices by offering incentives for implementing safety measures or using risk assessment tools.

Bridging the Insurance Gap with Insurtech

To bridge the insurance gap and protect SMEs from risk, it’s essential to combine innovative technology with comprehensive education and support. By leveraging AI and ML, insurers can provide more accurate quotes and better comparison tools, making it easier for SMEs to obtain the coverage they need. In addition, ongoing education and regular policy reviews can help SMEs stay informed and adequately protected.

The Final Word 

Addressing the issue of underinsurance among SMEs requires a multifaceted approach that includes prevention, education, and the use of advanced technology. By taking these steps, insurers can help SMEs safeguard their businesses and ensure they have the coverage they need to thrive and facilitate a new era of growth and innovation.

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