Tim Evershed asks: How should the industry respond to the recent spike in cancelled cover?
The number of UK businesses cancelling their insurance coverage due to issues with affordability has risen steeply recently, highlighting an alarming trend for the insurance industry.
Recent research showed that a third of UK businesses have cancelled one or more insurance policies during the past three years, because they could no longer afford them. It is a problem that is worsening as almost half of these cancellations occurred in the past 12 months.
Businesses have cancelled coverage across a range of lines including buildings insurance, directors' and officers' liability, product liability and business interruption. Perhaps more concerning is that the list also includes compulsory coverages like employers' liability and motor.
"It is shocking to see so many UK businesses missing out on vital, sometimes legally necessary, cover due to cost or concerns over payments," says Adam Morghem, strategy and marketing director at Premium Credit, which commissioned the research.
"Our research shows a rise in businesses cancelling cover as a result of rising premiums and a drop in business income. With rises in insurance premiums affecting a multitude of businesses across different sectors, we don't think it's a massive surprise that large numbers are cancelling cover.
"What is surprising though, and increasingly concerning, is that businesses are cancelling cover that they are legally required to have. If a business continues to operate without the vital insurance, they may be liable for fines and even legal action. It is a legal requirement for businesses to have employer's liability insurance, for instance."
WORSE TO COME
This is an issue that looks set to worsen in future, as the research shows that many more businesses are considering cancelling one or more of these lines of insurance cover during the next 12 months.
"Worst-case scenario, you are risking your livelihood and the livelihood of your business by cutting back your insurances, or cutting out your insurances, particularly covers like employers' liability and motor, which are compulsory anyway so you could be breaking the law," says Malcolm Tarling, chief media relations officer at the Association of British Insurers.
"For SMEs, they are putting the very existence of their business at risk," adds Mr Tarling. "Business owners need to ask themselves: 'Would I survive if there was a major unexpected and unwanted event like a fire or a flood?' The answer for me is almost certainly: 'Nope.'"
According to the British Insurance Brokers' Association (BIBA), one of the primary consequences of cutting back or cancelling insurance is that it leads to underinsurance.
This may be brought about by either the deliberate intention of the client to pay the lowest premium, or the prerogative of insistent clients to buy insufficient cover and 'take the risk'.
"The broker's role, when they encounter a client that they suspect is underinsured, or will likely to become underinsured, is to point this out and perhaps recommend that the client reconsiders the sum insured, limit of indemnity or indemnity period," says BIBA. "Some clients may be reluctant to do this, despite their broker's advice, simply because they prefer not to increase their premium.
"If a broker knows or believes the client to be under-declaring values at risk (or other material facts) the broker is at risk of being in breach of its duty of care, its fiduciary duty and its contractual obligations if it withholds that from the insurer."
Under the UK Insurance Act, the broker's knowledge is treated as the client's knowledge and supplying information that the broker knows may be inaccurate would almost certainly be seen as a deliberate and reckless breach of the duty of fair presentation, and the insurer will be entitled to void the policy.
Clearly, insurance brokers have a prominent and vital role to play in ensuring clients understand both the risks they face and the value that the appropriate insurance cover can provide in mitigating those risks.
Anthony Gruppo, CEO at broker Jelf, says: "Ensuring a thorough understanding of our clients' business strategy, future direction and risk appetite is imperative when it comes to the provision of comprehensive policies that seek to protect them.
"This requires us to educate the client on the real and tangible value of insurance and risk management, and the consequences of not having these. It also involves advising on the immediate issues and exposures that may adversely affect the business, as well as those that may surface down the line."
Of course, insurers too must play their part in making sure the cover and products they provide are relevant, focusing on better customer service and educating insureds about the value and benefits that insurance can bring beyond the vital service of paying claims.
"It is important that insurers provide value for money, that they constantly improve customer service so that it is meeting the demands of customers, and also look at ways of promoting insurance as a competitively-priced product," says Mr Tarling.
"People should be aware of how they can buy insurance, be aware of the right insurance for them and be aware of ways that they can reduce the cost of a product, which may be important but most people buy hoping they never have to use. It is never going to be seen as an attractive product, but it can be the difference for a business between survival and bankruptcy."
It is key that the insurance industry is able to educate its clients on the risks they face, both traditional and emerging, and that it reinforces its own role in providing a valuable service in times of need.
Mr Tarling adds: "If you look at things like terrorism, flood risk and fire, events like these can happen at any time. So, the right insurance at the right price is essential as well.
"Something like cyber insurance is becoming increasingly important. Small firms could literally be hacked out of business by cybercriminals. Every business is at risk but insurers can provide a risk management service and they can provide help and guidance to reduce risks. It is not just about paying out if the worst happens, which is obviously the primary function, it is also about taking steps to reduce the risk of something happening in the first place.
"The industry is constantly looking at providing products that are more tailored to people's needs, because people's needs change rapidly. Also, providing the best possible service at the time when the product is needed the most is important."
However, it is only natural that business enterprises will focus on the price of the products they purchase. And as the reasons that businesses give for cancelling cover are primarily financial, it is also incumbent on the insurance industry to find ways to keep premiums as competitive as possible.
"It is also [about] helping people and encouraging people with more help and guidance to shop around. Insurance is very competitively priced in all sectors but we do need to look at ways of helping people get the most from the market," says Mr Tarling.
Jelf's Mr Gruppo adds: "We're able to leverage our scale and expertise to benefit our clients in terms of product offering and fully tailored solutions. Working with third parties such as premium finance agencies also helps our clients spread the costs of their insurance, so that they remain protected without compromise."