Following the FCA’s concerns about the financial risks faced by businesses as a result of not having adequate insurance cover, reported by the regulator in their thematic review of SME insurance claims, the response to FCA demands for industry action has seen greater efforts by insurers and insurance trade associations to highlight the growing scale of the problem, and provide guidance to customers and insurance brokers on avoiding underinsurance.
Aviva Insurance research indicated that 77 % of commercial properties surveyed by their specialist valuers were underinsured, by an average of 45 % of the correct insurance value. For business assets, Aviva identified that one of the key drivers of underinsurance is where a business takes on new plant and equipment, but does not advise their broker or insurer and fails to increase their level of insurance cover. This could include new assets that are leased or financed, and commenting on the consequences for lessors and funders, Nick Leader, Director of Acquis Insurance Management, said “Underinsurance by business customers is now recognised as an industry wide problem by the insurance market, and it has direct risk implications for equipment lessors. If a customer is underinsured, any claim involving leased or financed assets will not be fully paid by the insurer, and may indeed be refused. It is not just the amount of cover that could result in underinsurance, but the basis of cover in terms of asset valuations, the level of claims excess and any policy exclusions or other special terms.”
Recent guidance to their 2,000 members by the British Insurance Brokers Association (BIBA) highlights fraudulent underinsurance, where the customer knowingly underinsures in order to reduce premiums. BIBA has also identified “reckless” underinsurance where the customer or broker has failed to determine what level of cover is required for the business, or where the basis of cover and policy terms are not understood by the customer.
According to Boston Consulting Group research, one third of SME’s in the UK are unaware of who their insurer is, and Nick Leader comments “If a business does not know who is providing their insurance cover, can they be aware of the details of their policy?” Although brokers are the dominant market channel responsible for arranging 78 % of commercial insurance, disintermediation is seen by the industry as an increasing cause of underinsurance, with business clients avoiding brokers to buy cover on a direct basis, often via on-line platforms. Nick Leader’s opinion is that “a business that buys insurance on price alone may not be buying the right insurance”.
“Underinsurance can occur with any size of business, in any sector of the economy” according to Leader, “but I believe it is likely to be a higher risk for lessors if a small business is acquiring new leased assets to support rapid growth, and their insurance cover does not keep up with their increased asset base. At the other extreme, businesses facing trading difficulties may look to reduce costs by downgrading their insurance cover, leaving them underinsured.”
“If funders continue to rely on their customer’s insurance cover, they cannot be certain that all of their financed plant and equipment assets will be fully covered during the whole term of their finance agreements. Even if the customer believes they have adequate insurance for financed assets, the evidence from the insurance industry, endorsed by FCA research, demonstrates that this is not always the case.” Leader concludes “Lessors need to consider how they can mitigate customer underinsurance risks. Acquis offers a risk based approach to this problem, with regulatory compliant services that deliver good customer outcomes for lessors and their customers.”