FSB’s new publication looks into the price of insurance and whether the products on offer are suitable for small business customers.

The findings expose concerns about whether the insurance market is performing adequately for small firms and self-employed people.

With high inflation putting general pressure on small firms’ bottom lines, the report’s finding that a clear majority (60%) have seen their insurance premiums rise in the last year is an illustration of the cost squeeze facing small businesses, who cannot in most cases operate without various forms of cover.

Over half (52%) of those whose premium costs have risen say that the rise is 11 per cent or greater, while some individual businesses have seen cost rises far in excess of that – particularly following a claim.

The pandemic brought many underlying problems with insurance into sharp relief, as small firms had to fight hard for their business interruption insurance to be honoured, leading to significant uncertainty and worry at a time when they were already fighting to survive.

Other types of insurance, particularly professional indemnity insurance (PII) – which is very often a trading requirement for firms in areas such as accounting or architecture, among others – have seen their markets harden, restricting access to cover and the protection afforded to customers in the wake of COVID-19.

The report includes numerous recommendations for regulators, insurers, and the Government on how to resolve or improve many of the difficulties small firms face around insurance, including:

• The Government should work together with insurers and the Financial Conduct Authority (FCA) as the regulator to agree specific conditions for forms of Government support that should not be taken into account when calculating business interruption insurance claims.
• The Financial Conduct Authority should be explicitly required to consider intervening in a market if it becomes clear that there is a segment/sector of businesses that are unable to obtain insurance.
• The Government should convene discussion with relevant sector-specific regulators and professional associations, to ensure that PII requirements that are imposed as a condition of being able to practise are assessed so they do not disadvantage small businesses. The FCA should carry out a market study of PII, given recent price increases and market hardening.
• The Government should use the Procurement Bill to remove barriers for SMEs in accessing public procurement opportunities. This should include commitments not to impose unlimited liability for public contracts, to share risk reasonably, and to ensure that both PII and public liability insurance requirements in public contracts are proportionate to the size of the contract.

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.

“Long, complex contracts present difficulties to smaller businesses without a whole department dedicated to deciphering legalese, and runs the risk of small business customers believing they have purchased adequate policies, when in fact they have not.

“Meanwhile, procurement processes which mandate unnecessarily high levels of insurance for relatively small contracts put them out of the reach of small businesses, once again leaving them on an uneven playing field.

“Our recommendations, taken as a whole, 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.”