SME underinsurance is far from a small problem

Insurers must do more to educate the UK’s sole traders and SMEs around essential insurance covers because at present, the industry is not meeting the needs of this demographic, contributing to a growing underinsurance crisis, according to Peter Norman, head of distribution at MGA OneBefore.

According to a February 2024 article published by consulting firm Leyton, there are currently around 5.51 million SMEs in the UK, making up 99.9% of the country’s private sector. Just under two-thirds (61%) of British workers are employed by private sector companies.

Norman believes these enterprises are not having their insurance needs met – especially when it comes to accessing accident, health and protection cover.

Norman told Insurance Times: “The threat of underinsurance in the SME sector is not new, but it is growing. The insurance sector seems to have a blind spot [around] SMEs, particularly in the accident and health space.”

During his prior tenure at a large carrier, Norman said he had seen around 30% of claims made by SMEs on their accident policies declined because they were claiming for the impact of sickness, unaware that the product they had purchased did not cover this risk.

Furthermore, he added that the majority of SME owners and workers typically do not even take time off from work due to sickness because this could lead to them “losing money”.

Norman continued: “This [issue] is down to a lack of insurance and the industry has yet to shine a light on the problem. [It does] not seem to think [that it needs] to provide solutions, [but] it is creating this gap.”

Although Norman acknowledged that some distribution networks look at accident and health type covers for the SME market, he said a key barrier to providing these products to SMEs is that policies are not available from major insurance entities.

“We need to look at the development of solutions which balance cost with value,” he urged.

“The bigger insurers are still leaning towards accident rather than health and this is only increasing the potential for SMEs to find that if they claim for sickness, it will be declined.”

Nick Homer, head of market management for corporate risk at Zurich Insurance, agreed with Norman that a lack of awareness in the SME sector around the need for certain covers, as well as the availability and price of such cover, poses a challenge.

He said: “In many ways, we need to make it easier for SMEs to access the solutions which are in the market.

“A large number of products provide far more than simply income protection. Many will also look to support physical rehabilitation and mental health support.

“[For example, Zurich offers] access to digital general practitioners and a number of services which go above and beyond the financial impact of accident or illness.

“These are services and support that SMEs simply cannot [usually] access and would make a significant difference in the length of time that key staff are unavailable.”

Homer emphasised that “a positive promotion” of relevant insurance propositions to “raise awareness of the benefits” of cover was vital.

He continued: “There is a need for greater education so that SMEs and micro traders can make informed decisions around these products.

“The biggest challenge for the smaller business sector remains affordability, but all too often it does not get to that point. There are gaps and we should be looking at how they can be filled.”

Government intervention

Homer noted that one possible route the industry could take to tackle this challenge is a public-private initiative.

“This is an ongoing issue – not only for us in the sector, but also the government,” he explained. “There have been concerns around the vulnerability of the SME and micro workforce. The government often talks about workplace health and the benefits for the economy.

“At present, we see mental wellness and cancer as the two biggest reasons keeping people off work. It creates a need for vocational rehabilitation and that is where insurance can play a role.”

Another driver of potential government involvement in this conundrum surrounds the role of intermediaries.

Homer acknowledged that the low premiums these policies usually generate – and therefore the low broker remuneration – makes accident, health and protection covers more challenging for intermediaries to sell.

He said: “It is difficult for intermediaries as this is not an easy sell to SMEs.

“We may well need to see a collaboration between government and industry to increase the education and awareness of the risks and the solutions available.”

An ‘untapped market’

Edward Axon, chief growth officer at intermediary LifeSearch, believes this environment presents insurers with a real opportunity.

“It is a significantly untapped market,” he said.

“There are two major reasons. The first is awareness. Around 45% of smaller businesses haven’t even considered business protection and keyman cover. It means as an industry, we are not doing enough. It is not a mandated cover, so we have to look at how we can engage with clients.

“Secondly, it is perception versus reality. A third of SMEs believe that [insurance] products are more expensive than they actually are.

“As an industry, we are very good at talking to ourselves and loading our products with too much jargon.”

Axon added that a significant number of SMEs have told him that the loss of a key member of staff would see the firm cease to exist within six months.

Therefore, the insurance industry needs “to promote not only the awareness of the products and the price, but also the consequences of not having it”, Axon explained.

He continued: “These are very busy people and we need to take these products to them – not expect them to find the solutions.”

He said greater levels of data could be a game-changing factor in addressing this.

“If we can use data to better understand the client and say ‘we understand you and your business and this is the product you need’, it would make a huge difference,” he said.

“We need to drop the jargon and make it clearer.

“It is a significant opportunity for the market, but we need to find ways [to] be more proactive around how we get the solutions to the clients.”