Britain's 5.7 million small businesses are not, for the most part, deliberately underinsured. Of those, 5.4 million employ fewer than 10 people, according to the Federation of Small Businesses. Many are insured for a version of themselves that no longer exists.
That is the central argument of David Perry (pictured), chief executive of FSB Insurance Service, the insurance arm of the Federation of Small Businesses (FSB), Britain's largest business organisation. Perry believes many small firms outgrow their insurance without realising it, while the industry still lacks an adequate answer to why it keeps happening.
"It's not a deliberate underestimation of what they need," Perry said. "Businesses don't know about insurance. They sort of don't know what they don't know."
The problem begins with how small businesses describe what they do. When buying insurance, many describe their business in the broadest possible terms, without accounting for everything that has quietly accumulated around that core activity.
One furniture retailer illustrates the point. The business had traded for 20 years under a basic shop combined policy, but when the owner was asked to talk through the business, a different picture emerged. It had quietly expanded into furniture manufacturing, bespoke design, delivery and installation.
"On the face of it, it's a furniture shop," Perry said. "But actually they're a retail, design, manufacture, delivery, installation business. And a simple shop policy isn't really going to cater to everything that they do."
Nobody had done anything wrong; the owner had made a reasonable effort, and the broker who sold the original policy had no reason to ask deeper questions. The gap had opened gradually, through the ordinary process of a business adapting to survive. That, Perry argued, is precisely the problem: many established small firms have diversified over time, adding services, taking on subcontractors and changing how they operate without ever connecting those changes to their insurance.
The same pattern emerged during the pandemic, when Perry spoke to a Scottish fisherman who had transformed a local business into one selling frozen fish worldwide online. His insurer had never been told.
"You've basically gone from a local business whose world is effectively 50 square miles to selling frozen goods around the world using the internet," Perry said. "Completely different risks involved there."
Subcontractor liability presents another common blind spot. Many small businesses assume hiring a subcontractor transfers liability, without fully understanding where responsibility for a claim ultimately sits. Public liability limits create a similar problem: firms with £1 million or £2 million of cover often assume those limits will always be sufficient, without considering whether their activities could generate larger claims.
Businesses are also being reshaped by risks beyond their control. The first is climate change. Flooding, fire and subsidence are becoming more significant risks for UK businesses, yet Flood Re, the scheme designed to make flood cover more accessible and affordable, applies only to domestic properties. Small and medium-sized enterprises (SMEs) remain outside its scope.
The second is geopolitical instability. The same furniture business that had quietly evolved also found itself unable to source cedar wood from Lebanon after shipments became trapped in the Strait of Hormuz. For a small UK firm with no international footprint, the link between geopolitical tensions and its own supply chain would once have seemed remote.
"The global political events and the constant change in global activity is making a big difference," Perry said. "It feels a little bit like the superpowers used to be the world's policemen and have turned into the world's playground bullies. The influential powers are less predictable, and so the impact of what they're doing is going much, much deeper into the smaller business community."
Whether the risk comes from inside the business or beyond it, the answer is the same: structured forward planning before something goes wrong rather than after.
He advocates a straightforward risk assessment framework: score the likelihood of each risk out of five, score the potential severity out of five, and multiply the two. Anything approaching 25 warrants immediate preparation and, where possible, insurance cover. The firms that survive disruption are not necessarily those with the most comprehensive policies, but those that have taken time to think through what could actually go wrong.
Business interruption (BI) insurance sits at the centre of that preparation, yet it remains consistently undervalued.
"You can pay for your building to be rebuilt over a couple of years," he said, "but if you've not got your gross profit or your revenue covered for those two years, you'll just have a nice new building and no business."
The COVID-19 pandemic turned business continuity planning from a compliance exercise into a practical tool for day-to-day resilience.
The furniture shop and the fisherman were not failed by the insurance market. They were failed by the shared assumption that a policy bought years earlier, for a business that no longer existed, was still doing its job.
