Small businesses, or enterprises with fewer than 50 employees, form the backbone of the UK’s business population, making up 99.2% of its six million-strong private sector operations, as revealed by the latest data from the Federation of Small Businesses (FSB). Of these, more than three-quarters are sole traders or those who handle their business’ day-to-day operations on their own.
This backbone, however, is facing a tremendous protection gap, with just slightly over a quarter (26%) of businesses carrying some form of insurance, according to a recent survey conducted by industry giant AXA UK.
The poll, which involved 500 micro-businesses or those employing fewer than nine personnel, also found that only 40% of owners have additional personal savings to protect them in case their business gets into financial difficulty. About a quarter (24%) of the respondents admitted that they would need to ask family members for money if such a situation arises, while 11% said they would rely on their friends for help.
Going back to FSB’s data, the numbers showed that the country’s overall business population decreased by 6.5% between 2020 and 2021. The drop is equivalent to 390,000 companies, which is 23% higher compared to the previous year.
The downtrend is expected to continue this year, with trade credit insurer Allianz Trade, formerly Euler Hermes, predicting insolvencies in the UK to be about 20% higher than in 2021. The situation highlights the need for businesses to be financially protected.
What are the risks facing small businesses in the UK?
Business insurance provides companies financial protection from unfortunate scenarios that could have otherwise cost them thousands, if not millions of pounds, making it difficult for them to recover. In its annual risk barometer report, insurance behemoth Allianz ranked the 10 biggest risks businesses in the UK are facing. These are:
- Cyber incidents: Securing the top spot from second place last year, these include cyberattacks, IT failure or outage, data breaches, and their corresponding fines and penalties.
- Business interruption (BI): With the pandemic forcing many businesses to close shop either temporarily or permanently, BI, including supply chain disruption, climbs from third to second place.
- Climate change: Global warming brings a range of physical, operational, financial, and reputational risks to businesses. As a result, climate change leapfrogs three other risks in the rankings to claim the third spot.
- Changes in legislation and regulation: Brexit- and COVID-19-related regulation and legislation continue to evolve, forcing businesses to implement measures in order to keep up. This type of risk retains its position at the fourth spot.
- Market developments: Major industry developments such as market volatility, stiffer competition, mergers and acquisitions, and market stagnation continue to have a huge impact on the operations of UK businesses. Because of this, the risk type secures the fifth spot for the third consecutive year.
- Shortage of skilled workforce: A new entry in this year’s rankings, manpower scarcity is among the biggest consequences of Brexit and the coronavirus pandemic.
- COVID-19 outbreak: With restrictions beginning to ease, pandemic-related risks suffer a massive drop from number one last year to the seventh spot in 2022.
- Fire and explosion: Posing a danger to both life and property, these hazards go up a notch from their 2021 ranking.
- Loss of reputation or brand value: Reputational damage also climbs one spot as companies’ sustainability and ESG credentials, linked to concerns around climate change, are put in the spotlight.
- Natural catastrophes: Natural calamities, including storms, flooding, earthquakes, and other weather events, remain in the top 10, albeit sliding down from seventh place.\
What types of coverage do UK small businesses need?
Because each small business faces unique risks and challenges, there is no one-size-fits-all policy that caters to every insurance need. The type of coverage a company will require depends on a range of factors, including its business activities and the number of employees.
Business insurance providers across the UK offer various policies that can help protect small enterprises against the different risks they face. The selection is diverse, but according to industry experts, these are some of the most essential coverages small businesses need to protect their operations.
1. Employers’ liability insurance
Businesses in the UK employing at least one staff are required to take out employers’ liability (EL) insurance. This type of policy provides protection if an employee becomes ill or injured while doing their job. According to insurer Hiscox, EL’s coverage is not limited to full-time or part-time employees. It is also a requirement for businesses to enlist the help of volunteers or employ staff on a casual basis. Failure to get employers’ liability insurance can result in a £2,500 fine from the Health and Safety Executive (HSE) for every day an enterprise goes unprotected.
2. Public liability insurance
One of the most popular policies for small businesses, public liability insurance (PL) protects companies from claims of property damage or bodily injury made against them because of their business activities. Although having this type of coverage is not a legal requirement in the UK, some clients and suppliers may request businesses to have one as a condition for working with them.
3. Professional indemnity insurance
Professional indemnity (PI) insurance is designed for businesses offering professional services or advice. It protects them from claims arising from negligent acts or omissions committed while performing their work. PI typically covers legal and compensation costs, and similar to PL, some clients may insist that a business get coverage before agreeing to work with them.
4. Business contents insurance
This type of coverage protects a business’ physical belongings essential to its daily operations. These can include laptops, smartphones, and other mobile devices. Business contents insurance covers damages or losses caused by theft, fire, flooding, and other covered events.
5. Product liability insurance
Product liability policies protect businesses should a customer suffer an injury or property damage resulting from the use of their product. It typically covers legal and compensation costs.
6. Personal accident insurance
This kind of coverage is designed to minimise the financial impact of losing a key employee, if a job-related accident causes them to miss work, usually for a period of two weeks or longer. It pays out for lost income, medical costs, and hospitalisation, up to the limit of the policy.
7. Business interruption insurance
The disruption brought about by the COVID-19 pandemic has given prominence to this type of coverage, which has also been the point of contention between insurers and their policyholders. BI cover is designed to protect businesses from loss of income and additional costs incurred if their operations are forced to shut down because of an unexpected event. Insurance companies, however, argue that the loss should result from “material damage caused to property.”
8. Cyber liability insurance
With cybercrime rapidly emerging as among the biggest risks facing businesses, it pays for companies to have some form of cover. Cyber liability insurance is designed to mitigate the financial impact of data breaches and cyberattacks. Coverage typically includes legal and compensation expenses, and the cost to restore data.
9. Equipment breakdown insurance
Many small enterprises rely on their equipment to keep their business running. This type of coverage protects businesses against sudden and unexpected mechanical or electrical failure of essential equipment by paying out repair or replacement costs.
10. Tools insurance
For tradespeople who rely on their tools to get the job done, taking out this type of coverage is important. Tools insurance covers the cost to replace or fix industry-specific instruments if these are lost or damaged.
What should UK small businesses consider when taking out insurance?
Small businesses working out the coverage they need should consider a range of factors before taking out insurance. Online insurance brokerage Simply Business laid down these key questions entrepreneurs must ask to find out which policies fit their needs.
- Are you a sole trader or a limited company?
- Does your business deal with members of the public?
- Do you have business premises?
- Does your business hold any stock, equipment, or tools?
- Does your business employ any other staff?
The firm added that it would also be helpful for businesses to consult an experienced insurance agent or broker who can give them sound advice regarding which coverages suit their operations the best.