Insurance can seem like an unnecessary added expense for a small or medium-sized enterprise, on top of already sizeable liabilities such as rent, supplies and bills.

However, commercial insurance isn’t a luxury, or optional extra. It could prove to be essential, ensuring your company can continue operating should disaster strike.

“Insurance is a mechanism by which an entrepreneur can trade uncertainty for certainty, by purchasing an insurance policy that effectively transfers the financial risk of an insurable event from the business to an insurer,” explains Damien Cassin of insurer Willis.

What insurance does an SME need?

Depending on the industry it operates in, an SME may have legal obligations in respect of insurance. But businesses without mandatory requirements still have key areas to consider.

“Any business should consider asset protection, insurance which safeguards workplace buildings and their contents, stock and property like cars,” says Paul Anscombe, managing director of James Hallam insurance brokers. They may also consider taking out a workers compensation insurance policy especially if they have a number of employees.

“Business interruption is a crucial area, as are liabilities – statutory, public and private – and if your business offers services rather than products, professional indemnity. If your business relies on data, cyber risks are a major concern. Staff dishonesty is another issue becoming increasingly common, sadly.”

Cassin warns against taking a ‘one size fits all’ approach to SME insurance.

“No two businesses are the same, and the specific needs of your small business can be determined by a clear understanding of what risks the business is exposed to, the availability of insurance protection and the business owner’s appetite for risk,” he says.

If SME owners believe they don’t need insurance, Jack Seton, insurer development executive at Swinton Insurance, urges them to ask themselves two questions.

“Firstly, how can I protect my small business (whether as an individual, limited company, or both), and how can I protect the others around me (whether employees, customers, or members of the public and their property),” he says.

“When these questions are considered in more detail, it becomes clear how exposed small businesses can be and the importance of ensuring they have the right policy suited to their business activity.”

Anscombe notes insurance not only protects a business, but legitimises it in the eyes of lenders and clients.

“A solid insurance cushion acts as a guarantee for a business. When financial institutions lend to an SME, they want assurance it’s properly protected in the event it goes bust,” he says.

Common mistakes

Beyond not recognising its value, there are a number of common errors SMEs make in respect of insurance.

For Seton, the most common is a business not fully understanding what cover they have, or do not have.

“Small businesses have to constantly think of new ways to obtain the edge on their competitors. It’s easy to let an insurance policy get left behind and outdated while this process of evolution is happening,” he says.

For Cassin, SME owners far too infrequently check the stability of their insurer, and fail to ensure the wording of their policies is clear and unambiguous and affords wide cover. A willingness to cut corners on cost is also a recurrent issue.

“Be prepared to pay a fair price for advice and cover. The perception ‘cheaper is better’ is an easy trap to fall into given the financial pressures small businesses faces,” he says.

“As a result, underinsurance is common; get a professional valuation on a regular basis.”

For Anscombe, neglecting to safeguard against disruption to a business is all-too common.

“Small businesses typically do not have strong balance sheets, and don’t have the resources to support extended periods out of business,” he says.

“Larger organisations have all sorts of reserves and provisions to deal with lapses in trading, but an SME can only get that protection from business interruption insurance.”

Using a broker vs. going it alone

When deciding whether to use a broker, the chief consideration for businesses is whether they feel informed enough to be able to assess both their own requirements, and the products available.

“If you decide to go it alone and compare insurance by policy online, you’ll probably find at least  half a dozen offers – but how do you know which one is best for you?” says Anscombe.

“A ‘tick box’ approach won’t ensure you’re covered for all eventualities, and have the correct level of cover. A good business insurance broker will be able to expertly assess your requirements and deliver insurance options bespoke to your requirements.”

Cassin also favours brokers, for the advice they can offer.

“You will not be afforded any regulated advice if purchasing direct so, for the majority of small business owners, the broker route with the ongoing professional advice available will be the better option to ensure your business obtains the desired level of protection,” he says.

Brokers are commission-driven, which can be a double-edged sword. On one hand, a broker has a vested interest in garnering the highest commission possible, which may mean selling you unnecessary products.

On the other, as they are motivated to earn your business year after year, it’s in their interests to retain their clients by securing the best deal possible.

“Be challenging to your broker, ensure they take the time to understand your business and have the necessary experience to be your trusted adviser,” Cassin recommends.

Click here for part 1: Setting up a business? How professional advisers can save you money

Click here for part 2: Setting up a business? The key tax considerations