FEDERATION OF SMALL BUSINESSES small businesses in the liability insurance market
ABOUT THE FSB The Federation of Small Businesses (FSB) is the UK s largest lobby organisation representing the selfemployed and owners of small businesses. Founded in 1974, it now has over 185,000 members across all industries, trades and services. It is a non-party political lobby group that exists to promote and protect the interests of all those who own and manage their own businesses. FSB members together employ 1.25 million people and turnover 10 billion a year. FEDERATION OF SMALL BUSINESSES PRESS AND PARLIAMENTARY OFFICE 2 CATHERINE PLACE, WESTMINSTER, LONDON, SW1E 6HF TELEPHONE: 020 7592 8100 FACSIMILE: 020 7233 7899 E-MAIL: london.policy@fsb.org.uk WEBSITE: http://www.fsb.org.uk
FOREWORD The crisis in the insurance market in the last year or so has been an area of increasing concern for the FSB as a vast number of small firms have seen massive hikes in their insurance costs. Good well-run companies are in trouble and losing jobs as a result of the dramatic increase in the cost of Employers Liability Compulsory Insurance (ELCI). The FSB has taken up the cudgels with Government and with the insurance industry and has sent evidence from its members regarding this grave area of concern. Our recommendations, as highlighted in this report, have been widely endorsed and have led to two major changes: the ABI proposal which ensures that liability insurance policy holders now get a minimum of 21 days notice of renewal and the launch of a scheme which will make it easier for firms with a good health and safety record to access affordable ELCI. This has been achieved as a result of this report coupled with the support offered by Warren Hill, our own FSB insurance brokers. This report detailing the FSB s work with its members as well as exploring the FSB s media approach with newspapers and the broadcast institutions and arguing the case with Government Departments and other organisations, will contribute to a sensible resolution for all concerned, most of all for good, well-run businesses that do not deserve to close simply because they cannot afford or cannot secure liability insurance. I am grateful to Reema Shah who has put this publication together with speedy and remarkable efficiency. John Emmins National Chairman 1
This report presents the results of a Federation of Small Businesses survey, carried out in June 2003, on the effects of the current crisis in the insurance market on UK small businesses. SUMMARY Small businesses are continuing to experience a steady rise in insurance costs with 20% of firms reporting a doubling in premiums this year. 25% of employers find the essential Employers Liability Compulsory Insurance (ELCI) difficult or impossible to secure despite vigorous attempts to find cover. Small businesses in sectors such as retail and services are facing serious difficulties in securing ELCI the problem is not restricted to firms in high risk sectors. 9% of respondents have not secured ELCI cover whilst 8% are continuing to trade without ELCI. 18% of firms reported that conditions applied to their insurance, an additional 13% now have a different level of cover and 9% have higher excesses. Many insurers are not responding to proactive business planning approaches, from owners attempting to ascertain premium levels before the renewal notice is received. The rise in insurance premiums has severely impacted on many small businesses. 60% reported a decrease in profitability and 25% saw turnover go down. 19% of respondents saw a decrease in staff levels, 16% reported a decrease in their marketing activity with a similar number reducing investment in training. FSB SUCCESSES RESULTING FROM THIS REPORT As a result of the survey and this report, the ABI recently launched a scheme which aims to make it easier for small firms with good health and safety records to access affordable ELCI. Until now, the majority of insurers have not been taking firms health and safety records into consideration Half of small business owners receive 2 weeks or less notice of renewal, or withdrawal of cover, from their insurer, yet the majority of the 15% who need to find an alternative insurer need 3 weeks or more to find cover. 70% are not offered extension of cover whilst seeking a new insurer. The FSB welcomes the recent ABI proposal arising from FSB lobbying which ensures that businesses will get a minimum of 21 days renewal notice of their insurance. 1 METHODOLOGY The Federation of Small Businesses has over 185,000 individual business owner members. Regular profiling by the organisation demonstrates that the membership is a robust cross section of the UK small business community, in terms of geography, business status, age and gender of owner, length of time in business, number of employees, turnover and sector. The electronic survey was circulated to 28,000 members and received a total of 1,243 responses, a response rate of 4.5%. 2
2 PROFILE OF THE BUSINESSES Responses were received from small business owners throughout the UK. The profiles of the businesses resembled those of the FSB membership as a whole, and therefore the small business community. For example, the largest proportion of respondents was drawn from the retail, repairs, wholesale sector (16%) followed by the business services and other services (12% each) and the manufacturing sector (11%). More than half of the respondents operate as limited companies (55%) showing a significant swing towards incorporation as the taxation regime is now more favourable for limited companies- and 25% as sole traders. Analysed by turnover, 72% of all respondents had a turnover of 500,000 or less, whilst 11% had a turnover of more than 1million. 95% of the respondents employed less than 50 people with the majority (55%) employing 1 to 4 people. 3 INSURANCE COSTS The survey indicates a steady increase in insurance costs from 2001 to 2003. In 2001, 18% faced insurance costs of more than 3000, in 2002, 27%, and by 2003, this has risen to 37%. Between 2001 and 2003, the percentage of respondents facing insurance costs over 10,000 has more than doubled, from 5% to 13%. During the first six months of 2003, insurers continued to renew 84% of respondent s insurance policies. Of these, 80% saw a significant increase in their costs compared to last year (2002), with 20% experiencing a further increase of more than 100% in their premiums, on top of the significant increases seen in 2002. For those business owners who did not have their policies renewed by their insurers and have needed to find new insurers, the study revealed that the cost of cover from the new insurer increased even more compared to the previous insurer. 26% of respondents report an increase of more than 100% in their premiums - compared to the 20% reporting the same rise with their previous insurer. 4 ACCESS TO EMPLOYERS LIABILITY INSURANCE 25% of respondents with employees reported that Employers Liability Compulsory Insurance (ELCI) has been difficult or impossible to find. At the same time, the study also indicates that a high number of respondents tried many sources of cover if their current insurer refused to renew their insurance. 63% of respondents have tried 3 or more sources. Of the 9% of respondents who have not managed to find ELCI, the vast majority have continued to actively trade, equating to 8% of the survey respondents. Analysed further, the survey demonstrates that certain sectors find it more difficult to find insurance than others. Of the small businesses that found it difficult or impossible to find ELCI, the largest percentage came from the Other Services sector (19%), followed by 15% from Construction and 13% from Manufacturing. Surprisingly, 11% of respondents were from the Retail/repair/wholesale sector. 3
It is no longer only the seemingly high risk sectors that are being affected by the insurance crisis - low risk sectors are also facing serious difficulties in securing ELCI. Business owners are trying strenuously to secure the essential ELCI. 8% of respondents are trading without Employers Liability Compulsory Insurance. 5 CONDITIONS FOR RENEWAL Almost half of the respondents experienced a significant change regarding the type of their insurance cover with 18% reporting that new conditions applied and 13% reported that they now have a different level of cover. Many of the 15% of small businesses who have been declined insurance cover by their then insurer, have made changes in order to obtain new cover, with the most popular alteration being reducing high risk activity. The study reveals that the majority of insurers are not taking health and safety records into consideration when setting premiums only 32% of respondents report any interest. This figure, however, rises slightly when the business has transferred to a different insurer 38% of new insurers take health and safety records into account. More than half (57%) of respondents reported that their claims record was taken into consideration. This figure was slightly higher for the new insurers with 61% of respondents stating that new insurers take claims records into consideration. Until now there has been little incentive for small businesses to demonstrate their health and safety records as they have previously not been taken into consideration by the vast majority of insurers. However, since the release of this report, the ABI has proposed a scheme whereby insurers will be encouraged to take health and safety records into account. Claims records are important for many insurers but small business concerns that their good record is not considered is vindicated as over a third of insurers show no interest 6 RENEWAL NOTICE For those respondents whose insurance has not as yet been up for renewal this year, nearly 30% have actively tried to contact their insurer in advance of notice. Of this, 32% stated that the insurer was not willing to communicate about renewal. Business owners are trying to plan ahead for insurance renewal but, disappointingly, a third of insurers are still not providing the requisite information. Nearly half of the respondents (47%) were given 2 weeks or less notice of renewal or withdrawal of cover - from their insurer or broker. For those respondents whose insurance was not renewed by their current insurer (15%), almost 70% were not offered any kind of extension whilst they looked for alternative sources of insurance. More than half of these respondents reported that it took over 3 weeks to find new insurance. Half of small business owners received 2 weeks or less notice of renewal from their insurer/broker, yet the majority of those who needed to find an alternative insurer took 3 weeks or more to find new cover. 4
The FSB welcomes the new standards authorised by the ABI and BIBA, which will ensure that liability insurers will provide at least 21 days of their renewal terms: an initiative recommended by this report and further FSB lobbying. However, the FSB also feels that evidence actually demonstrates that a 30 day period is absolutely essential if businesses are to maintain cover. All insurance companies refusing to renew cover must additionally offer to extend pre-existing cover for a minimum of 30 days, whilst the business owner pursues alternatives. 7 INSURANCE DRIVEN CHANGES IN BUSINESS OPERATION The overall impact on the respondents businesses due to changes in the insurance market was assessed. Turnover was also adversely affected with 25% of respondents experiencing a decrease in their turnover. An overwhelming majority, almost 60% of all respondents reported a decrease in profitability. The drop in turnover reflects contraction in business activity, changes in operation and investment patterns. As a substantially larger percentage of respondents saw a decrease in profitability than in turnover, the increase in insurance costs is absorbed by the firm rather than being passed onto the consumer. This affects the cash flow as well as reducing any possibility of investment within the business. This in turn will hinder the growth and development of small businesses. 16% reported a decrease in their marketing activity whilst 15% of respondents reported a decrease in their training activity. Reduced investment in marketing will constrain business growth potential. Reduced investment in training is bad for employees and employers alike, with the probability of restricting productivity and reducing competitiveness. 19% of all respondents saw a decrease in staff levels over the last year. Small firms workforce reduction, with anecdotal reluctance to replace staff and take on apprentices, is an unsurprising response to the insurance crisis, particularly as ELCI is so difficult to secure. This will have repercussions on the labour market as more than half of the private workforce is employed by the SME sector. FSB research (Lifting Barriers to Growth, 2002) shows that 25% of businesses wish to grow by increasing staff numbers these ambitions will be undermined by this dynamic. A relatively high number of respondents (4% of those surveyed) sold or tried to sell their business as a result of the changes in insurance costs and 1% of respondents closed their business as a result of the insurance crisis. A buoyant small business sector is vital to a healthy economy, and the insurance crisis is clearly forcing business closures. 5
THE INSURANCE LIABILITY MARKET IN NORTHERN IRELAND Insurance is the single biggest issue for businesses in Northern Ireland. The situation across Northern Ireland is more serious than the rest of the UK and the OFT recognised this in its recent report. The reason for this is that there is a reduced level of competitiveness due to insurance companies moving out of the region or refusing to offer cover to businesses. In 1994, there were 26 insurance underwriters, today there are five major companies. Local research was carried out in response to our members concerns and to substantiate the largely anecdotal information expressed to the FSB from many varying sectors. We are convinced by our research that it is an issue that has particularly serious implications for the business community and therefore the wider economy as a whole. If we witness premium increases similar to last year, many more businesses will be forced to close or to operate illegally. The FSB in Northern Ireland has been lobbying the Department of Enterprise and Investment for them to develop a strategy to attract more insurance underwriters to Northern Ireland. This would assist businesses in receiving more realistic quotations, and provide further protection from Insurance Fraud Scams. (The latest scam affected 1000 businesses). We are continuing to pursue Government to set up the FSB proposal of an Insurance Pool, funded from the Insurance Premium Tax for small businesses unable to get insurance at all. We believe this should be devolved and administrated by the Department of Finance and Personnel. We have made some progress, however, the fact remains that thousands of jobs and businesses are at risk from this problem and it needs to be a top priority for the Government. 6
Some comments from those surveyed Insurance premiums make us feel like fish in a barrel being shot at We are a new company that cannot start business because no one will insure us Despite 6 weeks of calling to ask for this quote, the information arrived in verbal format only, less than 2 hours before close of business on the day cover ran out Three companies refused to quote due to us having a garden & children s play area. This is likely to reduce the number of child friendly pubs/restaurants in the future I make and sell pottery giftware on the Internet and to continue with my present insurer, I have had to stop exporting to the USA and Canada or have my premium increased by 400% for the package, i.e. fire, Product Liability and Employer s Liability, and I have had to agree to this Due to the cost and problem of getting Product Liability insurance, we have closed manufacture down in the UK and moved it to mainland Europe. We have received no help whatsoever from the Government I recently sold a business and the purchaser nearly pulled out at the last minute because they could not get insurance cover. They tried frantically for 2 weeks without success As a lot of sole traders do not insure, I cannot compete, therefore I will do the same to stay in work I reduced the 2003 insurance premiums because I drastically reduced our overall cover and agreed to higher excess. We have also closed down our pre-fabrication premises and reduced staff, we now take on less freelance people. We currently sub-contract all our pre-fabrication work and pass insurance cover to them. If we had not done this, our insurance would have increased by 50% for 2003 Businesses that offer water sports hire on the sea, i.e. water-skiing, biscuit rides, etc cannot get insurance and have been forced to close and go abroad It is very difficult for a really small business to get insurance related to the REAL ris. By ceasing to employ any staff, I have avoided having statutory employers insurance. Although this has meant an increase in my own working hours, it has allowed the business to remain in existence I seriously considered ceasing trading as my insurance costs now run at nearly 10% of turnover. I would have if I could have disposed of my assets, unfortunately now worthless as no one could enter my business without paying even higher premiums than I (and I have an unblemished record for 14 years.) The good news is you have got insurance, the bad news is the premium has more than doubled Just did not bother to renew insurance due to high increase in premiums 7
Some press coverage July 2003 The Times 14 July 2003 Daily Mirror 15 July 2003 The Financial Times 9 July 2003 Daily Telegraph 14 July 2003 The Independent 14 July 2003 8
Author: Reema Shah Federation of Small Businesses Copyright 2003 Federation of Small Businesses Federation of Small Businesses 2 Catherine Place, Westminster, London, SW1E 6HF T: 020 7592 8100 F: 020 7233 7899 e-mail: london.policy@fsb.org.uk website: http://www.fsb.org.uk The right of the Federation of Small Businesses as the author of this work has been asserted in accordance with the Copyright, Design and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior permission of the Federation of Small Businesses (FSB). Whilst every effort has been made to ensure the accuracy of the facts and data contained in this publication, no responsibility can be accepted by FSB for errors or omissions or their consequences. Articles that appear in the book are written in general terms only. They are not intended to be a comprehensive statement of the issues raised and should not be relied upon for any specific purposes. Readers should seek appropriate professional advice regarding this application to their specific circumstances of the issues raised in any article. PUBLISHED BY THE FEDERATION OF SMALL BUSINESSES PRESS AND PARLIAMENTARY OFFICE Designed and printed in the UK by Spacequest Marketing, London. Tel: 020 8668 6932