The review was based on non-motor claims between £5,000 and £100,000, for various insured events - fire, theft, flood, water escape and business interruption.
The FCA study concluded that for 22 % of the SME claims analysed, the sums insured proved to be inadequate. In some cases the sums insured were less than 50% of the actual loss.
For an SME, under-insuring will normally result in any claim settlement being reduced in proportion to the degree of under-insurance.
An independent research report, commissioned by the FCA to support their review, has also identified many examples where SME insurance claims were not paid in full due to policy terms and conditions, warranties or exclusions.
In a number of these cases, the customer believed that they were adequately covered, and only realised after making a claim that their policy was not as comprehensive as they thought. Some customers received no settlement payment as claims were repudiated, mainly due to policy violations, for example, keys being kept on premises or lack of bars on windows.The financial impact on an SME of having a claim reduced due to policy interpretation can also be severe.
Market value settlement
One example concerned a small building company which had some of its machinery stolen from a secured building site. No used equipment was available for sale as a replacement, and the company was therefore forced to buy a newer model costing £5,000 more than the original. Their insurer would only pay a market value settlement, which was £20,000 less than the original machine cost and leaving the company to carry a loss of £25,000.
Customers also said that they were unable to fully understand the legal terms of their policy, and where they had changed insurers on the advice of their broker, some customers did not appreciate that the basis of their cover, or some of the key terms and conditions, may have changed from their previous policy.
Commenting on the impact of these findings on lessors, Nick Leader, director of Acquis Insurance Management (pictured above), said: “The under-insurance and various policy issues raised by the FCA have clear risk implications for lessors who are financing assets to SMEs.“It’s normally a contractual requirement for an SME customer to have full, comprehensive insurance cover for any financed assets and if an SME who is already under-insured then adds financed equipment to be covered by the same policy, the degree of under-insurance is compounded - placing the lessor at greater risk.
Leader added that funders who rely on their SME client’s insurance policy to insure financed assets cannot be certain that the customer’s policy will always provide sufficient cover. Even if the customer believes they have an adequate level of comprehensive insurance to include financed assets, the FCA review shows that this may not be the case.
Nick Leader stressed: “Lessors need to consider how they can mitigate the SME insurance risks that the FCA have identified. Acquis offers a risk based approach to this problem, with regulatory compliant services that deliver good customer outcomes for lessors and their customers.”
Acquis Insurance Management is an independent insurance broker and administrator that provides specialist insurance solutions to the finance and leasing industry. Acquis is tracking insurance cover on over £2 billion of assets and provides insurance cover to lessors across Europe.
Financial Conduct Authority ( FCA ) Thematic Review TR 15/6 Handling of insurance claims for Small and Medium-sized Enterprises
Commercial Insurance Claims: Findings from Research with SME Customers. Prepared by Quadrangle for the FCA. May 2015.