Small hospitality business owners are risking their livelihoods, according to a survey by the British Insurance Brokers' Association, by failing to get proper advice about their commercial insurance cover.
Buying commercial insurance cover to protect a business is complicated - even for the smallest company. Research has found that many business owners could come unstuck because they think they have received advice, whereas all they are getting is information.
The research, commissioned by the British Insurance Brokers' Association (BIBA), found that one-third of small and medium-sized enterprises (SME) not using the services of an insurance broker didn't realise they were not being advised and were only being offered products limited to a single insurer or provider.
CLARITY
This lack of clarity is worrying, as the cover may not be the best for the purchaser's business. Business owners are far too pressed for time to read all the conditions of an insurance policy.
As a result, businesses could find themselves unprotected if they haven't had certain terms and exclusions pointed out to them or understood security requirements, for example. Sadly, this often only becomes clear when a business needs the protection offered by their policy the most - when a claim has arisen.
Eric Galbraith, BIBA's chief executive, says: "It is clear there is confusion among commercial buyers of insurance, and we have suspected this for some time. It is worrying to think these firms could end up with inadequate or even the wrong cover because they did not receive advice or a recommendation."
ADEQUATE COVER
The competitiveness of the insurance market means that businesses have plenty of choice when it comes to buying insurance, but it needs to be the right cover, warns the association. Having suitable insurance in place is vital. Business owners should always check that adequate cover is being bought and ask, if the policy is a recommendation, whether it is suitable for their specific needs - or obtain advice from a broker.
BROKER SUPPORT
Brokers take time to learn about the insurance needs of a specific business and can offer a full range of professional services, including risk management, recommending insurers for their quality and, not least, providing assistance in the event of a claim.
The research found that the feedback from those who did use brokers was generally positive, with 95% of SMEs saying they are likely to do so again for their business insurance when their policy next falls due for renewal.
REMUNERATION
How a broker gets paid has been a source of much discussion in the insurance industry over the years. The Financial Services Authority (FSA), which is responsible for regulating the activities of the insurance industry, has been seeking greater transparency about the level of commission earned by intermediaries when selling insurance; the type of services they provide; and the relationship between brokers and insurers. The FSA argues that this information is needed to ensure that the buyers of commercial cover can make a more informed decision about the most appropriate insurance product for their business.
INDUSTRY GUIDANCE
To help the buyer, BIBA with the support of other industry bodies, has published industry guidance. Its aim is to ensure that buyers of commercial insurance are given clear information about their broker's ties - ie, are they working for the insurer or the customer or, in some cases, for both; the services being provided; and the remuneration they have received for them.
Customers need to be made aware by the broker or their intermediary of their right to request information about the broker's commission and where it comes from. The guidance advises brokers to tell customers about this, as FSA research found that many customers were still unaware of this right.
The guidance also aims to give customers clearer and more comparable information about the commissions that brokers and intermediaries receive, as well as the services they provide. This includes information about the breadth of search and whether a broker has used the services of another intermediary to place the insurance policy.
The FSA's rules require authorised companies to take all reasonable steps to identify conflicts of interest between themselves and a client. A conflict is where a broker's own interests conflict with those of a commercial customer; or a broker is unable to act in the best interests of one commercial customer without adversely affecting the interests of another commercial customer. Consequently, a large part of the BIBA guidance is devoted to helping brokers to manage the conflicts of interest that may arise from commercial relationships.
BUSINESS AS USUAL
BIBA will be working hard with the industry to ensure that this guidance is adopted and becomes embedded in the day-to-day practices of intermediaries so that it becomes business as usual for them. The FSA's supervisors will be reviewing how effective the guidance has been and whether it is achieving the desired outcomes for customers in the next year.
Galbraith concludes: "Commercial customers should expect to receive disclosures that are clear and accurate, and this industry guidance should play an important part in helping achieve this."
To find a BIBA broker, visit www.biba.org.uk. A copy of the industry guidance can be found here.
THE KEY FINDINGS OF BIBA'S RESEARCH
Lack of understanding as to what constitutes advice
SME business owners do not understand what advice entails; 33% of SMEs not using a broker to arrange their business insurance did not understand that they were not receiving advice and were probably being offered only a single product.
The majority of those not using brokers think a suitable product is being sourced
Among both those who use a broker and those who do not, there is confusion as to where they can obtain advice; 63% of SMEs who did not use brokers said they thought they had received a suitable secure insurance policy and specialist advice.
Clients appreciate that taking the cheapest option may not be the best move
SMEs who use brokers understood that the cover provided by the policy was as important a factor in the buying decision as was the total cost. In our sample, 84% thought that the cover was very important. SMEs using brokers appreciated that in the commercial market cheapest is not always best.
Brokers understand their SME clients' businesses
More than two-thirds of SMEs who used a broker regarded it as very important for their broker to understand their business. When asked whether their broker understood their needs in terms of risk exposure and protection of assets, an overwhelming 92% said they did. Eighty nine per cent felt that using a broker allowed them to focus on their business.