Why SMEs should consider insurance cover for terrorist-related losses

Blogs 1 Mar 2019

Small businesses consider their risks and understand how to get the right insurance cover.

Barricaded Road

Although SMEs, with tight budgets and small cash reserves, would be hard hit by the disruption to business in the aftermath of a terrorist attack, few take up insurance cover.

It's been estimated that take-up is around 10% - and that reduces among businesses outside London, who may consider it a low risk or not a priority on a tight budget.

But changes to make terrorism cover a more attractive proposition for SMEs are on their way - and, as attacks become more indiscriminate, it is important that small businesses consider their risks and know how to get the right sort of insurance for them.

Small businesses may mistakenly assume that any loss to their assets or custom will be covered by their existing insurance policy, or that the government will pick up the tab.

But UK insurers stopped including terrorism cover on their commercial insurance policies, following the Baltic Exchange bomb in London in 1992.

Businesses must choose instead to take out separate terrorism cover, as it is not included in standard packages.

However lost business due to police cordons, lower footfall, closed roads etc is a very real risk to small businesses.

Eight people were killed and 48 injured when three attackers drove a van into pedestrians on London Bridge and launched a knife attack at Borough Market on 3 June 2017. The market was closed for 10 days while investigations continued.

Aside from the human cost, according to a Pool Re (the Government backed terrorism re-insurance scheme) report from 2017, businesses most affected were from the SME community with losses put at £1.4m at the "absolute minimum". Others have suggested more than £2m was lost by 150 businesses in the area.

While Pool Re helps insurance providers cover physical damage to buildings, it has not previously been able to help cover "non-damage business interruption losses". The London Bridge, Westminster and Manchester attacks highlighted the impact of that gap on businesses in the surrounding areas.

But things are changing. Earlier this year the government agreed to allow it to extend its cover to non-damage business interruption – the legislation to allow this is currently going through Parliament.

Steve Coates, the chief underwriting officer for Pool Re, said they were "ready to go as soon as possible" in offering cover for non-damage business interruption losses and were hopeful that they would be able to start doing so from 1 January 2019 - if it gets through Parliament before then.

Pool Re has also been trying to make its cover more accessible for SMEs and regional businesses outside the biggest cities with changes to pricing structure from April 2018.

It wants more small businesses to seriously consider adding terrorism cover to their insurance, and not assume it will never affect them.

Mr Coates said SMEs were far less able to withstand the short-term shock of a terrorist incident than larger firms: "They don't tend to have the balance sheet or cash reserves or contingency fund to withstand that sort of shock."

"We would encourage any business to spend some time thinking about it and decide whether the business may be exposed to terrorism and if it is, how much it's going to cost to close that gap.

"You can increase your business’s ability to survive by either buying cover or thinking about business continuity. If you do both of those things, your business has a better chance of survival than if you don't."

Mr Coates advises businesses to talk to their insurance brokers about their options: "This isn't just about buying it from Pool Re members, there are other options out there that may be more competitive for certain types of business."

FSB Insurance Service is also trying to make sure that SMEs are aware of the options for terrorism-related insurance cover.

Managing director David Perry added: "There are other people out there that are looking to sell this type of insurance and extend the cover beyond the basic terrorism cover as well, an example being the incident that happened in Salisbury.

"There are still businesses down in Salisbury that are not open following the incident there but the government has not declared it a terrorist incident so it falls between two stools."

Terrorism is a "peril" that small businesses should consider, Mr Perry says.

"Because of the indiscriminate nature of this type of incident, assume it can happen anywhere and if it is affordable I think it's something you should think about buying.

"The fact that Pool Re is there is reassuring, they have reduced their rates so if you are not in a city centre, it is more affordable and there are commercial outlets looking to provide the cover and provide extensions.

"If you are looking for advice, talk to us or talk to your broker because they will be able to give the right advice."