Rise of the uninsured economy? Start-ups boom but lack protection

Just four in ten businesses operate with insurance in their first three years, most commonly assuming they are ‘too small’ for claims.

More than two million people have started a business in the past three years as the UK experiences the most rapid rise in self-employment in its history. According to a recent survey by AXA, the momentum shows no signs of letting up as a further 3.5 million people say they are planning to go self-employed. However, it would appear that these budding entrepreneurs are natural risk takers with most operating uninsured – essentially not underwritten against risk in any way – according to AXA’s latest small business study.

Most startups founded in the past three years operate without any cover – just four in ten told the study they had insurance of any kind. By the start of their fourth year in business this figure has improved to six in ten, but still leaves a large slice of the country’s business activity unprotected.

The most serious gap is in employers’ liability insurance, which covers workplace injuries and illness. It is legally required and businesses can incur serious penalties for non-compliance, but the survey found that just 41 per cent of those who have taken on eligible staff have this cover. Fines can reach £2,500 for each day that a company operates without this insurance.

The most common reason not to cover the business was not price, as would be expected for a new business working to tight profit margins, but an under-appreciation of risk. Seventy-two per cent of those without cover said their business was ‘too small’ to need it and 25 per cent hadn’t considered it at all. For comparison, just eight per cent said it was too expensive and three per cent had forgotten to renew.

‘The key finding of this survey is that people are operating businesses without insurance because they think they are ‘too small’ or ‘too young’ for risk. We see no evidence in our claims figures that this is the case: we regularly settle injury claims on behalf of microbusinesses that top the million pound mark. That isn’t unusual these days at all, and the amounts claimed in compensation are likely to increase following the government’s change to the Ogden Rate in March of this year. Added to that is a significant rise in property damage claims too, as the value of fixtures, fittings and floorings is going up in British properties across the board,’ says Gareth Howell, managing director, AXA Direct

AXA further notes that claims for small businesses are changing too. What are termed ‘trade specific’ claims, such as industrial deafness, vibration white finger or RSI (repetitive strain injury), have fallen off significantly over the past three years. Linked to specific work activities, these claims are increasingly being anticipated and mitigated by business owners through better risk management.

Industrial deafness claims, which were by far the single biggest trigger for claims against small businesses in past years, have fallen by 73 per cent since 2013.

Vibration White Finger claims have fallen steadily year on year (by 68 per cent since 2013).

RSI have fallen by 35 per cent since 2013.

By contrast, ‘non trade’ claims have more than doubled since 2014. This is significant as these claims are less easy to anticipate, can reach figures running into the hundreds of thousands and affect businesses of every type – professionals and retailers just as much as tradespeople or construction industries. Examples would be an employee slipping on a loose carpet, someone hurting their back lifting a heavy parcel, falling from step ladders or even being scalded by a hot drink spill.

Freelance professionals are the least insured section of the UK economy: just a quarter of those in their first three years of business have professional indemnity cover. The figure changes little for older businesses, where the rate of indemnity insurance is just 35 per cent. This insurance covers costs for compensation following alleged professional negligence, including breaches of intellectual property and data protection laws. While not legally required, it is often strongly advised by professional associations, as these claims, though rarer than injury claims, can be financially ruinous to an unprotected business.

‘We anticipate that claims against small firms will increase in value, and they are affecting a wider spectrum of occupations than ever before. Compensation culture has played its role here. Having a greater proportion of young businesses in the economy also contributes, as they can be less prepared for pitfalls and mistakes than firms that have been around longer. Insurance should be considered an essential piece of financial protection from Day One,’ says Howell.

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