Underinsurance, don’t let rising costs catch you out

Many small business owners take out insurance, renew it each year, and assume they’re protected. But rising costs mean that for some businesses, insurance that once looked right may no longer be enough. This is known as underinsurance, and it’s becoming more common.

As the Association of British Insurers recently highlighted, underinsurance among small businesses is rarely deliberate. It tends to arise as costs rise, businesses evolve, and insurance is not reviewed alongside those changes.

What is underinsurance?

Underinsurance happens when the amount you’ve insured is lower than the real cost of rebuilding, repairing or replacing what your business relies on.

That could include:

• Buildings
• Contents, stock or equipment
• Fixtures, fittings or specialist items

If a claim is made and the insured values are too low, the settlement may be reduced, even if the claim itself is valid. This can leave a business having to cover part of the loss at exactly the moment cash flow is under pressure.

How businesses fall into the underinsurance trap

“There’s no point in going cheap on business insurance if your claim won’t be paid.”

In most cases, underinsurance isn’t caused by carelessness. It happens gradually.

Common reasons include:

• Sums insured set years ago and never properly reviewed
• Rising building, labour and material costs
• Supply chain delays are increasing replacement prices
• Changes to premises, equipment or the way the business operates

Policies often renew smoothly, so the problem may go unnoticed. The shortfall usually only becomes clear after a fire, flood, theft or major disruption.

Why this matters more now

In recent years, costs have changed quickly across many sectors. Rebuild times are longer, materials cost more, and specialist labour can be harder to secure.

At the same time, many businesses have adapted how they work, expanding services, investing in new equipment, or relying more heavily on technology.

If insurance values haven’t been reviewed alongside those changes, there’s a real risk that cover no longer reflects what recovery would actually cost today.

Why going cheaper isn’t always better

When budgets are tight, it can be tempting to reduce cover or keep values as they are to manage premiums.

But there’s little value in paying for insurance if it doesn’t respond fully when you need it. A reduced payout following a valid claim can have a far greater impact on a business than the short-term savings made at renewal.

Insurance works best when it’s treated as a resilience tool, not just a cost.

A simple sense-check for FSB members

FSB Insurance Service gives registered members access to a Free Virtual Valuation Indicator.

This tool helps you:

• Sense-check whether your current sums insured still look realistic
• Identify potential underinsurance early
• Decide whether a more detailed review may be needed

It doesn’t change your policy, and it isn’t advice. It’s a practical way to highlight risk before it turns into a problem. FSB members who are registered with us can find the link to the Free Virtual Valuation in your welcome email, or call us for a reminder.

Don’t wait for a claim to find out

Underinsurance is rarely identified at renewal. It’s usually discovered after a loss, when options are limited. Taking a few minutes with an FSB Insurance Service broker to review your policy and valuations now could help protect your business finances later.

If you’d like to talk things through, FSB members can access a free insurance advice line. Call 020 3883 7976 or book a callback at a time that suits you.

This content is for general information only and is not intended to provide advice or a personal recommendation. Insurance cover is subject to the terms, conditions, and exclusions of the policy. Always consider your individual circumstances and seek professional advice before arranging insurance. External websites are not under our control and we are not responsible for their content.