Soft market opens a time-limited window to address underinsurance gaps

After several years of rising insurance costs, market conditions have started to reverse. Over the past 18–24 months, insurance rates have been falling due to stronger insurer capitalisation, increased competition and more favourable reinsurance conditions. Many businesses, including SMEs, are now achieving annual policy premium savings of between 10% and 20%.

For many SMEs, this period is being used to lock in renewals at a reduced premium. Given cost pressures on energy, labour and tax, that instinct is understandable. However, it risks forfeiting a greater opportunity: to test whether existing cover still reflects how the business operates, earns income and manages risk in a more complex trading environment.

More than two-thirds of brokers (68%) report an industry-wide increase in declined claims due to underinsurance. This reflects several overlapping causes: years of accumulated cost pressure, limited awareness, inflation in rebuild and replacement costs, misunderstanding around policy terms, optimism bias (i.e. the tendency to underestimate the likelihood that something will go wrong), and cost sensitivity. In some cases, businesses accept narrower cover to keep costs manageable, including shorter indemnity periods, reduced declared values or fewer policy extensions. In others, policies have simply become outdated as operations, revenues, assets and dependencies have changed. The result is that businesses may believe they are adequately insured when the assumptions behind their cover no longer match reality. Crucially, where a business pivots or changes dependencies without informing the insurer, the policy risks becoming voidable, creating a layer of urgency beyond underinsurance.

Underinsurance is often invisible until a claim exposes the gap. When tested by a serious disruption, policies may contain inaccurate revenue forecasts, outdated asset valuations, insufficient indemnity periods or policy wording that does not respond as expected. Claims that fall short can create financial strain, operational disruption and, in severe cases, threaten jobs and business continuity.

Softer markets should therefore be treated as more than a cost-saving opportunity. They provide a chance to re-evaluate whether policies still align with current operations, asset values, revenues and risk exposures – and to present that risk clearly enough to secure both stronger terms and more appropriate cover. At renewal, the key question is not whether the business has insurance in place, but whether the assumptions behind that cover are still accurate. Several areas commonly need review:

• Liability declarations: turnover and wage roll are central to public liability, employers’ liability and product liability underwriting. If these figures are inaccurate or outdated, the policy may not reflect the actual risk profile.
• Property and business interruption: reinstatement values, rental income, rebuild costs, indemnity periods and business interruption calculations need to keep pace with how the business operates and earns income. An Allianz SME survey found that only 52% of owners knew the rebuild value of their business property, and only 59% of those had obtained a professionally qualified valuation. This highlights why reinstatement values need to be reviewed regularly rather than assumed to remain accurate.
• Construction: project duration, scope of works, changed specifications and contractual complexity can all affect whether construction-related cover remains appropriate.
• Fleet: vehicle values, usage, permitted drivers and driving restrictions should reflect the fleet as it is actually used.
• Cyber: businesses should test whether cover reflects their reliance on IT systems, third-party platforms, email, payment systems and digital processes.

Business interruption is one area where the gap can be significant. Underinsurance can arise where the policy is calculated on the wrong basis – for example, failing to properly reflect gross revenue, gross profit, rental income or the time it would realistically take the business to recover after a serious disruption. A fire, flood, break-in, cyber incident or loss of access to premises may create more than an immediate repair cost; it can interrupt trading, cash flow and customer relationships.

As businesses grow, move premises or become more dependent on third-party suppliers, the assumptions behind interruption cover can quickly become outdated. Cyber risk follows a broadly similar pattern. Many SMEs still assume they are too small to attract attention from attackers. The threat is less about the strategic value of the business to an attacker than about operational dependency: ransomware, compromised email systems, identity fraud or loss of access to core systems can disrupt trading and client service regardless of business size or sector. A dental surgery, logistics firm or professional services business is as exposed as any large corporate if its IT systems are the primary means by which it operates.

The underinsurance risk here extends beyond whether a cyber policy exists, to whether the business has properly mapped its exposure through third-party software providers and digital platforms it does not directly control – from cloud-based accounting systems, to payment platforms, client management tools and supplier portals. These all represent potential points of vulnerability.

Underinsurance represents mismatched risk that can be exposed by a single climate, cyber or market event. SME directors should use renewal as a practical risk review: testing whether declared values, revenue assumptions, indemnity periods, fleet details, cyber dependencies and operational changes still align with the business as it exists today. In a softer market, proactive directors can use that review to negotiate stronger terms, improve coverage and extend indemnity periods before a claim tests whether the policy is fit for purpose.

BTG’s insurance team is well placed to support that review. Working closely with you and insurers, we search the market to test whether existing cover still reflects how the business operates and scrutinise the detail that is often overlooked: declared values, indemnity periods, policy wording and claims support. For property and business interruption cover, an accurate reinstatement figure is fundamental, and our colleagues at BTG Eddisons provide professional Reinstatement Cost Assessments that give directors a reliable basis for their sums insured. Together, we can help businesses use this softer market to secure terms and cover that genuinely match the risk they carry today.