In light of the economic implications COVID-19 has created for SMEs’ operating environment, 13.3% of UK SMEs ended up cancelling their business interruption insurance. With England entering its second national lockdown on November 5, the unstable economic environment enables further potential for policy cancellations.

According to GlobalData’s 2020 UK SME Insurance Survey, 13.3% of UK SMEs have cancelled their business interruption insurance, with the leading reason (26.3%) being that their policy did not provide the level of cover they thought they needed. Many SMEs would have assumed that losses due to the pandemic would be covered in their policies, but many have found otherwise. Rejected COVID-19 claims and cost-cutting were the joint second most common factor for cancelling policies, with each cited by 22.9% of SMEs.

Fieldwork for the survey was carried out in August 2020, before lockdown measures were reintroduced across the UK and before the High Court ruled in favour of the Financial Conduct Authority’s (FCA) business interruption test case.

Due to a lack of contractual clarity, SMEs whose businesses were affected by COVID-19 were unable to get payouts under their business interruption policies. This led the FCA to take legal action against insurers in June 2020, while the High Court’s ruling provided a level of clarity by defining the COVID-19 pandemic and the government’s and public’s responses as a single cause of lost income. Each policy still needs to be considered against the detailed judgment to work out what it means and how it is affected. This could still leave some SMEs that were relying on their business interruption insurance out of pocket, creating further distrust among SMEs.

Additionally, as England enters a second lockdown, the majority of businesses will once again have to suspend operations. The Office for National Statistics (ONS) reported that the first national lockdown, which began in mid-March and ended in mid-June 2020, contracted the UK’s GDP by 20.4%, the largest recorded fall since the ONS started collecting data in 1997. However, while the second lockdown is set to last until December 2, restrictions are subsequently expected to be lifted in line with reported COVID-19 cases. Should the lockdown be extended, many business will be financially hit during the Christmas period – their most critical quarter. A lack of income will lead UK SMEs to further cut costs in all areas possible.

With businesses continuing to face high levels of uncertainty in an unstable economic environment, the potential for policy cancellation will remain until the pandemic is overcome. Insurers, in the meantime, need to rebuild trust with businesses and communicate the greater implications they could face if they were to be underinsured.