Soaring insurance hits small firms

THOUSANDS of small firms may be forced to close because they cannot afford soaring insurance premiums, experts have warned. Floods, riots, rail crashes, terrorism, plunging stock markets and the growing compensation culture have combined to push up premiums.

The British Insurance Brokers' Association said the average cost of cover has risen by 400% in a year. The association warned that many firms will go out of business in the autumn unless the Government intervenes to limit compensation payouts and crack down on 'ambulance chasing' lawyers.

The threat is attributed to a steep rise in employers' liability insurance, which compensates staff in the event of accident or injury. This insurance became compulsory in 1972, but some firms continue to operate without it as the premiums are too costly.

Mike Williams, chief executive of the British Insurance Brokers' Association, said a glass manufacturer was recently quoted £120,000 for its annual employers' liability premium - up from £15,000 last year.

The association said: 'There are thousands of small companies that either cannot obtain cover or cannot afford to pay the increased premiums, and will either close down or continue to trade illegally.'

Large businesses have also been hit. Selfridges' annual premium has risen £400,000 to £ 1.9m for its store on London's Oxford Street.

David Bishop, at the Federation of Small Businesses, said: 'The growing compensation culture is the main problem, as people take a chance and seek to win a payout. The threat is growing and many firms will go out of business if nothing is done soon.'

American-style law firms speofcialising in no-win no-fee compensation claims have also encouraged lawsuits, with payouts doubling in the last five years, he said.

Insurers have also raised premiums in an attempt to claw back losses made in the 1990s price war, when they accepted losses to increase their share the market.

Last year's heavy floods also added to the problems - as have the terrorist attacks on 11 September and the resulting burden of claims. Increased premiums on motor and home insurance have also been blamed on the compensation culture.

Two of Britain's biggest insurers, CGNU and Royal & SunAlliance, said policy prices had increased by up to 20% in the last year. Royal & SunAlliance said: 'Claims inflation has risen significantly in the last year. Insurance is a mechanism for splitting risk around society, and if that risk becomes more expensive, then rates go up to reflect this.'