The world we live in is highly dynamic and we face different challenges daily. This is even more pronounced if you are involved in the operating a small and medium-sized enterprise (SME). Due to a lack of resources, many SME owners may actually overlook the finer details of managing the operational and financial risks of their businesses.
Many also view paying for insurance as an additional, unnecessary expense or a luxury instead of a necessity. This often results in the average SME owner missing out on crucial protection to cover their business and mitigate risks.
Facilitating Risk Management
The Covid-19 pandemic has provided a timely opportunity for SME owners to reassess and review their business operations. This also includes potential financial risks that could be transferred to insurance companies to minimise potential losses if an unexpected scenario occurs.
Naturally, different types of businesses are exposed to different levels of risk, which calls for different protection plans. The insurance market offers various forms of protection packages in order to suit the unique requirements and needs of each individual SME.
Let’s explore a few major areas that SMEs should consider for protection.
The Basics
The first order of business is to ensure that the operations and premises of your SME are fully covered. This is to ensure assets are protected against financial losses caused by fire, burglary, and/or damage from natural disasters.
A common protection package will include fire insurance cover for the building, fixtures and fittings, and all assets inside, as well as insurance against burglaries.
Depending on the nature of your business (for example food and beverage, beauty, education, office, healthcare, hospitality, retail, construction), SMEs can also opt for optional coverage deemed necessary, such as coverage for loss of income due to business interruptions (consequential loss), breakdown of machinery or electronic equipment, glass breakage, loss of money on the premises, or during the transit between the premises and bank, floods, fallen trees and so forth.
With the basic minimum coverage to protect against fire and burglary, should these unfortunate incidents occur, insurance claims can help to negate or reduce your losses on assets, thereby cushioning the financial blow to your business.
However, there are many other operational risks that occur in running a business. For example, if a small construction or renovation business neglects safety procedures during business activities, this could end up causing injury to employees or even the general public.
Extra money will need to be forked out in order to compensate for the damages, injuries and other related claims. This could pile up to a hefty amount which will affect business cash flow.
To minimise the financial impact of risks associated with doing business, it is advisable to protect your SME against potential claims with various liability insurance options available:
Directors and Officers (D&O) Liability
Coverage is intended to protect individuals from personal losses if they are sued as a result of serving as a director or an officer of a business or other type of organisation. It also covers legal fees and other costs incurred as a result of such a suit.
Employers’ Liability
Protects employers from financial loss if a worker has a job-related injury or illness that is not covered by workers’ compensation. Employers’ liability insurance can be packaged with workers’ compensation insurance to further protect companies against the costs associated with workplace injuries, illnesses, and even death.
Professional indemnity
Often referred to as professional liability insurance or PI insurance, this covers legal costs and expenses incurred in your defense, as well as any damages or costs that may be awarded, if you are alleged to have provided inadequate advice, services or designs that causes clients to lose money.
Public Liability
Covers the cost of claims made by members of the public for incidents that occur in connection with your business activities. Public liability insurance covers the cost of compensation for personal injuries, loss of or damage to property, and death.
Product Liability
Covers manufacturing or production flaws that cause unsafe defects products.
Protecting Your Greatest Assets
Did you know that SMEs can also protect against the loss of key staff such as the CEO, CTO or any team member you deem crucial to your business? The loss of such personnel could lead to financial losses due to disrupted sales, loss of creditor confidence, and customer relationships.
Keyman insurance is a protection for SME owners to ensure the company has sufficient funds to keep the business going in the short term before a successor is recruited and trained. The coverage calculation can be ten times of the person’s annual compensation.
It is also important that business owners take care of all their employees. SMEs may consider providing group insurance coverage for employees that includes group personal accident cover for accidental death, total permanent disability, and hospitalisation income.
While group medical insurance provides hospitalisation and medical surgery coverage, these benefits can also be extended to an employee’s spouse and family members.
With suitable protection as a safety net, your business can operate with minimum interruption in the knowledge that should the worst happen, public property can be repaired and employee welfare is taken care of.
Ensuring Business Continuity Interest
Many businesses come to a standstill or even close down when one of the partners passes away or chooses to exit the business. In fact, plenty of SMEs do not generate enough money to buy over the shares of the owner who passed away, making it tricky for the remaining parties to continue the business.
To offer a safety net for business continuation, the company can take up an option on life insurance to provide capital for the required liquidity. Together with a buy-sell agreement and a confirmed share valuation, business partners can buy a policy assigned to an insurance trust as a source of funding to pay for the share of the business partner who passes away or wishes to exit.
This buy-sell agreement effectively keeps business ownership in the hands of existing owners in the event of a sudden exit of one of the partners due to unforeseen circumstances. It can also grant existing partners the first option to buy the exiting owner’s share of the business according to a pre-set valuation formula.
Existing owners can buy out the share through a direct payment to the exiting partner or the partner’s heirs. This also prevents beneficiaries from being stuck in a business they are not interested in, while protecting the remaining partners from being forced to deal with new partners unexpectedly.
I would say that all SMEs should assess their operational and financial risks based on their nature of the business, and seek suitable insurance protection to transfer risk for financial peace of mind.
About the Author
Angel Pau, CFP, IFP is a financial planner with Wealth Vantage Advisory.
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