Insurance for SMIs/SMEs
Exposure to risk is part and parcel of any business. There are risks of losses that arise from damage to business property, liability and the deterioration of health and loss of employees’ lives, especially key employees. As risk is part and parcel of running a business, the practice of risk management for an enterprise is a crucial aspect. As long as a company operates a business, it faces exposure to loss.
Insurance is a useful tool to address such risks. An insurance policy is a contract in which one party agrees to compensate another party for any losses or damages caused by risks identified in the contract in exchange for the payment of a lump sum or periodic amounts of money to the first party.
Although insurance cannot physically protect properties or lives, it can protect the business insured against the adverse financial consequences of losing properties and lives. For example, a factory that is insured does not prevent a fire from breaking out at the premise. However, the insurance money collected can be used to rebuild the factory should it be accidentally burned down.
Insurance also allows more efficient utilisation of financial resources. With the protection of insurance, businesses need not establish huge contingency funds to protect against the risks they face. Without insurance, the potential losses due to capital destruction must be met by a business’s own internal funds. As a result, a bigger portion of the company’s profits will have to be retained in the business instead of being distributed to its owners.
Insurance is an important expect of any operation, including SMIs, to safeguard assets and to reduce losses in the event of any untoward incidents. Operators of SMI businesses today are better educated on the added benefits of incorporating insurance into their operations and are no longer insuring themselves just to safeguard against typical business risks such as losses caused by unforeseen circumstances, bodily harm caused to end-users of the company’s products or loss of income from temporary shut-down of business due to crimes. They are now aware that incorporating insurance into their businesses as a risk management measure also assists in determining the success of loan applications with banks and financial institutions.
More and more financial institutions are now assessing the management team of a company based on the adequacy of insurance coverage undertaken. In other words, undertaking adequate insurance coverage indicates that a company’s risks are well covered and this in turn, gives banks and financial institutions a level of comfort on the risk management of a company.
Insurance now also plays the role of a guide to banks and financial institutions in determining the management of a company, it still remains as something that people will increasingly need because of the uncertainty of life and more so in this day and age when the cost of living is escalating. Undertaking insurance coverage simply means that you have bought a “promise” to protect yourself against “perils” be it an illness, accident, natural disaster or whatever unforeseen event that may cause financial losses.
As the SMI sector of Malaysia constitutes the majority of the country’s business activities, the insurance industry has also expanded in terms of product offerings to keep up with the growth momentum.
An SMI business operator should perhaps be familiar with a few insurance terms prior to signing up with an insurance company. Some of those terms include the following:
“Insurance policy”- a documentation which serves as a contract between a corporation and an insurance company.
“Policyholder” – the corporation who is the party in possession of the insurance policy.
“Insurer” – the insurance company who is the party to an insurance arrangement and who undertakes to indemnify for losses.
“Premium” – a specified sum of money paid by the policyholder to the insurer as the price of insurance protection against the risks for the time period as specified in the insurance policy. Policy periods are generally annual and payment is due when coverage starts or as agreed upon.
SMI business operators can select from the following range of insurance products and more, depending on the nature of their business:
1. All Risks Insurance which covers loss of or damage to the property insured caused by any accident (wide cover) or on specified perils basis (restricted cover).
2. Burglary Insurance which covers loss of or damage to the property insured as a result of theft.
3. Business Interruption Insurance which covers loss of profit arising from physical loss or damage to the property insured, thus hindering a company from carrying out its planned level of business.
4. Electronic Shield Insurance which indemnifies the insured for any unforeseen or sudden physical loss of or damage to electronic equipment such as computers, thus requiring repair or replacement.
5. Employers’ Liability Insurance which indemnifies the employer (insured) against liability at law for employee claims resulting from bodily injury or disease sustained during the course of employment.
6. Equipment Insurance which covers loss of or damage to equipment, its accessories and spare parts caused by accidental collision or overturning, fire, external explosion, etc.
7. Fidelity Guarantee Insurance which covers all direct pecuniary loss sustained by the insured as a result of acts of dishonesty and fraud committed by an employee and which is discovered within the insurance period.
8. Fire Insurance which covers loss of or damage to property caused by fire or lightning and other extraneous perils such as explosions, storms, riots, etc.
9. Money Insurance which provides coverage for loss of money occurring from money in transit namely when collecting and/or delivering money from/to the bank or money stolen while in the personal custody of an employee.
10. Professional Indemnity which protects professionals who supply skills or services against their legal liability to compensate parties other than the insured for losses sustained as a result of their professional negligence.
11. Product Liability which provides compensation to the insured for bodily injury, loss of or damage to third parties’ property caused by the defective design, packaging, etc. of goods sold, supplied, tested, repaired and serviced by the insured.
Marine Cargo Policy
Marine cargo policy refers to insurance for merchandise that is transported by sea, air, rail and road. As SMEs are venturing more and more in the export of their products, the issue of insuring the goods in transit becomes increasingly essential to SMEs’ business operations.
The loss or damage to large shipments of goods can cause serious financial difficulties to SMEs. By understanding marine cargo insurance and the different types of coverage available, SMEs would be able to better plan for their insurance needs. The examples of perils covered are fire or explosion; stranded, grounded or sunk vessel; and overturning or derailment of land transport.
To prevent the risk of not insuring any particular shipment through oversight, an open cover is recommended. An open cover is a master policy that remains in force for specific periods and provides protection for cargo on the move within geographical areas specified.
Your Employees and You
We often hear the saying “Our people are our most important asset” and undeniably, key personnel responsible for running and managing the operations of a company are also the ones who will be responsible for the company’s success or failure. In this regard, safeguarding against any misfortune befalling these “assets” should be top priority for any small or medium employer on top of being a social responsibility. The laws governing Workmen’s Compensation in Malaysia is the Employees’ Social Security Act 1969 for Malaysian workers and permanent residents whereas for foreign workers, the Workmen’s Compensation Act 1952.
It is a requirement by law and pursuant to the Employees’ Social Security Act 1969 that an employer must make a monthly contribution for each eligible employee from the first month the employee is employed.
The Social Security Organisation (SOCSO) is the organisation set up to administer, enforce and implement the requirements under the Employees’ Social Security Act 1969 and the Employees’ Social Security (General) Regulations 1971.
Apart from the employer, any employee employed under a contract of service and earns monthly wages of RM3,000 and below regardless of employment status whether permanent, temporary or casual in nature is also required to contribute to SOCSO. Persons whose wages exceed RM3,000 a month and has never been covered before are given an option to be covered. Both the employer and employee have to consent to the coverage, by filling the necessary form. SOCSO, however does not cover the following categories of persons:
- Government servants
- Domestic servants employed to work in a private dwelling house
- Employees of age 55 only for purposes of invalidity but if they continue to work they should be covered under the Employment Injury Insurance Scheme
- Self-employed persons
- Foreign workers
SOCSO provides coverage to eligible employees through two schemes, namely the Employment Injury Insurance Scheme and Invalidity Pension Scheme. Both the schemes provide the benefits of invalidity pension, invalidity grant, survivors’ pension, rehabilitation, funeral benefit, constant attendance allowance and educational loan. The schemes can be further classified as follows:-
- First Category – Employment Injury Insurance Scheme and Invalidity Pension Scheme in which contribution payment is made by both the employer and employee
- Second Category – Employment Injury Insurance Scheme only in which the contribution payment is made by the employer only. An employee who is not eligible for coverage under the Invalidity Pension Scheme is covered under this category.
The employee’s share of contribution amounts to 0.5% of wages under the Invalidity Pension Scheme whereas the employer pays 1.75% for the Employment Injury Insurance Scheme and Invalidity Pension Scheme.
Foreign workers not receiving coverage under SOCSO are protected under the Workmen’s Compensation Act 1952. An employer who has or who intends to engage foreign workers in its business operations may be interested to know that it is a requirement by law that compensation is payable to an injured employee arising out of and in the course of employment or in contracting an occupational disease. In the case where the employee dies in the event of a fatal accident or in contracting an occupational disease or in the course of performing his duty, then compensation payment is to be made to the employee’s dependants. More specifically, the provision of this Act applies only to two categories of foreign workers, namely foreign workers who earn not more than RM500 per month and all manual workers irrespective of the wage.
What happens next when a foreign worker is involved in an accident? Provided that the injured worker informs the employer within 7 days from the date of the accident (except in the event of a fatal accident), the employer is required to provide written notice of the accident to a Department of Labour branch nearest to the place of accident. The onus is also on the employer to ensure that all information provided to the Department of Labour is complete with supporting documents such as medical certificates or details of the accident. The employer must also ensure that the compensation settlement as determined by the Department of Labour is paid direct to the injured worker by depositing the amount payable to the Department of Labour as directed. It is an offence if an employer fails to notify the Department of Labour in the event of an accident and upon conviction, he or she will be subject to a fine of RM5,000 for the first offence and RM10,000 for the second offence.
Initially, it may be difficult for you to decide on the insurance package most suitable to your small business. The next thing that comes to mind after the protection of your employees is protection of your physical assets. As a start, consider getting a basic insurance coverage for “real” property which will cover your losses in the event of a fire, lightning or storm causing damage to your office building. This type of coverage would fall under basic Fire Insurance. Once you have covered “real” property, you can then focus on insuring what needs to be covered more – your personal property. Burglary Insurance takes care of the property located inside your office building should there be loss or damage caused by theft. Should you feel that there is necessity to provide coverage for more expensive items which are essential for the day-to-day operations of your business such as electronic equipment or heavy machinery, you may want to insure them separately under Electronic Shield Insurance or Equipment Insurance. It would perhaps be advisable to conduct a complete inventory check on the items located in your office building in order to determine the items which are highest in value and thus, worth insuring. If you prefer wider coverage, you may want to just settle for All Risks Insurance which also covers your personal property. Depending on the nature of your business, you may be handling large amounts of cash in or outside your business premises and therefore, Money Insurance may be deemed necessary to safeguard against any money lost or stolen while in transit or in the custody of an employee.
Is Your Business Adequately Covered?
Once you have basic insurance coverage in place, it may be prudent to run a check on what you are covered for and what you are not. After a lapse of time, you may even want to review your business insurance policies to see if there are any gaps or even overlaps in your coverage areas. It does not make much business sense if you have adequate insurance to cover the cost of repairs to a building but have not allocated any coverage for loss of profit caused by business interruptions. On the other hand, if you do come across an overlap, you may want to make revisions to your policy package as it is where your yearly premium is derived and you do not want to be paying for more than you need. Revisions are also highly necessary once your business has flourished and becomes more established.
When in doubt on the types of insurance for your business, always consult your insurance agent or broker who will be able to provide you with complete explanations of premium terms and coverage in writing. As with any consumer product in the market, you should always shop, select and analyse the types of insurance carefully before you purchase.
No insurance plan is perfect but getting your facts right in helping you make informed decisions does make a big difference. Think of small business property insurance as the business equivalent of life insurance. Just as how you would regard health and medical insurance in protecting you and your family against life’s uncertainties, think of how small business property insurance would give you peace of mind should the unexpected occur.