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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 or loss of employees’ lives, especially key employees. As risk is unavoidable in running a business, the practice of risk management for an enterprise is a crucial aspect. For the purpose of risk management, risk may be defined as “uncertainty about financial loss from an exposure”. So, how do you protect your business?
RISK MANAGEMENT
Risk management is a systematic approach to protect people and assets from risks. The management of a company may choose to completely ignore the risks but this would not in the best interest of the business owner. By opting to properly manage the business’s exposure to losses, the long-term results for the business will usually be better.
THE 6-STEP RISK MANAGEMENT PROCESS
SMEs can better manage their risks by implementing a risk management process as highlighted below:
Step 1: Establish Risk Management Objectives
The 1st step is to ascertain the risk management objectives for the business. These objectives should be in line with and complement the business’s overall goals.
Step 2: Gather Relevant Information
The 2nd step involves gathering information to identify the loss exposure of the business.
Step 3: Analyze Information to Identify and Evaluate Risk
This step involves analysing the information gathered earlier to identify, measure and evaluate the risks faced by the business.
Step 4: Develop the Risk Management Plan
The next step is to consider the various techniques of risk management required and to create a plan. One of the ways of managing risk is by transferring it through insurance. Other methods include avoiding, reducing and retaining the risk.
Step 5: Implement the Risk Management Plan
After the risk management plan is developed, the techniques mentioned in the plan are applied to the areas of risk exposures.
Step 6: Monitor and Revise the Risk Management Plan
The final step in the risk management process is to monitor the entire risk management programme and to adapt it to changes, whenever required.
INSURANCE AS A RISK MANAGEMENT TOOL
Insurance is a useful tool for managing 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 is an important expect of any operation, including SMEs, to safeguard assets and to reduce losses in the event of any untoward incidents. Operators of SME 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.
As the SMEs of Malaysia constitutes the majority of the country’s business activities, the insurance industry has also expanded its product offerings to keep up with the growth momentum. An SME business operator should 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 document that serves as a contract between a corporation and an insurance company.
Policyholder - the corporation that is the party in possession of the insurance policy.
Insurer - the insurance company that is the party to an insurance arrangement and that 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.
SME 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.
12. 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.
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.
