Five common risks where SMEs are under-prepared
Many small and medium enterprises (SMEs) get their basic insurance in order – such as accident and fire – but then under-prepare in other critical areas.
This can lull owners and managers into a false sense of security and jeopardise the future of the business if disaster strikes or a serious accident or disruption occurs. Below are some key areas of insurance that SMEs should look to address.
1. Business interruption
Insurance Council of Australia (ICA) research reveals that just 27 per cent of SMEs have some form of business interruption coverage.
If a commercial property must shut down for an extended period due to fire or flood, coverage for equipment replacement won’t also cover lost revenue during the business downtime. That requires “prevention of access” cover to be in place.
Richard Sandow, Vero’s Portfolio Underwriting Specialist, Commercial & Consumer Portfolio & Products, says it’s as simple as one key question: “If you can’t access your premises, can you still run your business?”
“In many cases, yes, an office can run remotely,” Sandow says. “But a lot of people who are location-based, if they can’t access their premises, then it’s directly lost income to them.”
2. Money in transit
Money and cash-in-transit insurance provides cover for the physical loss or damage of money and valuables while in transit or at a business’ premises. Don Johnstone, a director in Deloitte’s Actuaries & Consultants practice, says it may not be part of a standard business insurance package.
“You make a big sale, you are happy, and you walk down to the bank to deposit the money and [what happens if] it doesn’t make it?” he says.
If your business holds large sums of money onsite, or if it regularly transports money to and from the business premises, this is an insurance area to flag.
3. Rebuilding and recovery
Karl Sullivan, General Manager of Risk and Disaster Planning at the Insurance Council of Australia, says insurance policies should cover the replacement value of property in the event of a disaster. In many cases, business owners insure only a percentage of the true value of buildings or associated assets in an effort to lower insurance premiums.
He cites the common case of farmers who under-insure their fencing, and this can come back to haunt them in the rebuilding and recovery phase.
“If you have 20 or 30 kilometres of fencing, you need to make sure you insure that in its entirety, rather than just going with a default product”.
Most SME focused policies will cover such events at replacement value, so ensuring customers understand exactly how their policy coverage will protect them, and why it will work that way, will help ensure they have peace of mind.
4. Machinery and equipment breakdown
The 2018 Vero SME Insurance Index found that 80 per cent of businesses are not covered for common issues such as business risk and machinery or equipment breakdown.
The finding, according to Johnstone, is “one of the more classic cases of non-insurance or under-insurance”. Sometimes the lack of cover is deliberate, with owners potentially regarding insurance for machinery breakdowns as too expensive, or perhaps being content to have an alternate plan if such a breakdown occurs. Regardless, it can leave a business exposed.
5. Tax audits
With the Australian Tax Office continuing to flag its intention to crackdown on more aspects of business taxation and perform more audits, many business owners may not have discovered it is possible to hold cover for just such an event.
“Until something happens, people don’t pay too much attention to it,” says Sandow. “Then as soon as someone gets investigated and discovers they could have had insurance to cover that, the first person they look at is their broker and wonder why they never learned about it earlier.”
Such a policy can cover costs related to the work of dealing with the investigation, legal and accounting costs, and even further costs if a business is in breach.
“Brokers can struggle with this as there can be a lot of write-ins, of course” says Sandow. “It has to be an honest mistake, you can’t be avoiding tax or breaking the law.”
Sullivan says the above list of possible under-insurance scenarios is by no means complete, but points to the value in getting assistance from a trusted industry adviser. It can save a lot of headaches – and money – for businesses as they plan their risk-mitigation strategy.
“If I could have a megaphone taped to my mouth and say that every day, that would be my message.”
For Sandow, the problem for customers resides in the ‘traditional thinking’ of business insurance as protection for assets and/or liabilities. There is a need to educate them about what else they’re at risk of losing and what they can get coverage for.
“What are the priorities in their industry and as a business owner, and what’s going to have the biggest impact?” asks Sandow. “You’ve got your assets, income, and liabilities. Insurance for a business owner is a cost, most can’t afford everything, so they need to understand what matters and what needs the most protection.”
Disclaimer
The information is intended to be of a general nature only. We do not accept any legal responsibility for any loss incurred as a result of reliance upon it – please make your own enquiries.
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