Business insurance must adapt to new threats facing SMEs |
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| Finance | |
| Written by Gary Howes | |
| Tuesday, 02 February 2010 | |
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Demand levels greatest threat to SMEs. As the fall-out of the recession continues to impact on the UK’s SME population, a report by the Centre for Risk and Insurance Studies at Nottingham University Business School, commissioned by Premierline Direct, reveals the greatest threats facing the future of the UK’s SME population and how business insurance may need to adapt to a changing business landscape. The study reveals more than half (52%) of SMEs believe reduced demand for their goods and services is the biggest risk to their business with late payments in second place (41%), closely followed by concern about increased competition (32%).The risk of financial issues continues with lack of cash flow to develop the business seen as a threat by nearly a third (29%) of SMEs and with financial institutions having restricted their lines of credit, lack of accessible funds was considered a risk by 15% of respondents. As new rules and regulations regularly affect businesses, 39% of SMEs were concerned by increased legislation, and with a general election looming, and the possibility of a change in government, the uncertainty is greater than ever. As well as SMEs having a realistic view of the risks they face, with 54% saying their main objective over the next five years is to survive the recession, their forward-looking nature was apparent. Nearly two thirds (61%) will be focusing on increasing sales, 28% will be looking to introduce new products and/or services and 23% are keen to diversify into new markets. However, financial risks and SMEs’ pragmatic approach has impacted on their objectives with more than a third (39%) looking to improve their cash flow, 18% want to lower operational costs and 17% said they want to reduce their company debt. With financial concerns front of mind, the study reveals a business insurance ‘wish list’ for the SMEs questioned. Nearly half (43%) said they would like their insurance to cover bad debts, one in five (21%) wished for more comprehensive protection of intellectual property and 16% wanted to insure against costs to sue suppliers for failing to deliver. Christopher O’Brien, director at the Nottingham University Business School Centre for Risk and Insurance Studies comments: “Business insurance policies cannot cover everything that can go wrong for a small business, however, with SMEs having a ‘wish list’ for what they would like to be covered for, the report raises some important points about what business owners view as being most important. The recession may have led to small businesses viewing risks differently, being particularly concerned about financial risks and looking for greater protection against issues that threaten their position in increasingly competitive markets. In addition, there may be circumstances beyond the business owner’s control that they are not insured against, but could cripple the business. So there are areas where insurers may wish to consider expanding the protection they provide to help businesses protect their cashflow and reduce damage caused by loss of revenue.” The report examined how business insurance may evolve in the future to cover the highlighted risks. These include financial risks such as credit insurance for bad debts and defaulted payments, which are considered in 49% of SMEs’ risk assessments. Another area for protection includes extending business interruption cover to include technology issues such as hardware or software breakdowns, infections from viruses, or loss of personal or business data, which are considered in 36% of SMEs’ risk assessments. The report suggests that insurers may wish to set minimum standards for compliance on business owners, in a similar way to security measures, requiring the business installs adequate anti-virus systems and having back up systems in place to comply with the terms of the policy. In addition, there is scope to expand the level of cover where new regulations impose additional obligations on businesses. Sustainability issues are considered in 43% of SMEs’ risk assessments. So, the report suggests insurers could extend the level of cover provided by commercial legal protection to cover the cost of disputes when defending the company’s actions to meet environmental directives and obligations. However, the study also indentified that many SMEs do not recognise that some risks can already be covered under business insurance policies. More than a quarter (28%) want to cover the cost of stolen goods, 22% of SMEs wished to cover loss of income as result of electricity, gas or water supply failing, 15% want cover for environmental damage and 10% were looking for compensation if a supply chain collapses. These are risks that many policies already cover suggesting SMEs do not fully recognise the value of existing insurance. Chris Little, managing director of Premierline Direct adds: “Insurance is invaluable in protecting businesses against potentially crippling costs, and some areas of cover are compulsory such as employer’s liability. The findings of the report highlight that clearly businesses are aware of the potential risks they face in the future and we, as an insurance provider must certainly consider what role we can play to help SMEs manage these new risks. However, with the report also showing that firms have difficulty understanding what cover their existing business insurance policy offers, we are currently looking at how we can eliminate the amount of jargon we use in our communication to existing and potential customers.”
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