Managing the risks of SMES
An adequate insurance program is one designed to protect the business from any loss that would seriously impair its financial condition or its ability to remain in operation should an accident or disaster occur.
the owners of small and medium business enterprises (sme) have as their primary objective to make it a success. however, they should also take into consideration the various risk exposures that threaten this objective.
The owners cannot expect to be risk free, so it will be wise for them to select a professional insurance agent or broker to undertake a risk survey of their premises and operations. The purpose of the survey is to identify all exposures and to analyze all the insurance policies purchased by the owner. The agent or broker will then be able to prepare a comprehensive report, which will lay the basis of an adequate insurance program to protect and mitigate the various risks and perils inherent in the enterprise.
An adequate insurance program is one designed to protect the business from any loss that would seriously impair its financial condition or its ability to remain in operation should an accident or disaster occur.
In considering an insurance program, it is absolutely necessary to concentrate on the essentials, that is, start first with the MUST coverage. Buildings owned by the businessman often represent a large part of his investment and substantial financing is usually involved in the construction of these structures. Machineries, equipment and materials also constitute a major expense when its time to replace them. As we see it, fire insurance is absolutely necessary especially if the business is located in a hazardous area where one fire could practically wipe it out of operation. Furthermore, financial institutions would naturally require this coverage in order to protect their mortgage interest. For adequate coverage, the amount of insurance should be carried close to the value of the insured properties. The standard fire policy in the Philippines is subject to the Average Clause, which more or less requires that a property should be insured for its fair market value in order to be adequately covered. This clause often is the subject of a lot of misunderstanding for in the case of a partial loss; the policyholder will have to bear a portion of the loss in the ratio that the amount of underinsurance bears to the value of the insured item. Premium rates of fire insurance depend primarily on the construction, occupancy and exposure of a building to other risks.
In case of fire loss, the fire policy indemnifies for actual properties damaged or destroyed by fire but other losses consequent to the fire such as the inability to use and occupy the damaged premises as well as other expenses necessary to maintain continuing fixed charges such as rental, salaries, interest payments and loss of anticipated profits are not recoverable. This risk may be insured under what is known as Business Interruption coverage.
Importation of machineries, merchandise and raw materials or exportations of agricultural products and finished goods should be covered against marine perils and related risks such as theft, pilferage and non-delivery, although it is normal for the terms of insurance coverage to be provided for in the corresponding letters of credit.
Under the Workmen’s Compensation Act as amended, employers are responsible for paying indemnity to any employee who sustains physical injury by accident arising out of and in the course of his employment, or contracts illness or disease caused by such employment. A series of claims would certainly result in a drain of the businessman’s resources and we believe that Workmen’s Compensation insurance should be classified as an essential coverage.
Another MUST coverage is life insurance on the owner-businessman especially if he is the key man of the organization and whose untimely demise would adversely affect the business. It is therefore of vital importance that the small businessman carry adequate life insurance tailored to meet his responsibilities and at the same time sufficient enough to conserve the business for the benefit of his family and loved ones.
One of the common practice of the SME owner is to allocate or distribute his insurance placements among different insurance companies through agents who are either relatives or close friends as he wishes to make everybody happy and at the same time anticipate some reciprocal business from them. This practice should be avoided if possible.
It is obvious therefore that there is no substitute for professional insurance advice and that an adequate insurance program is necessary to guarantee the continued smooth operations of SMES.