Being prepared for the worst
Opinion: The SME sector takes a ‘‘she’ll be right’’ attitude in a time of higher risks, writes Marcus Pearson.
As the world faces escalating social and political unrest, climate change, natural disasters and cyber threats, it’s natural to assume that companies - who can be devastated by any of these threats – are putting protections in place.
In fact, more than a third of directors surveyed in the annual Marsh Directors’ Risk Survey don’t have effective frameworks in place to manage most of the risks surveyed. This is despite directors’ belief that 2017 is going to be riskier than last year.
Cyber-attacks are perceived as the biggest external threat, according to the survey, while businesses anticipate social media risks, followed by talent retention and attraction risks, will have an impact in the next year.
As we move in to a more volatile global business environment, the question must be asked, what about the small to medium enterprises (SMEs) who are the backbone of business in New Zealand? What risks apply to them? Are they prepared?
Larger enterprises understand the concept of risk and will have frameworks – some effective, some not so much – in place at the board level and, to varying degrees, enterprise-wide. But for SME businesses there seems to be more of a ‘‘she’ll be right’’ attitude and lack of awareness around the emerging risks identified in the survey.
It’s human nature to bury your head in the sand and not think about potential problems until they happen. But as a business expands, its risk profile becomes more complex.
Challenging contractual arrangements, changing health and safety legislation, and dependence on key customers are just a few of the complexities medium-sized businesses have to navigate.
When it comes to insurance the SME owner often thinks of it as a ‘‘nice to have’’ versus a ‘‘must have’’ product. Often, they will buy the insurance that is compulsory, such as insurance to protect physical assets as part of a bank loan requirement. The devil truly is in the detail and often businesses end up buying the wrong insurance product or not understanding their liability limits.
I once visited a printing press company in Sydney whose risk mitigation for hailstorms was to put tarps over their roof to prevent the hailstones from coming through the tiles and damaging their expensive equipment. When asked what the biggest risk to their business was, they said anything that stops the printing press machines from running.
Despite having a property damage policy limit in the hundreds of millions, the policy had a limitation of $100,000 for hail damage which meant they had next to no insurance protection against one of their largest risks.
There are hundreds of insurable risks and you are never going to insure them all. Rather than focussing on insurable risk products, the place to start if you are an owner of a medium-sized businesses is to ask yourself what are the big things that could happen to your business. Tease out ‘‘what could happen’’ scenarios, and hone in on the problems that you would need to solve.
Of the other key risks identified in the survey, directors see social media as a growing risk, and in this area smaller businesses are potentially more vulnerable than large enterprises.
In a general sense, where small to medium-sized businesses get caught out is through not understanding the risk management process, which is designed to stress-test businesses during these uncertain times and provide them with confidence to capture the upside from the new emerging risk environment.
Don’t assume you’ve got the right protections in place, and be curious. Start with the big problems first and make an informed decision about what you need to do.
"It's human nature to bury your head in the sand."