Riskier business

In an age of economic uncertainty it’s time for New Zealand businesses to be more ‘risk-savvy’ than ever. Kevin Kevany seeks advice from risk management experts.

If only one in 20 Kiwi small business owners/managers are doing it (and “it” is no longer simply “something to insure against” or to delegate to “someone else”) is it surprising the insightful boss of a leading credit agency is ringing the bell on the need for more risk awareness?
Veda Advantage MD, John Roberts, is warning all SMEs to step-up risk management processes, as they work hard to stay in business “during the toughest year they have faced in decades”.
“Without sound risk assessment in place these businesses will find it increasingly difficult to obtain credit from mainstream lenders.” And Roberts should know, because he keeps the score on how all businesses are shaping up in these turbulent times.
Data and statistics accumulated and held by the country’s largest credit bureau show just five percent of SMEs actually conduct proper risk assessment, which includes an assessment of creditors’ ability to pay.
“The days of relying on personal connections when it comes to advancing credit for products or services are well and truly over: to stay in business, companies need to know just how credit-worthy their clients are and whether they can actually pay their bills,” Roberts says. 
He points to research released by Massey University’s SME Research Centre which found a spike in business failures and staff cutbacks could occur this year. The Managing Under Recession report, which surveyed 1,539 SMEs in considerable depth, found many owners had relied on personal savings to back up their balance sheets since the recession began. 
Centre director, Professor David Deakins, says the survey found SMEs were “self-financing”, but he warned that when businesses exhausted their internal sources of finance they would then find it difficult to source external funding, such as bank loans.
Roberts notes “thanks to the recession, banks have limited lines of credit, so they want to know when they lend to a SME that the company has robust business practices in place – and that starts with risk assessment.”
Veda Advantage data shows a sobering 29.72 percent increase in the number of defaults in July 2010 compared with the same month last year.
You might be tempted to mutter a “so what; that’s how we’ve always done it; and it’s too late to change at a time like this. Anyway, it’s all mumbo-jumbo that the insurance companies put out there to scare us into unneeded policies”.
So, let’s get an expert, a man who is playing a pivotal role in developing the need for and understanding of the benefits of risk management in New Zealand, Steve Vaughan, executive director of the NZ Society for Risk Management, to add perspective.
“Risk management professionals generally agree that, depending on the business, the proportion of risks that can be dealt with by insurance may be as low as ten percent. Don’t get me wrong, insurance does have a valuable part to play in managing business risk, but it is certainly not the whole story.”
Refreshingly, Vaughan accepts the science and jargon can often be a barrier to adoption.
“Firstly, let’s bring it down to a local example and focus on a simple key aspect – communication – to demonstrate the broad scope of risk management and the practical application of it.
“Last year, after at least a four year process, the three Auckland District Health Boards signed a new contract for community diagnostic services in Auckland (“bloods” as they say in the trade). The major goal was to reduce the cost of these services to the community.
“Within weeks of the new provider starting-up, instead of being hailed as wise guardians of public money, the DHBs were stridently criticised in the national media as diagnostic test results were misplaced, late, or just plain wrong. Shortly afterward, the new diagnostic service was being publicly criticised by the Health and Disability Commissioner.
The large scale transfer of diagnostic services and records from one provider to another was inevitably going to have some risks attached, says Vaughan, especially since the new provider was setting-up from scratch and promising to do the same job at less cost. 
“Few, if any, messages about potential risks from the changeover, or indeed about what might be done to reduce those risks, were communicated to the Auckland citizenry. We might have found the resulting ‘teething problems’ more acceptable if the DHBs had been upfront about those risks, ahead of time, and were clear about what they had in place to deal with them.
“Better yet, some more clarity about the advantages of this change would have been helpful, such as what the freed-up funds were going to be spent on,” Vaughan notes.
“What was needed was some way of exchanging information about the risks between the various parties impacted by the changes, such as informing people about the possibility of failures; providing means to report those failures; and explaining ahead of time what could be done when mistakes occurred.
“This would have assisted with building trust and understanding between the provider (in reality the DHBs) and the others affected, including GPs, nurses, patients and the wider community.”
Vaughan maintains fronting-up quickly to accept responsibility and explain what is being done to fix the problem (when risks eventuate), fully understanding who is affected, appreciating their perspectives, being open and honest (including admitting mistakes), supplying information (in useful and easily understood ways; and providing access to more detail if critics want it) and making solutions part of the process are vital.
“Wire it into” your SME’s overall management process, or if that’s too formal – the way you do business. Involve every employee and integrate into how everyone does their job, he advises.

Planning process
What then is the insurance industry doing to help us and what trends and products are evolving?
QBE’s Ross Chapman, GM QBE Insurance (International) believes all SMEs need to undertake the implementation of a pre-planned, considered approach to minimise the impact on business if ‘disaster’ strikes.
“Each business is unique and, by its very nature, is exposed to physical, financial and other risks.  Even though ‘insured’ no amount of insurance can possibly allow for all contingencies and, even when insurance ultimately provides financial compensation, the long-term impact on the business due to loss of customers and reputation can be major.”
Chapman outlines the planning process which involves several stages of development. The following key steps need to be considered before a written plan can be developed:
• Establish a consensus view on the business’s key business continuity priorities, through a formal risk assessment process (‘business impact analysis’).
• Develop risk mitigation options (strengthening and/or contingency plans) based conclusions drawn from the assessment.
Then, says Chapman, the business’s vulnerability to disruption risks needs to be assessed by:
• Agreeing on the business’s goal(s).
• Defining those core business activities which support the business’s strategic and emerging markets.
• Determining the tolerance of these markets to disruption or lack of supply of the business’s products and services.
• Identifying those business functions (including assets, systems and resources) used to support the core business activities.
• Recording those conditions or circumstances where disruption to business functions (and hence core business activities) could exceed tolerable limits.
• Considering viable options for reducing the probability and/or duration of such disruption, and identifying areas where specific contingency plans are warranted (or may need upgrading, if they already exist).

 The age of relentless acceleration
the aftermath of the global financial crisis.
“The good news, however, is that green shoots are also starting to reappear in the small business market, particularly in the export areas of manufacturing and technology,” Chapman says.
Kevin Kevany is an Auckland-based freelance writer. Email [email protected]

 Grant Milne, recently appointed country head of Marsh NZ, has seen many changes during his 23 years in the insurance industry, and led various growth initiatives, including the establishment of SME-oriented Marsh & McLennan Agency in New Zealand. He says the challenge is to continue to be innovative with products and services, to meet changing insurance needs and to help [business owners] manage these risks in the best way possible.
“There are several key areas where change is heavily influencing the way that we manage both insurance and risk in New Zealand – global events, regulation and climate change.
“The global financial crisis reminded us how interconnected the world is and how quickly a single event can create wide-reaching impact – even on the other side of the world. Marsh’s global CEO and chairman uses the phrase ‘The Age of Relentless Acceleration’ to describe this new phenomenon, whereby emerging risks, uncertainty and volatility can spread in an exponential fashion.”
He points to the oil spill crisis in the Gulf of Mexico as not only directly impacting the surrounding environment, but also having far-reaching global consequences. Inevitably, given insurance is a global industry, this could also raise premiums in New Zealand.
“According to the Insurance Council of New Zealand, weather-related disasters represented 19 of the top 20 insurance losses in New Zealand since 1968.
“Flooding, by far the most significant cause of damage, is responsible for 70 percent of all weather-related losses. Already this winter we have seen the devastating impacts that this can cause on businesses, home owners and communities,” Milne says.
Medium-to-large enterprises, he says, are catching on. As evidence of this, he quotes the recent Excellence in Risk Management VII report, which revealed the number of firms saying that they have an Enterprise Risk Management programme more than tripled in 2010 compared to 2009.
“It is no surprise that the focus on risk management, especially in boardrooms, has increased.  Following the financial crisis, regulators and stakeholders are demanding greater assurance from companies in the area of risk and corporate governance – so organisations must be seen to be addressing these areas. 
“In addition, there is a greater focus on risk management’s role in developing companies’ business strategies – i.e. risk plans cannot be isolated from an organisation’s overarching business strategy.”
QBE’s Chapman reckons that since a large number of businesses have suffered reduced revenues in the downturn, it becomes even more essential SME bosses check their insurance programmes to ensure that cover is as robust as possible, given the likelihood of their being able to trade out of a mishap is reduced.
“It pays to get your broker to do a full review to make sure that your business can continue in the event of a catastrophe. Good cover on your buildings and machinery and business interruption insurance can ensure continuity of trading when otherwise you might just have to shut up shop.”
Chapman says the market in New Zealand remains a challenging environment, with some insurers posting results which are less than desirable. As a result, most are looking more carefully at their risk selection and underwriting discipline to ensure that they can pull back into more profitable positions in the coming years.
Claim trends, particularly in the liability lines, are upward at present due to a combination of the leaky/rotting homes scenario, as well as financially-related claims in