Are you really covered

Our thriving SME (small and medium enterprise) businesses effectively followed the trends and products – in a scaled-down version – of the corporate sector, although they were frequently chastised for trying to cut corners. During the last 12 months, however, we have unexpectedly found ourselves dealing with a new phenomenon that all logic dictates should not impact on the little guys. After all, global warming, just by its mega-size, shouldn’t be threatening our existence, profits and ultimate survival. But as one of our top insurance men, Roger Bell, chief executive of Vero Insurance puts it; “we have seen a dramatic increase in the number of 100-year floods this year, leading to small companies losing stock, having damaged equipment, their major customers shutting down and even one-man operators going outside to find their vans totally underwater.” Gone are the days when you had to drive into a river to do that: now the river, the sea or the burst dam brings that to your front door! As Bell puts it: “Dramatic climate change has added to the volatility of the market in the last year – along with extensive discounting, across the board. “In July alone, we had nine weather-based ‘catastrophe codes’: tornadoes (highly unusual), flooding, snow and ice across the country. To reinforce that, something is going on which is changing our climate, we have had two one-in-a-100-year events in the last three years now. It’s pretty horrific.” And simultaneously, flowing out from Australia – which caught the disease from the US – we are becoming a more litigious society. Exporters are a particular target in offshore countries, which often have very different legal systems. QBE risk manager Peter Birch believes that businesses operating in overseas markets should take a close look at the public and product liability cover they have. “Because of the different legal environments, your risk exposures out there can be quite different to those at home.” Climate change adds volatility All of the above would seem to indicate that insurance companies and risk managers should be having the time of their lives, with anxious business owners queuing at their doors for protection from these latest threats to their survival. Not yet, apparently, as many of us continue to juggle, gamble and close our eyes – hoping that “it” will never happen. This is probably why you have seen a flood of TV advertising – led again by the creative NZI campaign – as well as mailers, education campaigns and some ‘tut-tuting’ from the insurance industry. We decided to put the ball in their court and ask them whether the industry itself wasn’t being risk-averse and slow themselves (or via their agents and the independent brokers who represent them) in not being firmer with SME owners. The perennial complaint from busy owners is that risk management experts give them a couple of scare stories, dump a screed of literature on them, and leave them to “choose” the best option. Too often that goes into the “too hard basket”. Triplejump, a franchised network of unaligned life, disability and health insurance advisers was launched earlier this year by its founder Cecilia Farrow and now has nine franchisees throughout New Zealand. Farrow, who ran her own company for 10 years, has drawn in industry veteran John Stace who returned to New Zealand in 2005 after a career in financial services in London, including founding Stace Barr Limited, which in 1997 was the largest provider of capital to Lloyd’s of London. He was deputy-chairman of Lloyd’s in 1995 and 1996, and now chairs Triplejump. She said her decision to invest in Triplejump was stimulated by the range of emerging issues facing the life insurance broking industry. “These include: an ageing profession, with a lack of succession options; inadequate development within the industry of effective sales processes and training; inability within small firms to leverage and create scale; and significant under-insurance of the consumer.” Farrow claims Triplejump is “a leap forward for the industry”, believing that 21st century risk managers are required to reshape the industry for the future. One of her criteria for aspiring franchisees is that they will share the philosophy of sustainable and lifelong client service. So is the industry resting on its laurels and now leaving it up to the global warming/climate change bell-ringers to do their work for them – frightening us all into submission? Karl Armstrong, head of underwriting at IAG (which includes NZI and State Insurance) carries a lot of clout in the industry (36 percent local market-share and more than $1 billion “on his book”). His company undertakes a good deal of research into both the local and Australian markets. “Remarkably, 75 percent of SMEs are not carrying business interruption insurance, or are inadequately covered, as the Northland floods demonstrated recently. That’s a startling statistic which has calamitous consequences. “Take a corner dairy, for example. Many think this is not an issue for them. What they fail to appreciate though is that in the event of something like a flood, they still have bills to pay. Rent bills, equipment hire, rates, power etc are all still due and payable. “They can possibly carry that for a couple of months. But they could be faced with three to six months to get resource management consent and then another six months to get building consent. Northland, the Coromandel and Manawatu showed it takes a year to repair a building. “While that is all happening their customers are going elsewhere. That’s just a fact of life.” Armstrong points out that 60 to 70 percent of buildings are under-insured too, with building costs having gone up 30 percent in the last three years. Many SME owners are too busy focusing on their businesses to check a landlord agreement which obliges them to cover all fixtures and fittings, for example. 50 percent go out of business The most worrying statistic is that the IAG research shows that half the SMEs in Australia that sustain a major loss or catastrophe go out of business. Is it really a case of “you can lead a horse to water”? Shouldn’t the industry be more directive and tougher on their clients in making them aware of the risks they are running? What about the call centre-driven sales drives that some companies are running, where securing the contract is everything and little time is spent on discovering the customer’s real needs – and little comeback if they get it wrong? Roger Bell again: “It is essential to know what you don’t know; and deal with professionals. SME owners must take advice of risk management professionals, like independent insurance brokers. For a start, they don’t cost you anything and they are steeped in the history and culture of the insurance industry which is all about managing risk to the tune of billions of dollars. “They have the processes and systems – the systematic methodology – to explore every possibility,” says Bell. “I would encourage owners to challenge these professionals; to stretch beyond the basics and help them to mitigate other losses like, say, brand damage, currency losses, impacts on balance sheets. There is no reason for business owners to feel they are on their own in this.” QBE’s Birch believes insurance can be “the ambulance at the bottom of the cliff” where risk management is more the fence at the top in preventing the problem from occurring in the first place. “We aim to work with the client and their broker to obtain a good understanding of their total business operations, so we can develop a good risk management plan. Insurance isn’t necessarily the only solution,” he says. “For example, insuring a piece of machinery is relatively straight forward. However, the company’s dependency on that machine or a part of the machine – for example, a die or a mould – may require more detailed investigation to determine the wider implications to the business of damage, or loss to that particular part. For example, a whole group of business units might have value-added products significantly dependent on that mould’s output,” says Birch. Here there is both an insurance solution and a risk management one – cover the definable loss and/or have a duplicate mould in different premises, or a fire-proof area in the plant. Birch adds that risk management can be as basic as pointing out to a restaurateur that cleaning with methylated spirits around hot plates and ovens is not a smart idea – instead, avoid that particular fire risk entirely by changing how you operate. To reinforce the point, Karl Armstrong repeats the story of the SME owner who was advised to introduce a “tidy desk policy” and to place all files in cabinets as a fire and flood precaution. A short time after, following a disaster, the staff returned to find their files secured and intact, ensuring the business could continue operations. “It is a good simple example of the added-value you can get from a risk adviser who is not just there to sell policies, but is committed to helping keep you in business.” Birch again: “Imagine a major brewery having a fire. They might be able to get replacement stock brewed in Australia, in say three months, but you can bet their customers haven’t gone thirsty in that time. It would take enormous resources and effort to right that situation. It could be five years – or never. “The same applies to small businesses. Your friendly competitor down the road will gobble up your customers in a flash. There’s nothing sinister: the customers need the work done and they can service them,” says Birch. He notes that in a tight labour market too, skilled staff may have to be given incentives to stay with a battered company. Rather than reduce the sum insured, SMEs who are battling costs should look to increase their own excess in discussion with their broker advisers. Vero’s Bell believes we should take a leaf out of their book – they have a 90 percent ‘staff satisfaction’ rating from an outside agency – and get our employees motivated and committed to risk management. That should see a big saving across the board. NZB Relevant websites: www.ibanz.co.nz www.iag.co.nz www.qbe.co.nz www.triplejump.co.nz www.vero.co.nz Kevin Kevany is an Auckland-based freelance writer. Email [email protected] 585