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SMMEs should not ignore the importance of proper insurance

SMMEs should not ignore the importance of proper insurance
21-11-12 / Staff Writer

SMMEs should not ignore the importance of insurance

Cape Town - Small, Medium and Micro Enterprises (SMMEs) are fundamental to job creation and Namibia's economic growth. But their size and the many challenges associated with small business also makes them vulnerable when faced by unplanned crises such as fraud, crime, fire and floods. According to Ken Robinson, Santam's Head of Commercial Business, the crippling and unexpected costs associated with these disasters are compounded by failure to protect the business adequately through appropriate insurance.

Robinson says: "It is absolutely critical to ensure that you have appropriate cover for your business. Although the greatest losses are experienced when a business is not insured, under-insuring your business, property or assets can also have a detrimental effect on your financial wellbeing. If you, for example, insured your computers for N$30 000 and they are worth N$60 000, you will only be paid out 50% of the value when you claim."

He suggests that entrepreneurs use an intermediary.

"Setting up a business can be a costly affair and it's important to get the right insurance cover to suit the business needs. Intermediaries exist to help business owners find the correct insurance cover, and to ensure there is sufficient cover should the need to claim arise."

"At Santam, we believe that by addressing challenges in the SMME sector, like creating an understanding of the potential risks and how to avoid them, we will be able to facilitate economic growth. The success and growth of the SMME sector leads to job creation, skills development and goes a long way towards helping to alleviate poverty and this, in turn, assists in building sustainable communities and a landscape that accelerates economic growth in Namibia," concludes Robinson.

Some of the risks that SMME's should take seriously and discuss with their intermediary, who can guide them in mitigating these risks include; Crime, Natural disasters (fire, floods), Fraud, General Liability insurance.

Santam suggests that business owners follow a simple risk management process:

  1. Identify all potential risks to your business, these could include:
    • Natural perils (wind, storm, hail, lightning, flooding, etc)
    • Crime related perils (burglary, armed robberies, theft of vehicles/hijacking, etc)
    • Accidental damage (motor accidents, damage to computers, etc)
    • Legal liabilities (due to products being sold/repaired, motor accidents where the insured/driver is negligent, etc)
  2. Evaluate these risks in terms of the likelihood of them happening and the potential size of the loss, for example:
    • The likelihood of having a motor accident is high and the size of the loss would be medium to large (a vehicle being written off as well as damage to a third party's vehicle/property)
    • The likelihood of a fire at the premises is low but the size of the loss would normally be high to extremely high.
  3. The third step is proactive risk management. Using the information above, a business owner should decide whether some of the risks can be eliminated or reduced, here are two examples:
    • Installing an alarm and burglar bars reduces the likelihood and impact of potential burglaries.
    • Arranging with suppliers to deliver stock instead of collecting your own eliminates the risk of loss or damage to goods whilst in transit.
  4. The fourth and last step is to finance the residual risks (i.e. the risks that can't be eliminated or reduced to an acceptable level. The most common method of financing the residual risk is through dependable insurance, this would also be the most viable option for the small business owner.

Deciding on what should be insured.

This is dependent on the information gathered above as well as the specific industry that the business owner operates in, but as a general rule, Santam suggests the following:

  • Plant, machinery and equipment (against natural perils and burglary).
  • Stock (against natural perils, burglary, during transit).
  • Reduction in business turnover from damage or loss of stock, plant, machinery, equipment or buildings.
  • Computers, cash registers and other equipment (against natural perils and burglary).
  • Loss of money.
  • Motor vehicles (accidental damage, accidents and liabilities).
  • Legal liabilities.

What business owners commonly overlook when taking out short-term insurance:

  • Underestimating the impact that damage to equipment, stock and buildings has on the financial wellbeing of the business.
  • Forgetting to consider the legal liabilities of the business.
  • Not adhering to the conditions set out by the insurance company, which could easily result in claims being repudiated.
  • Forgetting to advise the insurance company of changes to the business (e.g. a clothing store that starts selling fireworks, a change of address, and so forth).

How to calculate asset value:

  • Plant, machinery and equipment should be insured for the new replacement value (i.e. what it would cost to replace the items with new items of similar capacity and design).
  • Stock should be insured for the invoiced amount.
  • Motor vehicles should be insured for the reasonable market value (i.e. the amount the business owner would pay when he purchases a second-hand vehicle in a similar condition).

Santam offers small businesses owners the following tips for insuring their business:

  • Always declare all relevant information to your intermediary, no matter how small the detail. Indicating all the risk reduction measures you have implemented will indicate to the insurance company that you are serious about your business and would assist you in negotiating a preferential premium.
  • Always spend time identifying all exposures to your business, do this with your intermediary as he/she will have insight that you may not have when it comes to business insurance.
  • Always act as if you are not insured. Insurance should be used for large catastrophic claims that are difficult to predict and avoided. Insurance should not be used for small, regular losses as this would result in premium increases.
  • By taking appropriate precautions, like installing proper security measures and fire precautions, you could have a substantial premium saving.
  • If you are prepared to pay a higher excess, you could negotiate a premium reduction. Again lean on your intermediary for advice as you also need to bear in mind the impact on your cash flow, should you suffer a number of losses in short period of time.

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