Insurance Helpline | SMEs need cushion to soften business risk
QUESTION: I am the owner of a St Thomas-based small business. We use farm products grown nearby to manufacture and distribute sauces, salad dressings, seasonings and food flavourings. Consumer feedback has been very positive. Four persons are currently employed. Plans are afoot to increase production with a loan from a financial institution and enter the export market. The lender is, however, insisting that we buy insurance in order to get the loan. What are some of the types of insurance that I should be considering?
- S.J., Morant Bay PO,
Insurance is a risk-coping tool. Many Jamaicans, including small-business operators, often ignore it.
This is not surprising. According to a 2013 University of the West Indies focus group study, insurance ranks slightly ahead of government handouts to lessen the impact loss events. Add to this the negative views that persons have about insurance and the way it is practised, I am sure that were it not for your financial partner, you probably would not have thought about insurance.
The Jamaican situation is not very different from what happens elsewhere. In Australia, according to a 2008 report, "26 per cent of all small to medium-sized enterprises do not have any form of general insurance. Nearly 40 per cent of sole traders operate ... without any coverage".
Many small entrepreneurs in the Middle East view insurance "as an unnecessary expense, while others who may believe it to be important, see it more as a luxury instead of a necessity," wrote the author of a magazine article in 2015.
In the United Arab Emirates, to cite another example, 75-80 per cent of the SMEs there do not buy insurance. Financial inclusion is the term the IMF uses when governments take steps to encourage individuals and small business operators to place more reliance on banking and insurance solutions.
HEDGE TO PROTECT
Banks, credit unions and other financial bodies use insurance as a cushion to safeguard their collateral. For a business operator like you, insurance should be seen as a hedge to protect your investment in your business. Middle Eastern Entrepreneur says: "Insurance allows business owners to operate without having to worry about unexpected events that can slow them down or bring them to a complete halt. Whether it is water damage from leaking pipes, money lost in transit due to theft, or a fire at a warehouse, (or a flood, hurricane or an earthquake, in our case), these are liabilities that cannot always be anticipated. Insurance provides the confidence you need to keep moving with the knowledge that your assets are covered from loss and other legal liabilities."
Failure to understand these ground rules or when there is a mismatch between what the consumer's needs and the type of insurance that is bought often lead to problems. Business owners must have an understanding of the risks that their businesses face and assess the policies that they require.
They will also need to assess the values of the buildings, where applicable, and the contents (inventory, machinery and other property); and understand the liabilities and probable risks that the business faces.
TYPES OF INSURANCE TO CONSIDER
There are various types of property insurance that protect the physical assets of the business. Properly investigate them and decide which is appropriate for your business.
There is lots of information about insurance companies and the products that are available in the Yellow Pages of the telephone directory. Additional details can be studied by visiting websites.
Liability insurances are often more complex than property policies. This is because these types of contracts assume a level of understanding about our laws. For example, one of our laws imposes a legal duty on employers to protect employees failing which, if an employee was to suffer on-the-job injuries, the employer could be held by the courts to be legally liable. A successful claim could result in the payment of millions of dollars.
Product manufacturers can be held legally responsible for any injuries to people or damage to their property caused by a faulty product. You may be liable for compensation if, for example, your company's name appears on the product.
Your business is very prone to product liability risks because the goods you make are eaten. May I suggest that after you have done your homework - see 'Consumers Should do their Due Diligence before Buying Insurance' - that you contact a representative from an insurance company or intermediary.
- Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: email@example.com