What’s the risk?By Shane Brady, Account Manager, Sear Insurance Brokers
We all take risks every single day. A lot of the everyday activities we all do involve risks that are taken subconsciously where our brains assess and measure them without us even realising. There are also risks we consciously take where the stakes and rewards are higher. These risks take a degree of consideration to weigh up the level of risk and associated reward in deciding whether to take the risk or not. These types of risks come in all shapes and sizes ranging from something as simple as crossing the road through to life changing decisions and anything and everything in between.
The subconscious risks that we don’t mentally recognise in the moment are what you could define as low chance, low exposure risks, meaning there’s only a small chance of a negative outcome and regardless of whether it doesn’t turn out as planned, the consequence will be minor. Unfortunately not all risks are this simple.
When the stakes start to increase and the potential impact of a risk is greater, in theory they need a higher level of consideration. The average SME business faces exposures that could literally cripple them every single day. Material risks such as fire are most relatable to the layman, but the ones lurking in the background can easily pose a significantly greater consequence. There are several ways to manage these, but first they must be identified, calculated, and then risk managed accordingly. Most commonly, exposures are dealt with via an insurance policy or managed preventatively. For tangible and easily recognisable risks such as fire, an ISR or Business Package policy can effortlessly transfer these risks to an insurer, who is much better positioned to financially respond when the unexpected occurs. Those in the insurance sphere will know that for an insurer to take the risk for you, they ask for an annual premium in return and that premiums are calculated as a percentage of the measureable risk size and proportionate to its’ probability. Same goes for theft and burglary, business interruption, machinery breakdown, tools and portable equipment among other things - but what the average business owner may not fully appreciate are the impact of risks that can be buried deep inside a 300 page contract, contained in a malicious email, or liabilities that can arise from injury or damage to third parties whilst operating your business.
Broadly speaking, I’m referring to liabilities to third parties and most will assume a simple public and products liability policy will do the trick, it is sadly not that simple. Liability insurance is technical, complex, legalistic and in some cases difficult to understand for even a seasoned professional. A typical public and products liability policy has around 15-20 exclusions all with varying levels of restrictiveness on the cover. Generally it needs to be overlapped with several other types of liability policies, some of which are statutory, in order to create an overarching program that contemplates a broader scope of risks for a business.
To put things in perspective and to reinforce the importance of understanding the potential impact of third party liabilities, take a $3m turnover business with $1m of physical assets as an example. A total loss fire can cost that business the full $1m for its’ assets, compounded with the cost of business interruption the total of the whole loss could be as high as $8-10m (obviously depending on how long it takes to get back to full capacity). On the surface of things it would be hard to think of a scenario that could rival that type of financial devastation for a business of this size, however the standard public liability policy has a $20m liability limit, double the amount of the maximum exposure of the fire example above. Why such a high liability limit you may ask? Simply because liabilities to third parties (particularly when there are multiple parties involved) can easily climb into the millions for a relatively minor incident. Taking into account defence costs, legal and professional fees, investigation costs and then the liabilities itself, the cost of a liability claim could easily overshadow a material damage claim and financially paralyse an otherwise financially secure business.
Your typical business owner may not understand the subtle differences between the various types of liabilities or what policies can assist to mitigate them. As such, it is important SME businesses partner with a professional that can identify them, explain them and arrange a suitable program that addresses their exposures. In some cases, insurance won’t be available for the types of risks faced and it is vitally important that these are recognised, understood and are allocated plans and measures to protect the business against them.
Delving into the dark world of insurance can be daunting to those not directly involved in the industry. It could be very easy to confuse yourself with the likes of Directors and Officers Liability, Statutory Liability, Employers Liability, Professional Indemnity, Umbrella Liability and Cyber Liability just to name a few, but these are some of the exposures businesses should be planning for when it comes to protecting themselves. There are easy ways to explain all of this, and it isn’t as overburdening as it may appear when dealing with an insurance professional if the business owner is engaged throughout the insurance process and willing to partner with their broker wholesomely. It has always seemed pointless to me for a business owner to work tirelessly to build their business, only to leave it wide open to threats that could destroy it instantly.
In such an uncertain world where risk is so liquid and ever changing, a professional broker can be the difference between surviving a major disaster or succumbing to the overwhelming burden that comes with major losses.
In the medieval ages, those that built the most successful empires were those with the highest walls around their castles. Those walls served as their protection against the most recognisable threats, walls that stood to protect what was being built inside them – the empire. A business can be thought of in the same way and it’s vital not to get caught building your empire only to forget to ensure your virtual walls are strong enough to help you recover if you are ever to suffer a major loss.
Is your castle protected?
About the AuthorShane Brady is an Account Manager at Sear Insurance Brokers. Having been at Sear since 2009, Shane has a diverse portfolio of commercial clients across a broad range of industries.
In addition to his general broking role, Shane helped establish and runs an industry specific brand “SMIB” (Sign Manufacturers Insurance Brokers) focussing on Sign Manufacturers and businesses associated with the Sign industry.
Shane also writes regularly for the NIBA blog.