Pinpointing your risks is essential
Biemond Nurseries founder Marion Biemond was relieved she'd been through a comprehensive review of her business insurance when a fierce storm hit the nursery in the Yarra Valley.
"We had just completed building a greenhouse. We then had a very violent storm, almost tornado-like. We had high winds and a corridor of wind came through and blew over our new greenhouse," Biemond said.
Not only did damage from the storm mean parts of the nursery needed to be rebuilt, but the business lost a third of its capacity because it had to cancel stock that would have been stored in the greenhouse.
Biemond said her insurance broker, OAMPS, had taken her through a detailed process of the different types of insurance available to her business.
"[As] as a small business owner you need someone to explain the different components, and help us work with our accountant to get the right business interruption figures. Once you have this formula it's actually very easy," she said.
Victorian sales leader for insurance broker Willis Australia, Leigh Frost, says there are three key types of insurance a business should consider: protection against operational, strategic and financial risk.
Frost says strategic risk covers loss resulting from inappropriate or flawed strategy, for example when entering new or untested markets. Operational loss occurs when there's a breakdown of controls or procedures that results in damage, and financial loss is when a business has impaired its ability to provide adequate return on funds.
In the current economic climate, it is financial risk that is usually of greatest concern to small and medium enterprises, Frost says.
"Because times are tough, the financial risk is the one that keeps them awake at night: they're worried about how they're going to pay a mortgage or loan. The operational or strategic seem a little more removed because they are potentially things the business can control," Frost says.
There are additional risks that might come under any three of the categories above, such as personnel risk, or "key man insurance" - where heavy reliance on one person might eventuate because of an issue with strategic or operational failure. And environmental insurance, which can cover a business for damage it causes to the environment because of catastrophe or in the event it suffers because of changes to the environment.
The first thing to do when identifying the key risks your business faces is for a broker or insurer to understand the nature of the business and its objectives, Frost says, which includes getting to know the risk tolerance of a business.
"Risk is anything that would stop a business from achieving its objectives." A broker will then discuss ways a business can manage its risk, looking at ways to change business processes and balance the cost of insurance with risk tolerance.
Frost says only 25 to 30 per cent of business risks are usually insurable, once all the costs are considered. He says insurance is not the only way to manage risk and brokers work with clients to consider other ways to reduce risk.
"Just because it is insurable doesn't mean we'll always progress down that path," he said.
The third phase of working with clients is matching business objectives and advice to appropriate insurance products, balancing all the objectives, likelihood of risks, risk profile and costs, Frost says.
Biemond says having thorough insurance covering different contingencies such as physical damage and the costs of business interruption is the smart approach.
"You always think, 'This would never happen to me,' and when it does you're really glad that you've got the right cover," Biemond says.
"People must be crazy not to have proper insurance. You always hope you don't need it, but if you do I hope you have good insurance."
Questions when arranging cover
What do you see as the key risks in your business?
Which risks do you insure at present?
How confident are you that your organisation's key insurable risks have been identified?
What is the most important part of your existing risk program?
How do you quantify risk in your business?
Are you aware of any gaps in your program?
What is your risk retention appetite?
Is your insurance aligned to your organisation's risk profile?
Source: willis.com
Frequently Asked Questions about this Article…
Business insurance protects against events that can stop a business from meeting its objectives. The article uses Biemond Nurseries as an example: a storm demolished a new greenhouse and forced cancellation of stock, and having the right cover — including business interruption — helped the owner recover. Insurance helps cover physical damage and the costs of disruptions so owners aren’t left exposed after unexpected events.
Willis Australia’s Leigh Frost identifies three broad risk types to consider: strategic risk (loss from a poor business strategy or entering untested markets), operational risk (breakdowns in controls or procedures causing damage), and financial risk (losses that impair returns or cashflow). Each type may require different insurance or other risk-management approaches.
Business interruption insurance covers lost income and extra costs when a physical event (like the Yarra Valley storm at Biemond Nurseries) forces a business to stop or reduce operations. The article highlights how the nursery lost about a third of capacity after its greenhouse was destroyed — business interruption cover can help replace that lost revenue while repairs are made.
A broker can explain different insurance components, help quantify business interruption figures with your accountant, assess your business objectives and risk tolerance, and match those to appropriate products. The article notes OAMPS guided Biemond Nurseries through a detailed process, and Willis Australia advises brokers should understand the business before recommending cover.
Not all risks are practical to insure. Frost says typically only about 25–30% of business risks are insurable after costs are considered. Brokers will therefore look at insurance alongside other risk-reduction measures and may recommend changing processes or accepting some risks based on your risk tolerance.
Beyond standard property and interruption cover, the article highlights covers such as key man insurance (to protect against heavy reliance on a single person) and environmental insurance (to cover damage your business causes to the environment or losses from environmental changes). These can fall under strategic, operational or financial risk categories depending on the situation.
Start by working with a broker or insurer who asks about the nature of your business, its objectives and your risk tolerance. The broker should help define what would prevent you from meeting objectives, quantify risks, and identify which risks are insurable versus those you might retain or manage through process changes.
The article suggests asking: What are the key risks in our business? Which risks do we currently insure? How confident are we that all insurable risks are identified? What is the most important part of our risk program? How do we quantify risk? Are there gaps in our program? What is our risk retention appetite? And is our insurance aligned to our organisation’s risk profile?
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