Pinpointing your risks is essential
All businesses need to have the right insurance cover, writes Anneli Knight.
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?