Too often, one reads of businesses burning down, being robbed or countless other unforeseen losses that could lead a small business to ruin if it does not have the right insurance cover.
Making sound decisions about insurance cover during the infancy stages of a business is key to protecting it against unforeseen losses that most startups find unable to absorb.
So say specialists in the insurance sector and small business owners.
“The reason that startups skimp on insurance is because they generally have less capital and free cash flow to absorb such losses, and will be unable to continue to operate when impacted by a loss, says Standard Bank’s head of small enterprise, Ravi Govender.
Mutual & Federal commercial, distribution and Africa executive Mark Weston agrees. “Many small businesses are often sole proprietors. This means that an owner has heightened financial liability in case something goes wrong.
“Therefore, it is important to obtain insurance, because claims can destroy not only a business, but the business owner’s financial health,” he says.
Nelson Mandela Bay Businesses Chamber chief executive, Kevin Hustler, says small business owners often find themselves financially constrained within the first few years of operation, and that this is when the temptation to “skimp” on the seemingly expensive “luxury” of good business insurance is at its greatest.
“However, as with any other decision, business owners must consider the greater long-term impact of the decisions they make in the early days of their business, especially when it comes to dealing with financial setbacks that could otherwise mean the end of business operations.
“Losses due to theft, the breakdown of machinery and equipment, and unforeseen damage to premises, for instance, should be insured against to provide the necessary protection in the long run,” says Hustler.
Videographer Craig Blewett says insuring his camera equipment was one of the first considerations he made when he started his business. “If a camera breaks or if I lose equipment due to theft, I am unable to provide my services, which in turn means no income,” Blewett says.
However, he believes that premiums are becoming very costly and difficult to afford.
Sarah Dirsuwei, the owner of The Plantation and The Boma event venues, says having sufficient insurance cover is “vital”.
“A single disaster such as a fire or a client getting injured on your business property can literally ruin a small business.
It is virtually impossible to self-insure to cover all the associated losses, which are much further-reaching than just the cost of the damage – including business interruption, legal action and loss of income.
“Being in the hospitality industry, hosting weddings and functions, we need to manage our risk comprehensively. This includes having sufficient public liability cover, as well as basic short-term insurance, business interruption and key man insurance,” says Dirsuwei.
When speaking to brokers and insurers about the importance of insurance, they consider business interruption cover to be critical for any startup, and one of the first options to be considered when looking into business insurance.
“The cover is designed to put your business back into the same position, or as close to the same position, as before the occurrence of a loss,” says Shehnaz Somers, the head of Santam’s commercial underwriting.
However, over and above business interruption cover, finding the best cover for a business’ individual needs among the myriad of options available can be a challenge.
“It is a good idea to go to an insurer or broker specialising in your industry, because their policies are built to cater for the unique intricacies of that particular industry,” says Dirsuwei.
Andrew Bolton, director of Southsure, says it is also important to ensure that your broker is from an independent brokerage with no vested interests as well as possibly a member of the Financial Intermediaries Association of South Africa (FIA), which advocates the highest levels of professionalism and conduct.
According to Weston, a reputable broker will be able to evaluate the risks a business may face and will complete a proper needs analysis.
“We would advise owners not to accept a generic type of insurance solution,” he says.
Theuns Hattingh, director of Commsure, says using a reputable broker is important, primarily to establish the nature of the risk, finding a solution, and then comparing the different insurers’ products.
“The beauty of business insurance is that it consists of 30 different sections ranging from fire, business interruption, to theft and vehicle insurance,” Hattingh says.
According to Govender, small business specific prepackaged options can start from about R150 to as high as R950 per month.
According to Weston, the major costs associated with business insurance depend on the risk appetite of the business and the segment it operates in, as well as the inherent risks in that sector.
“For instance, industrial businesses face potentially higher risks as result of their processes – some tend to be highly flammable or dangerous and thus can represent an increased fire hazard. Other industries have intrinsically lower risks, which naturally will affect the cost of insurance,” says Weston.
“Build the cost of insurance into your business plan; at least an amount providing the most essential or basic cover that will help you to continue to operate, should a loss happen.
Also, ensure that you understand the cover purchased, the exclusions, and your specific requirements. Ask, to ensure that it covers the loss your business is most likely to suffer,” Govender advises.
- To find a reputable insurance broker to speak to, go to www.fia.org.za
Six tips on how to cut insurance costs
Business insurance is not always very high up the priority list of a small business owner, yet it is invaluable. Here are six ways to try to keep insurance costs down.
Go online, research and speak to other business owners to hear what they have to say about their insurance companies.
Remember, this is a very competitive market and you can use this to take advantage to get the best possible quote.
ASK FOR A DISCOUNT
As mentioned above, the industry is very competitive and your agent might be more than willing to allow for a discount should you ask for one.
Ensure that your broker is from an independent brokerage
CHANGE YOUR COVER
If your policy has a broad coverage, you can reduce your premium by reducing your coverage.
However, this will also limit the losses that will be covered and increase the risk of you having to cover losses out of your own pocket.
Instead of making monthly payments, which is the norm, rather make annual or quarterly payments.
You could save on your premium by making a once-off payment.
INCREASE YOUR EXCESS
Insurance companies might be willing to allow a discount on your premium if you increase your excess which will take some of the pressure off the insurer in the event of a claim. Excess refers to the amount you will have to pay when you claim.
Credit scores are used to check the likelihood of potential claims by clients.
This is because research has shown that people with good financial management skills are less likely to make a claim.