Cyber-crime, product liability, climate change and political instability are among the new risks that SMEs need to address, quite apart from traditional protections like fire, theft and health insurance. HO WAH FOON reports.
SMALL and medium enterprises (SMEs), especially export-oriented ones, must brace themselves to face more emerging risks amid rising sophistication in information technology, change in geo-politics and economic dynamics, as well as climate change.
The emerging risks in the increasingly globalised environment include cyber-risk, trade credit risk, product liability, currency fluctuations, political and country risks, as well as climate risk.
But most companies in Malaysia only buy fire insurance to cover their buildings and equipment, goods, as well as policies against theft, public liability and health insurance for their workers. Hence, they are grossly under-insured in emerging risks.
“Companies risk seeing their operation being wiped out or the decimation of their income or profit, if they do not cover themselves against all the major emerging risks,” said Marsh Insurance Brokers deputy chief executive Sean Chou.
As most SMEs have gone online for their operation and transactions, they face cyber-risks mainly resulting from cyber-attacks and cyber-extortion. Yet many do not treat this as a “normal risk” in their overall insurance plan.
In the case of cyber-extortion, a third party could have electronic means to block data or cause the complete shutdown of a computer system if ransom is not paid. This new risk, considered as high now, could lead to legal action against the business owner and consequently financial loss in terms of compensation.
“Over the years, we have studied the needs and behaviours of SMEs. Most do not want to spend too much on insurance. In fact, if they take our solutions and transfer these risks to insurance companies, it is likely to be less than 1% of their operating costs,” said Chou.
Unlike SMEs, most local big corporations — such as banks and hotels — were aware of cyber-risks and they had insured themselves quite adequately, Chou noted.
With uncertainty looming in the international environment, export-oriented SMEs are likely to face higher credit risk, product liability, currency fluctuations, trade credit and political risk against other countries.
For example, they are likely to face higher political risks in the Middle East and Africa. Political insurance will cover nationalisation of industries and confiscation.
“At this juncture, a lot of local businesses have no such visibility (in their insurance coverage). Most are under-insured and have no knowledge of passing such risks to insurance firms. As a result, the loss they suffer could cripple their operation,” said Chou.
As Malaysia has not been hit by natural disasters, SMEs tend to overlook the need to insure against catastrophic risks, such as the typhoons that hit China, Hong Kong, Taiwan and the Philippines.
“This is where we come in. Our global network will give them a holistic (helicopter) view on a global basis, and propose solutions. Different countries have different risks. Companies are advised to review their strategy for managing risk and achieving growth,” he added.
In the case of China, Sean advised SMEs with investments in the mainland to adopt a risk map that covered product liability, credit risk, natural disasters and public liability (such as the recent explosion in Tianjin).
For South-East Asian countries, local exporters should insure against credit risks as many buyers are relatively new companies that do not have a track record.
Other risks in South-East Asia will be catastrophic and political risks, particularly in the Philippines.
With progressive global warming, past data on climate are no longer reliable and hence investors should also pay attention to risk linked to pollution and weather.
Chou said Marsh helped clients to map risks and prioritise their risks, source insurance companies for coverage so that businesses could transfer these risks to the underwriters to mitigate their losses in the event the unexpected occured.
Marsh, a leading international insurance broker and risk advisor in Asia, has advised and provided insurance solutions to some 2,000 SMEs in Malaysia. It is also a risk advisor to many in the top 100 listed companies in the country, according to Chou.
He opined that SMEs, which could grow into corporations if their operations were not interrupted unexpectedly, ougt to have an enterprise-risk management framework to mitigate against losses.