Focus on managing business risks including insurance policies in a holistic manner

One of the major risks that small and medium-sized enterprises (SMEs) are especially vulnerable to, is the negative impact of events such as service delivery protests, strikes by public transport workers or incidents calling for the shutdown of cities, which present risks that insurance policies do not cover

Roy Wright, Head: Risk Solutions at GTC says: “Businesses can safeguard their operations better by changing their approach to risk management and engaging in an integrated process developed around their business needs, as opposed to merely relying on insurance policies for protection against perils.”

He warns that traditionally, business owners tend to think of risk management as taking out insurance, but there are substantial risks to the sustainability of business operations – often unique to South Africa – that cannot be covered by insurance policies.

“Rather than ignoring these threats, which are often outside of management’s control, we encourage business owners to adopt a holistic approach to managing their risks,” says Wright. “Shutdowns and protest events, to which SMEs are vulnerable, often make it difficult or impossible for much of the country’s labour force to leave their homes or get to their places of work on time or, sometimes even to get to work at all. Human capital forms a key part of any organisation, regardless of the skill level of the employee base. Industrial action – whether protected or not – has been a prominent characteristic of the local economy.”

The Department of Labour reports that the country experienced its highest number of work stoppages (132) last year (2017), since 1999 when the earliest strike data was available.

“Therefore, it is in any organisation’s interest to ensure it has a realistic plan to manage the potential negative impact on its operations in the event of its staff being unable to work, especially if the reason for this is outside the employees’ control,” Wright says.

While these incidents tend to cause significant frustration for business owners, he believes such events need not cause that much disruption if businesses, under the guidance of their professional risk advisors, develop a realistic risk management plan.

“In our approach to risk management we advocate a comprehensive approach that involves analysing the company’s operations in their entirety and identifying the major risks for that particular entity. The risk profile will be different for every business, and managing these risks extends beyond insuring an organisation against theft or property damage. A good risk management plan should include ways to mitigate any negative impact on business operations and would be developed to suit the organisation’s needs and circumstances,” he says.

According to Wright, the key to a risk management process is being realistic about areas where the business is vulnerable and determining the rate at which these incidents may occur.

“For example, in South Africa we know that strike action is a near-annual occurrence for much of the labour force. Companies can develop strategies to protect themselves against the impact of working days lost due to planned strikes, but they often find it challenging to plan for strike action that is unrelated to the business or industry – such as public transport strikes.”

Wright believes it is imperative that businesses account for the probability of these incidents and subsequently develop ways to manage the impact on the firm in a manner that is sustainable for the owners and employees.

“It is a short-sighted practice to punish employees with policies of ‘no work, no pay’ when the reason for them not showing up to work is beyond their control. Aside from the loss of productivity that the business suffers, a seemingly unempathetic management attitude also has a severely detrimental impact on staff morale.”

He suggests alternative solutions could be to allow staff to work from home; shifting compulsory production down time or maintenance days to the periods when strike action occurs, or, in collaboration with staff, determining other transport methods should this be an issue.

“Clearly there is no one-size-fits-all solution, but we have substantial experience in guiding businesses towards risk management strategies suited to their sectors and capabilities, that would work best in their circumstances. This way, business owners can rather focus on growing their business,” he says.

“Organisations should also review their risk management plans at least quarterly to ensure that all risks are accounted for, duly prioritised, and that the mitigation strategies remain relevant and cost-effective to the business.”

Whereas large corporate organisations will likely have dedicated risk management teams tasked with developing and monitoring the risks to the business, smaller businesses do not have this luxury, or the specialist knowledge to produce comprehensive strategies that mitigate the business risks.

Wright believes the major reason for the absence of robust risk management plans at especially SME organisations, is due to the perceived cost associated with obtaining advice and developing a plan.

“However, the long-term benefits to the sustainability of the business far outweigh the short-term costs of risk management planning. Considering that the country experiences an annual average net loss of -4.9%* in small businesses – which are crucial for employment creation – it is imperative that these organisations make a better effort to minimise these threats,” he says.

In a move that is set to aid SMEs, the Financial Sector Conduct Authority (FSCA) is making it compulsory for intermediaries to adopt a needs-based approach when consulting with their clients.

“This change is being rolled out under the Retail Distribution Review (RDR) which aims to make financial sector practices fairer for clients. It would mean that brokers would have to demonstrate that they have analysed their clients’ risk management needs before they advise on insurance products. This should help businesses to think more holistically about the risks to their businesses, even if these cannot be solved by an insurance policy,” he concludes.

Contact Roy Wright for any of your risk solutions and short term insurance needs: