Why insurance is a must for a small business

Sonali Chowdhury

The path towards survival and growth of any business is beset with many risks that need to be averted. Insurance helps remove this unpredictability and makes an SME resilient to potentially crippling surprises. It is especially important for an SME to be insured as a small businesses runs on slim margins and does not have the cushioning provided by liquidity that larger companies enjoy. But insurance is a tricky business and choosing the right policy means first understanding what constitutes ‘business risks’. Next, you need to thoroughly understand the nuances of the various policies on offer. Why should SMEs opt for insurance?
A large part of assets owned by SMEs are financed by banks or NBFCs. These loans are backed by personal collateral given by the promoters. In case of a large loss, the promoters of a small firm could lose not only their business but their collateral too, if the business is not insured. On the other hand, larger companies will simply absorb that loss and move on. “An SME with a turnover of Rs 5 crore can go bankrupt if a fire destroys equipment worth Rs 10 crore,” explains Kapil Mehta, Managing Director, SecureNow Insurance Broker Pvt Ltd. “The financial burden on an SME business owner is significant and insurance cover is the only fall-back measure available.” A Growing Market
The latent demand for insurance from the SME segment is huge and there is potential to double every year, says Mehta. But this potential will be realised only if the SME segment is given adequate focus and appropriate distribution channels are used, he adds. Another reason for the untapped potential is that SMEs have risks they don’t realise are insurable. “General insurance penetration in the SME segment is currently low, with coverage largely limited to protection of physical assets and goods in transit. In the next few years, we expect SME clients to increasingly avail products that focus on liability risks such as lawsuits and other legal claims as well as covering their employees,” says Bhargav Dasgupta, MD & CEO, ICICI Lombard General Insurance Co Ltd. To widen the insurance net, insurers are working with channels like banks that provide finance to the SME sector as well as financial institutions and credit companies who offer credit facilities to this sector. For instance, Tata AIG’s SME book has been growing by 25-30 per cent year-on-year, over the last three years. Distribution channels comprising banks, agents and brokers will play an important role in increasing penetration. What Risks Demand Cover?
Ideally, a business should be protected from all angles – assets, profits and liabilities towards third parties and employees. Some examples are, covering building, plant and machinery, and stock against fire, burglary, money insurance (safe and in transit) and machinery breakdown. * Liabilities towards employees can be taken care of by opting for personal accident and workmen compensation covers. * Companies that operate in services businesses require employee benefit insurances such as group medical, personal accident or term-life insurances. * Manufacturing SMEs are much more focused on property insurance and workman compensation covers. * There is also a small segment of SMEs operating in specialised segments such as clinical research, where liability insurances are a priority. “An example of an underutilised standard product is term insurance. This can be sold as keyman or employer-employee insurance to SMEs,” explains Mehta. What’s On Offer?
Insurance offerings for SMEs are at a nascent stage and most insurers do not differentiate between SMEs and larger companies. “Some of them have developed SME products but the distribution access they have to small businesses is limited,” says Mehta. However, an insurer like Bajaj Allianz General Insurance Co Ltd offers DIFFERENT types of cover in one bouquet policy. Called a Commercial Package Policy, it covers a number of contingencies the SME is prone to under a single policy, which would otherwise be covered under separate policies. “We have been able to sell this customised product to a lot of SMEs. But the overall contribution to the premium income is still a small percentage. We hope it will grow in coming years,” says T A Ramalingam, Chief Technical Officer, Bajaj Allianz General Insurance. Tata AIG General Insurance Co Ltd offers the Business Guard Series of Commercial Lines policies. A comprehensive package, it provides coverage for assets, profits, liabilities and employees where clients can choose options according to their needs. These are offered as a single policy across all client locations. “We have developed a suite of pre-underwritten as well as bespoke products catering to a large section of the SME space,” reveals Sonik Puri, Head, SME, Tata AIG General Insurance Co Ltd. Health Cover
With healthcare costs rising at every level, it is important for everyone to have health cover, regardless of the size of the company. Most insurers prefer groups of 50 employees or more and small and medium companies traditionally have either been unable to get coverage because of group restrictions or because such covers are priced too high. Bajaj Allianz General Insurance is offering a group health cover considering that SMEs, or growing companies have very high utilisation rates vis-à-vis other types of companies. “This health insurance plan has been customised for small and medium companies taking a group health insurance for the first time. Hence rates have been pre-discounted,” says Ramalingam. Premiums For SMEs
“Premiums for SMEs are almost always higher but there are different factors driving these high prices. For policies such as group medical and group term life, the smaller groups present inherently higher hospitalisation and death risks and so prices are high,” says Mehta. In property insurances, the SME has a diminished ability to negotiate discounts on the base rate and ends up paying more. For liability insurance, there is a minimum premium below which any insurance is not viable. However, insurers say that their premiums are competitive than the market price. For example, premium for a package policy for a retail shop that has stocks worth Rs 75 lakh is in the range of Rs 17,000 to Rs 19,000. Similarly, premium for an office package policy having contents worth Rs 2 crore is in the range of Rs 20,000 to Rs 25,000. Some insurers provide customised rate charts and combinations of coverage for group health cover so that groups can opt for plans according to their needs. “Pre-packaged and easy-to-underwrite products are essential to develop the SME market. However, most products available in the market today require a fair amount of underwriting,” says Mehta. What To Watch Out For       
Before you opt for a policy, there are several questions you need to answer. “For example, in group medical, the business owner must know if there are waiting periods, whether pre-existing diseases are covered from day one, whether are there restrictions on room rent and so on,” advises Mehta. In property damage, you need to check that not just fire but also flooding, earthquake and malicious damage risks are covered. EACH POLICY HAS ITS OWN FINER POINTS AND THEY SHOULD BE ALIGNED WITH YOUR BUSINESS NEEDS. All policies are intricate and in-depth knowledge is the best insurance of them all! You can send your feedback on smementor@moneycontrol.com or simply post comments below