How to insure a successful business

How to insure a successful business

When running a business you have to side-step a few not so metaphorical puddles to ensure peace of mind and a stable bank balance…

 

In order to run a successful business you need to be conscious of the risks involved in day to day activities. Risks can include anything from natural disasters – such as flooding, hail damage and earthquakes – to financial uncertainties in the market, such as stock exchange losses, project failures at any stage, exchange rate fluctuations and mismanaged accounts.

Prioritisation, identification and assessment of current and future possible risks will allow for an overview of what to look out for and what to try to prevent. In order to avoid unnecessary future spending, it’s vital to monitor all possible risk aspects. Due to our inability to predict the future we have to employ smart tactics, making the risk prioritisation process perhaps the most important one. What will have the greatest impact on the business? What’s most likely to happen? What will cost the most to address?

Intangible risk threats

Unavoidable risks are the most difficult to tackle – their probability is high but their occurrence date unknown. These include intangible risks, especially in South Africa, where we have political volatility year round – resulting in strikes, transport disruptions and staff unavailability, which is financially harsh on any business.

Trends and technology are growing rapidly and if you don’t stay current you’ll get left behind. In the 2009 international credit crisis funds were scarce and portfolio investors wary of emerging markets, such as South Africa. Minister of Finance, Pravin Gordhan, said in his 2010 National Budget Speech: “In the past year the world economy has gone through its deepest recession in over 70 years. Brought on by a crisis in the financial sector in developed countries, an estimated 34 million people have lost their jobs.”

As sales revenue and profits declined, manufacturers cut back on hiring new employees and even froze hiring altogether. Other cost-cutting initiatives used were the limited purchase of new equipment and halting research and development.

So now what?

It’s possible to avoid some hazards by putting a few simple measures in place. Hire a night-time security guard to prevent equipment theft and install fire alarms along with sprinklers to prevent equipment damage – perhaps even save lives. Hiring trustworthy staff will ensure regular attendance, internal political peace and minimise the risk of fraud. Installing modern software on business computers can prevent important file losses and also stop the intrusion of unwanted visitors to the company’s computer systems. However, the best way to prevent risk management from becoming overwhelming is by taking out some form of insurance.

What is insurance?

Essentially, insurance is defined as the transfer of risk from one party to another in exchange for payment. It’s designed to protect the wellbeing of an individual, company or entity.

There are 70 insurance companies in South Africa that will – provided you meet their criteria – insure almost anything: from the usual types of insurance, such as household, motor vehicle, health, property and business insurance, to the less common, such as pet cover, interest rate protection and protest insurance. This protects companies and people from damage incurred during violent service delivery strikes. The South African Local Government Association has said: “Counsellors should be entitled to, at the cost of municipalities or the State, risk benefits, including but not limited to death cover, disability benefits, funeral benefits and cover for assets lost or damaged as a direct result of public violence.”

Via a process called underwriting, insurers monitor the eligibility of prospective clients. This assists them in deciding what to insure and for how much. Probably the most complicated step of the insuring process is the actuarial science of rate-making or deciding how much premiums should be. The insurance agency will look at the probability of the event happening, the severity of the event, and the cost to them should it occur. The insurers look back into history and use equations to predict and quantify events and come up with a monthly or annual premium, which is also dependant on current economic factors, such as interest and exchange rates. Insurance companies must also look at the cost to reinsure: that means, in the event of a large-scale disaster, they’re completely covered. Usually they’ll take out their insurance with a large corporation, such as The Swiss Bank or Lloyd’s of London.

Insuring your business

So as a business owner what are the most important types of insurance to have? Property insurance is a priority as it will compensate for any property damages that occur, such as fire, flood, malicious intentional damage, a burst geyser, an explosion, earthquake, hail and storm damage. This is an important aspect of the business to cover, because if the building is damaged and there’s nowhere to conduct business, work will halt – and so will your cash flow. The same goes for business vehicle cover. If transportation is unavailable and staff are unable to get to and from work, or if the main trade of business is haulage, then your business will certainly suffer.

Another important form of insurance in which most businesses should invest is legal liability cover. This is when one person or a business is held accountable for damage incurred to a person. Should someone hurt themselves on the premises they could sue the company for any damages, most likely medical bills. Those bills can amount to large sums, which legal liability insurance will cover – including the legal costs involved if a dispute goes to court.

Probably the most vital form of insurance for any business to have is workmen’s compensation – which provides wage replacement and medical benefits in the event of an injury to or death of an employee while employed in their current position. This prevents the employee from suing the current employer for medical bills, costs and wage losses because the workmen’s compensation fund – provided it has sufficient proof of injury – will pay out what’s required. The workmen’s compensation fund is one of the few Government-run projects that generally operates smoothly and without prejudice in South Africa.

It seems the choice is obvious: insurance is the best way to protect your business – and therefore yourself – from any unwanted financial threats. It’s just a matter of choosing the right insurance broker or company for your needs. Some cater specifically for women, others are race-specific; some are more directed towards personal insurance, while others will suit your business needs better. Some will try to swindle you and some will reimburse you a percentage of your money if you remain claim-free. We’ve all heard of someone with a horror story regarding an insurance company or we may have had an experience ourselves. When you sign a contract with your insurance company you’re entering into a partnership – a relationship – and like all relationships, this one should be based on mutual trust. 

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