IT Spotlights: Insurance for mid-sized companies

The tough economic climate and eurozone crisis have presented challenges to mid-sized companies in 2012, as they struggle to find ways to increase profits and cut costs. These companies have been well placed to react to recent global events since they are nimble and agile enough to alter their models, service and product offerings. But it is important to remember that in every crisis there is opportunity, and in every recession there is rebirth.

Insurance for Mid-Sized Companies, produced by Insurance Times’s sister publication StrategicRISK, argues that having weathered the storm, mid-sized companies are ready to grasp the shoots of opportunity sprouting in and around the shadow of the financial crisis.

This is where having the right insurance becomes crucial: it provides unique business solutions for companies venturing into uncharted territory, together with ‘peace of mind’ in terms of risk transfer and financial security.

Insurance also gives businesses a much greater awareness of the risks they face. Only by fully understanding the nature of the risks out there can businesses ever hope to find the best solutions.

Risk transfer might be only one of a multitude of options in terms of risk management, but more often than not it is the most important one to get right.

Staying alive: why the UK needs mid-sized businesses
Mid-sized businesses are those with turnovers of between £10m and £500m, and they account for 1% of firms in the UK but earn 22% of the revenue, according to the Confederation of British Industry (CBI). These firms employ 16% of the workforce and generate 12% of corporation tax. Between 2002 and 2007, the CBI says 6% of mid-sized businesses accounted for 50% of job creation in the sector.

It is no wonder then that this sector is of such importance to the UK economy and is perceived to be one of the key solutions to ending the recessionary trends. In fact, the CBI believes that championing this sector could help the British economy grow by anything from £20bn to £50bn.

Any growth in this area comes with risks for the individual firms, however. One of the key solutions is risk transfer; taking the risk out of the equation will encourage more firms to grow.

“From a risk management perspective, firms need to have a social media policy and make sure its use is as controlled as any other part of
the operation”

Insurance plays a vital part in providing the back-up to give lenders confidence and protect the business and its staff.

In a recent poll, more than 25% of mid-sized firms told the CBI they intend to grow their businesses significantly in the next five years. To do that securely, insurance and risk management will play a key role. Whether in manufacturing, professional services, construction, technology or as part of a global programme, businesses will need to look beyond the main insurance types to find bespoke solutions.

Seeking new horizons
The UK has always been a strong trading nation. It has a 2.66% share of the world’s merchandise trade, with $405.7bn (£251.48bn) in exports and $561.6bn in imports in 2012, according to the World Trade Organisation.

In 2010, UK commercial services trade was 6.58% of the global total with imports of $160.2bn and exports of $246.5bn.

As the recession rumbles on, the solution for many businesses looking to combat poor sales has been to branch out into new markets. For some this has included forays into other types of product, while for others this has meant looking for new geographical markets.

For many mid-sized businesses, it is unlikely that developing new markets will involve investment in physical assets, such as factories, but it is more than likely to involve employees travelling to undertake financial deals. Both employees and contracts need protection.

Understanding the risk is key to making the deal work. Insurers and brokers often offer such support, whether it be continual monitoring of the political environment, providing negotiators if a team member is kidnapped or, before any business is done, advice so that the firm can make informed decisions about the investment.

Building a strong risk culture on-site
The construction industry has faced huge challenges in the past few years. Not only are the regulations becoming more onerous, but the appetite for projects has withered, forcing contractors to become increasingly competitive in tendering.

The danger is that corners could be cut on-site as contractors struggle to maintain a profit margin. For any business in the sector, there is a need to maintain a culture of good risk management, while managing the financial pressures too.

This culture and good management need to filter through all the layers of firms involved, from the lead contractor to second- and third-generation sub-contractors. For the lead contractor, there will be a responsibility to ensure any sub-contractors have sufficient insurance in place.

As with other sectors, new technology is playing its part. While improvements in products are helping make builds safer, few of these developments are without pitfalls.

Cyber risk: the one you can’t escape
Cyber and network data risks are relatively new and although most firms are exposed to these risks, few have been buying cover.

This risk is about much more than simply being hacked. New risks emerge all the time. Social media, for example, is raising new concerns. From a risk management perspective, firms need to have a social media policy and make sure its use is as controlled as any other part of the operation.

Each firm must think about the potential business risk of something going wrong as brands are easily damaged and reputations smeared. Social media can make this happen at an alarming speed.

Cloud storage has also become a buzzword. Firms see the cloud as a way to save money, but it is really a new form of outsourcing on a global scale. This brings risks for firms that must understand not only where data is stored, but the regulatory environment of that jurisdiction.

Keep safe, keep profitable
Safety of the consumer is key to the successful manufacture of any product. The European Commission, along with other authorities worldwide, takes its responsibilities in this area particularly seriously.

For the past eight years, the commission has operated the Rapex system of notifications of recalls, monitoring types of recall and working with safety authorities on areas of key concern.

China has historically been a problem area, with many notifications over faulty goods. Better news in the latest Rapex report is that safety is improving and the number of notifications involving products of Chinese origin fell further in 2011, representing 54% of the total notifications.

Another pitfall for UK companies primarily serving the UK and European markets can arise when they expand into the USA. While the sales numbers from breaking into the US market may look attractive, there are additional risks. For example, the wording of safety warnings and instructions for use is more important in the USA, as ‘failure to warn’ related claims may well succeed even if the product itself is not defective.

Joining the dots
Once any business has taken the first steps and developed international subsidiaries, the question arises of how best to protect the firm.

One increasingly common solution is to look for a global insurance programme. These began as property/casualty solutions, protecting physical assets. Times have changed, however, and these policies are now evolving.

Across Europe it is relatively simple to have one policy providing cover, thanks to various European directives. Other regulations, such as the Environmental Liability Directive, have also come into play and a pan-European insurance policy can again often offer the best coverage.

For many, the advantage of a global programme is central to control and consistency across the business. Ease of administration is also a key benefit for smaller companies without bespoke insurance teams and, once a claim is made, having a consistent approach can make settlements so much easier.

Supply chain risks are an increasing concern to business, but having a master policy with consistent business interruption cover can reduce that threat massively. It really is a case of joining the dots.

The complete StrategicRISK Guide to Insurance for Mid-sized Companies is available at: goo.gl/oZuhN