Have the Right Insurance

Have the Right Insurance


SMEs are fundamental to job creation and South Africa’s economic growth. But their size and the many challenges associated with being an SME makes them vulnerable to unplanned crises such as fraud, crime, fire and floods.

The costs associated with these disasters are compounded by failure to protect the business adequately through appropriate insurance. It is critical to ensure that you have appropriate cover for your business. Although the greatest losses are experienced when a business is not insured, under-insuring your business, property or assets can also have a detrimental effect on your financial wellbeing.

If you, for example, insured your computers for R30 000 and they are worth  R60 000, you will only be paid out 50% of the value when you claim.

Use an intermediary

As an entrepreneur, setting up a business can be a costly affair and it’s important to get the right insurance cover to suit your business needs. Intermediaries exist to help business owners find the correct insurance cover, and to ensure there is sufficient cover should the need to claim arise.

Research shows that SMEs represent a vast portion of business in developing countries. In South Africa, SMEs account for about 91% of formal business entities, contributing more than 51% to the GDP, and providing almost 60% of employment. This is a vital sector that needs to be growing – not falling victim to unplanned for events.

Understanding the risks

Some of the risks that you should be taking seriously as an SME owner and discussing with your intermediary include crime, natural disasters (fire, floods), fraud and general liability insurance. To protect your business, follow a simple risk management process:

1. Identify all potential risks to your business.

These could include:

  • Natural perils (wind, storm, hail, lightning, flooding)
  • Crime related perils (burglary, armed robberies, theft of vehicles/hijacking)
  • Accidental damage (motor accidents, damage to computers)
  • Legal liabilities (due to products being sold/repaired, motor accidents where the insured/driver is negligent).

2. Evaluate these risks in terms of their likelihood and the potential size of the loss, for example:

  • The likelihood of having a motor accident is high and the size of the loss would be medium to large (a vehicle being written off as well as damage to a third party’s vehicle/property)
  • The likelihood of a fire at the premises is low but the size of the loss would normally be high to extremely high.

3. Apply proactive risk management. Using the information above, a business owner should decide whether some of the risks can be eliminated or reduced. Here are two examples:

  • Installing an alarm and burglar bars reduces the likelihood and impact of potential burglaries
  • Arranging with suppliers to deliver stock instead of collecting your own eliminates the risk of loss or damage to goods whilst in transit.

4. Finance the residual risks (ie. the risks that can’t be eliminated or reduced to an acceptable level.  The most common method of financing the residual risk is through dependable insurance.

What should be insured

This is dependent on the information gathered above, as well as the industry you operate in, but as a general rule:

  • Plant, machinery and equipment (against natural perils and burglary)
  • Stock (against natural perils, burglary, during transit)
  • Reduction in business turnover from damage or loss of stock, plant, machinery, equipment or buildings
  • Computers, cash registers and other equipment (against natural perils and burglary)
  • Loss of money
  • Motor vehicles (accidental damage, accidents and liabilities)
  • Legal liabilities.

Commonly overlooked areas

Don’t fall into the common trap of simply overlooking vital areas of your business. These include:

  • Underestimating the impact that damage to equipment, stock and buildings has on financial wellbeing
  • Forgetting to consider the legal liabilities of the business
  • Not adhering to the conditions set out by the insurance company, which could result in claims being repudiated
  • Forgetting to advise the insurance company of changes to the business (eg. a clothing store that starts selling fireworks, a change of address).

Calculating an asset of value

Not all assets should be treated in the same way:

  • Insure plant, machinery and equipment for the new replacement value (ie. the cost to replace the items with new items of similar capacity and design)
  • Insure stock for the invoiced amount
  • Insure motor vehicles for the reasonable market value (ie. the amount the business owner would be paid for a second-hand vehicle in a similar condition).

Five key tips for insuring a business

  • Always declare all relevant information to your intermediary, no matter how small the detail.  Indicating all the risk reduction measures you have implemented will indicate that you are serious about your business and will assist you in negotiating a preferential premium.
  • Always spend time identifying all exposures to your business. Do this with your intermediary as he/she will have insight that you may not have when it comes to business insurance.
  • Always act as if you are not insured.  Insurance should be used for large catastrophic claims that are difficult to predict and avoid, not for small, regular losses as this would result in premium increases.
  • Reduce premiums by taking appropriate precautions, like installing proper security measures and fire precautions.
  • If you are prepared to pay a higher excess, you could negotiate a premium reduction.  Ask your intermediary for advice as you also need to bear in mind the impact on your cash flow, should you suffer a number of losses in a short period of time.
Louise Pharo
Louise Pharo is Santam’s head of commercial business. With assests totalling more than R17 billion, Santam is one of South Africa’s leading short-term insurers. Visit www.santam.co.za for more information.