COVER STORY
SMES LEFT VULNERABLE There are many gaps in New Zealand’s small business insurance coverage. By Angela Cuming
U
nderinsurance is a significant issue across the insurance industry and for small-to-medium enterprises (SMEs), failure to take out adequate cover could be catastrophic. While bigger businesses and companies can often bounce back relatively quickly after an event such as a flood or an earthquake, the same can’t be said for SMEs, which often run out of cash after a catastrophic event and are forced out of business. And that’s only one of several things that can happen to an SME to affect their fixed costs. KEY PERSON RISK The loss of a key person can be a real blow to a firm's finances, confidence and company image. Financial advisory firms are particularly vulnerable to key person risk as the nature of advice often means advisers have personal relationships with their clients, who will often follow the adviser out the door. Key person risk particularly affects New Zealand, says Niall Martin, head of health and benefits at international risk management and insurance brokerage firm Willis Towers Watson. “Small to medium-sized enterprises make up more than 9% of all New Zealand companies and headcounts in these businesses generally are quite small, so key person risk is very real,” Martin says. “Anecdotally, we know coverage is a problem. We don’t have statistics but from talking to our clients our impression is there is a large level of under-insurance for this particular risk. “This is a heightened problem for New Zealand companies. Given our geographical remoteness and the need to attract and retain top talent, it can be difficult to get key people with the required skillsets on board. Businesses need to be aware of the financial impacts of losing someone in a major role, as well as the time it takes to find and hire a new person.” 16
December 2018
SMEs also need to look at potential effects on their client base, goodwill, and even market share if they lose a key person, Martin says. “The impact of losing a key person has a larger impact in the SME market because multinational and large corporates have deep enough pockets, and bigger headcounts to mitigate the risk. In smaller businesses there’s a finite talent pool available if a business loses a managing director or CFO,” he says. Michael Naylor, a senior lecturer in finance and insurance at Massey University, agrees that loss of key person is one area where SMEs are underinsured. “When a business loses a key person, the business loses cash and knowledge and often reputation,” he says. “Say your chief salesperson dies and all the customer contacts literally go with them to the grave,” he says. “That’s a really big loss on all levels, and often something a boss won’t plan for, or take out a policy for.” Businesses should also be prepared if a business relationship goes sour, Naylor says, leading to a key person resigning abruptly and walking out the door, taking all their client contacts and files with them or leaving without handing over key computer system passwords and other crucial information. “A business owner may have a dishonest employee and they terminate their employment but what if that person has a lot of knowledge? Will they leave it behind? There’s a reason why some bigger businesses will escort a former-employee off the premises.” Then there are the problems that can come from the loss of a key person outside of, but close to, a business, says Naylor. “It's not just your own business you need to think about I mean, if your key supplier can't supply and you can't sell, that's also a problem. “Or your key customer goes bankrupt and you can't sell, that's a