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“20% of businesses which fail in their first year do so as a direct result of an uninsured loss”
INSURANCE MADE SIMPLE
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All businesses face similar exposure and risks but we at AIG recognize that each and every business is unique; with this in mind we have designed a product especially for you. We understand that customers are the centre focus of small businesses and that even the smallest incident can interrupt your daily operations; this is why we at AIG believe that it is not about replacement or repairing, it is about restoring your business to its original capacity. You can relax in the knowledge that our fast, reputable claims handling service will get your business back up and running promptly, just give us call and we will handle the rest. Learn more at www.aig.com
AIG is the marketing name for the worldwide property-casualty, life and retirement, and general insurance operations of American International Group, Inc. For additional information, please visit our website at www.aig.com. Products and services are written or provided by subsidiaries or affiliates of American International Group, Inc. Not all products and services are available in every jurisdiction, and insurance coverage is governed by actual policy language. Certain products and services may be provided by independent third parties. Insurance products may be distributed through affiliated or unaffiliated entities.
AN INTRODUCTION FROM MICHAEL S. JENSEN, AIG
elcome to this special insurance supplement for SMEs – Insurance Made Simple
The world of insurance is a somewhat confusing place and for today’s SME, it is essential you get the facts and understand the risks that could affect your business. You also need to understand how to manage these risks and the role that insurance can play to protect your business. In this comprehensive guide, we’ve invited a number of experts from the local insurance industry to share their insights, guidance and best practice. A broad range of subjects are covered including the importance of risk management, the challenges of doing business overseas, the importance of corporate governance, and even the impact of cybercrime on an SME.
Michael S Jensen Head of Commercial Lines, Arabia AIG
As an SME, insurance may not be top of your agenda. If this is the case, I would urge you to think again, as lack of proper insurance protection could seriously impact an SME. If your business was damaged by fire and closed for six months – could you afford to carry on paying your employees? If somebody hacked into your database and accessed your customer details, could you company’s reputation survive? As SMEs are by their nature small or medium sized businesses, the impact of a major incident could be so great that the company might actually have to close. My best advice for all SME business owners is that when it comes to insurance; please first talk with an insurance broker. Here in the UAE there are a number of well established insurance brokers that work with companies like AIG, providing SMEs with the insurance advice and protection you need. Brokers and insurers understand the risks, no matter how big or small your business is, and also no matter what type of business you may have. SMEs are the business powerhouse of the UAE and with the right insurance protection, SMEs can continue to prosper and play that important role in the economy of the UAE.
16 Helping you get the benefits of good insurance cover Paul Godfrey explains why SMEs have to make insurance a key priority.
Getting the basics right: property insurance Why property insurance is so vital and how it works
When SMEs are victims â€“ insuring against Cyber risk Juliette Petit explains why SMEs are a key target for the Cyber bandits.
Corporate Governance and the role of insurance Muhannad Abdulmajeed on how insurance can play a formative role in ensuring proper governance.
Using Trade Credit Insurance Learn how to protect your receivables - industry expert Shabnam Ansari comments.
INSURANCE MADE SIMPLE // JUNE 2013
Understanding Risk Management Audrey Weir on the value of tackling the dangers before they become a crisis.
Doing business overseas An A-Z briefing on the insurances you need to safely handle the import and export of goods.
Key Man insurance: protecting your people assets Will your business falter if it loses its top performers? Here’s how insurance can help.
Change management: the role of insurance Effective preparation for the growth of your business.
Leading providers and expert services
Globaleye corporate profile – the role of the Wealth Manager
A world of risk – or a wealth of opportunity? SME Advisor speaks to Globaleye Chairman, Tim Searle.
Office dramas covered – RSA insurance for SMEs
In the driving seat: the value of effective fleet insurance A keynote briefing from RSA’s David Harris on the advantages of fleet cover and how it adds value to your business.
Helping you get the benefits of good insurance cover
I Paul Godfrey Senior Editor
nsurance is a fact of our daily lives. When we watch a major sporting event, it can only take place because the potential risks to players and audience have been assessed and taken care of with the right level of insurance cover. When we walk into a mall, the owners and managers are protected against any damages that we might bring against them if we trip or fall. When we get in our cars and drive, we take for granted a complex web of insurance that can cover us, other road users, the repairs to our car and any damage caused to another vehicle. Yet the reality is that in many areas of their day-to-day business dealings, SMEs often don’t have the appropriate style of cover in place - or fail to take advantage of insurances that could transform cashflow and sustain and nurture business development when it’s needed most. Today’s raft of business insurance goes far beyond the basics of protecting property, vehicles and freight; it’s a sophisticated business tool that plays a role in key issues such as the protection of unique product investments, your business’ reputation and perception by the market, your ability to ensure investors that the right corporate governance protocols are in place, and the
means to balance classic financial dilemmas like capital versus liquidity. But first things first. What about the basics? It’s a sad truism in the GCC that many of the key facilities risks simply aren’t covered. Do you really want to risk losing everything as a consequence of your warehousing being destroyed by fire – with no funds coming in to compensate? Perhaps you take the view that your stockholding profile is a virtual one, fully outsourced to contractors and so you don’t need premises cover? So, what will you do if an office fire destroys your computer system and all your transaction records? Or if someone breaks in and steals all your data? These are all key fundamentals and prime reasons why you need insurance. That’s also quite aside from the fact that in every country in the GCC, the presence of insurance across the main operational aspects of your business is actually a legal requirement - and you could face heavy fines or imprisonment if the right covers aren’t in place. There used to be an old adage used by life insurance salesmen that whatever the cost of insurance, you couldn’t afford not to have it. As an owner or director of an SME, this is truer than ever - and the good news is that today’s insurers, post-financial crisis, are more prepared than ever to tailor policies to your needs at budgets you can fully afford.
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INSURANCE MADE SIMPLE // JUNE 2013
A stitch in time…
One of the key growth areas in insurance has been the field of risk management - ie, proactively ensuring that your business is as disaster-proof as possible and minimizing the risks of adverse events happening in the first place. This has been become increasingly important as businesses face evermore challenging risks in areas such as cybercrime and the growing threat of litigation against directors and company representatives. Good risk management protocols can make a massive difference to the level of preparedness and make the crucial distinction as to whether you can simply shrug off an incident or let it wipe out the business completely. At its simplest level, risk management can mean initiatives as basic - yet effective as these: • Walking your premises with a qualified risk advisor to assess where the break-in and security risks lay
• Producing a defensive-driving manual for your fleet drivers that could save a small fortune in repeat claims. • Protecting your desktop computers with a security cable and making sure that all the company’s laptops are locked away at night. On the other hand, risk management can mean a raft of financial strategies that assess ongoing financial exposures, for example: • Pre-screening creditor relationships by reviewing payment histories • Leverage hedging strategies against corporate debt • Turn assets into cashflow Enterprise Risk Management, tying together financial strategies with the spectrum of physical liabilities, is no longer the preserve of the large multinational, but a business
fundamental that astute SME owners and directors fail to observe at their peril. A one-stop resource
Insurance made simple explains all these key aspects of the insurance world and how SMEs can use them to their advantage. Every product line and technique is explained in plain English and related to a practical, ‘real world’ application. With an emphasis on how you can get the right cover for your needs, you’ll also find profiles of leading insurers, explaining the services they offer and giving priority contact channels. The businesses featured are among the leading names in the region and have very much set the pace of the sector in terms of product innovation and an accent on customer service. As an SME, this is your publication and aims to make the world of insurance as relevant, amenable and productive as possible.
Getting the basics right: Property insurance For a business, Property insurance is arguably the most important type of insurance you can have - literally protecting the roof over your head and giving you the means to repair, rebuild or relocate if disaster strikes. Surprisingly, all too many businesses in the GCC have inadequate property cover and risk being wiped out in the event of fire or catastrophe. Will yours be one of them? 8
INSURANCE MADE SIMPLE // JUNE 2013
The difference between these two situations amounts to two words: property insurance. You will also see that the first set of options results from an understanding of property insurance as an organic and very flexible - entity that can be moulded closely to your business’ needs and commercial commitments and expectations. It also has the advantage that it can be as simple or as complicated as you need it to be: from insuring a small 500 sq.ft, office to a series of extensive warehouses and mixed-use facilities, from covering four walls and a relatively simple data system to the extreme storage and handling requirements of toxic or highly flammable goods. Understanding what’s covered
onsider the following scenario: if your business premises caught fire tomorrow and were burned to the ground,
would you • Immediately contact your insurer and implement your Disaster Recovery Plan, aiming to relocate to your new temporary premises in approximately three working days? • Confirm the starting date for the property rebuild and the likely delivery timings for new laptops and business hardware? • Have a cheque for replacement of lost stock within 24 hours, enabling you to meet your challenging raft of contractual obligations with no hassle or interruption? Or • Have absolutely no idea when you can rebuild and have no certainty at all about staff retention and salary payments. You will also face a torrent of legal actions from broken supplier agreements.
One of the big differences between commercial property cover and property cover for private individuals (eg, for homes, etc,) is that in commercial policies the definition of “property” is very broad, and includes: • Lost income • Business interruption • Buildings • Computers • Company papers • Money • Industrial, manufacturing plant • Utilities located alongside industrial/ manufacturing plant • Machinery and accessories • Storage risks outside the compound of industrial risks • Tanks/gas holders located outside the main compound of industrial risks Almost any kind of facilities, equipment and goods can be included on the policy, but of course, this requirement may be reflected in a higher premium (storage of cellulose paints or chemicals would be a prime example). Similarly, you may be required to list the specific locations in which they are kept, to see whether this represents an acceptable risk to the insurer.
Managing the risks
Property insurance provides protection against most risks to property, such as fire, theft and some weather damage. Typically, you will find the following risks covered: • Fire • Lightning • Explosion, implosion • Aircraft damage • Riot, strike • Terrorism • Storm, flood, inundation • Impact damage • Malicious damage • Subsidence, landslide • Bursting or overflowing of tanks • Missile testing operations Yet there are certain other categories of incident that will generally be excluded from cover. These are: • Loss or damage caused by war, civil war, and kindred perils • Loss or damage caused by nuclear activity • Loss or damage to the stocks in cold storage caused by change in temperature • Loss or damage due to over-running of electric and/or electronic machines Choosing your insurance: Open Perils versus Named Perils
Property is insured in two main ways open perils and named perils (sometimes referred to as all-risk policies and perilspecific policies). Open perils policies cover a wide range of incidents and perils except for those named in the policy as specific exclusions. Whereas named perils policies require that you physically list and name the risks that you want to be covered: you won’t receive a payout on anything outside this list. Typically, policies in areas such as fire, flood and business interruption cover will work on the basis of named perils. As a rule of thumb, an open perils policy will generally cover the spectrum of risks faced by most small businesses, while named perils cover is usually the domain 9
of larger companies with a high risk of incidents of a certain, identifiable kind. Style of payout
Do you want to have a seamless, noquestions-asked replacement of your property in return for a higher premium? If so, you will opt for Replacement Cost Coverage, which pays the cost of replacing your property regardless of depreciation or appreciation. The premium here is calculated on the basis of replacement value, not actual cash value. Or, alternatively, you can opt for Actual Cash Value coverage. This provides for replacement cost minus depreciation. If construction costs have increased, you can take out an Extended Replacement Cost policy to ensure that you won’t be left too badly out of pocket. Property cover and risk management
One of the important trends in property
cover over the last 20 years has been the growing influence of risk management. This is the discipline of reducing the range of likely risks on the premises so that there is much less likelihood of claims. If your business has an effective risk management agenda in place, it can make a substantial difference to your insurance premium. On the other hand, you may have to commit valuable resources to putting the risk management criteria in place. As a business owner or manager, you will have to decide if this is worth the up-front financial cost. Some examples of classic risk management protocols include – • The absolute banning of smoking from all office premises - especially in warehouse environments storing flammable goods. • The installation of proper Health & Safety signage highlighting key risks. • Safe storage criteria for LPG and gas
cylinders, well away from all heat sources and preferably in locked cabinets. Secure overnight storage of all computers, company mobiles, tablets, etc. Fitting of handrails to all staircases. Secure deadlocks on cash offices and cash-handling areas, and where unique keys and entry cards are stored. Adequate lighting in courtyard and service areas. The re-alignment of assembly plant to ensure minimal risk exposure to staff.
One warning note: the power of risk management thinking is now such that in some cases it will be impossible to get any insurance cover at all without at least a modicum of sensible provision in place. It’s vital not to let that challenge put you into the alternative scenario mentioned in our introduction…
INSURANCE MADE SIMPLE // JUNE 2013
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When SMEs are victims: insuring against Cyber Risks Talk about Cyber Risk and you conjure up images of super-advanced hackers breaking into the sites of corporate giants like Apple and Microsoft. But guess again - in 2012, 31% of all attacks targeted SMEs with less than 250 staff, wrecking (and stealing) customer records, inventories and bank account transactions. We spoke to a top Cyber Insurance specialist, AIGâ€™s Juliette Pettit, about the proactive insurance strategies that your business can put in place right now. 12
INSURANCE MADE SIMPLE // MAY 2013
ake no mistake: Cybercrime is big business and companies of every shape and size are at risk. Commercially, the opportunity for large financial gains is fuelling the criminal underground, while on the political front, ‘hacktivists’ looking to advance their agendas see penetrating networks as a great way to draw attention to their cause - not to mention the added upside of humiliating their targets. From hacktivism to malware to administrative failure, no organisation that stores data or transacts business online is safe from the threats of cyber related breaches or attacks. There’s another dimension, too: very often, the enemy is within. Rogue employees continue to siphon
this demand for sensitive information has created an expensive problem for businesses when factoring in bad publicity, loss of business and direct costs. Notwithstanding, according to Symantec’s 2013 Internet Security Threat report, the largest growth area for targeted attacks in 2012 was businesses with less than 250 employees - 31 per cent of all attacks targeted them. This is particularly bad news because based on surveys conducted by Symantec, small businesses believe they are immune to attacks. While small businesses may assume that they have nothing a targeted attacker would want to steal, they often forget that that they retain customer account information, create intellectual property and keep money in the bank. While it could be argued that the
The largest growth area for targeted attacks in 2012 was businesses with less than 250 employees - 31 per cent of all attacks targeted them. proprietary data for personal benefit, and (like it or not) employees will continue to lose laptops. So, costing in all these factors, what are the top three cyber related threats to organisations? They are as follows: 1. Operational IT risks 2. Customer information theft 3. Hacking.
rewards of attacking a small business are less than those that can be gained from a large organisation, this is more than compensated by the fact that many small companies are typically less careful in their cyber defences. Another worrying fact is that there was a 42 per cent increase in targeted attacks in 2012.
It is SMEs that are most at risk
The key defensive steps and the role of insurance
The reality is that small businesses are the path of least resistance for attackers. Having said that, all businesses are at risk, because a typical organisation has at least one type of targeted data such as credit card numbers, bank account information, social security numbers, and medical information. The information has value on the street where it can be sold on the black market;
The main practical steps include – • Identifying where sensitive data is stored and how it is used • Adopting policies that formally communicate how your organisation stores, works with, transmits and destroys sensitive data • Making employees an active part of the information security programme
• Allocating time for reviewing log files. • Shifting the organisational focus toward detective controls and incident response capability, instead of solely on preventative security controls. In short, Cyber security should be embedded in the culture of the organisation at every level. One of the ways of supporting and enforcing your initiatives is to choose insurance cover that actually provides a comprehensive risk management solution (AIG’s own CyberEdge is a good example). This will help you safeguard against sensitive data breaches, computer hacking, dumpster diving, computer viruses, employee sabotage or error and pilferage of information and identity theft. In short, the protection that products of this type provide is a valuable additional layer to the most powerful first line of defence against cyber threats - a company’s own IT system. The best way to solve a problem is to prevent it in the first place, but sometimes that’s just not possible. In the event that something does make it through a company’s defences, a more comprehensive insurance product such as CyberEdge will be there to help with factors such as: • Local dedicated cyber claims specialists • Access to an extensive vendor network always at the ready to provide responsive guidance in relation to legal advice, forensic IT services and public relations consultants. CyberEdge is offered on a modular basis and these proactive insurance modules can be readily upgraded and enhanced as your business - and its raft of risks - continues to grow. It’s worth noting that products such as Cyber Edge also cover event/crisis management, providing funds to handle notification and other related costs, and also restore the organisation’s information on their network after a breach. It can also cover 13
network interruption, which addresses the loss of revenues stemming from a security failure, and cyber extortion, which is akin to kidnap and ransom coverage (however, the hostage in this case is a network or privileged information).
Juliette is Regional Head of Professional Indemnity for AIG (MEA Region). AIG’s MEA Region covers Africa, Middle East, South Asia, Central Asia including Turkey, Russia and Ukraine. Juliette has over 20 years specialist experience within the global Professional Indemnity sector, and has deep understanding of the regional and International markets.
- Compliance: Comes pre-loaded with security policy templates that can be accepted or modified to fit each company’s needs. If strong corporate security policies are already in place, existing policies can be uploaded and tasked to employees or third party vendors to confirm receipt and acceptance.
Identify your key risks – and don’t be a victim
Of course, it is true that you can’t effectively prevent risks until you know what your principle risks actually are. So you will need a practical approach to risk assessment. Every organisation needs to make sure that the risk assessment framework is broadlybased and appropriately identifies all technology risks. If a framework such as ISO 27799 is used, it is also important to realise that about half the questions are IT related, but the other half - such as vendor management, human resource
Another worrying fact is that there was a 42% increase in targeted attacks in 2012. hiring practices, decisions on what information to retain and how to retain it, etc. - fall outside of IT. So it follows that all stakeholders need input, not just IT representatives and risk managers. Remember that it’s important always to take a proactive stance against Cyber risk - don’t be a victim. Select insurance and risk management products to help ensure that rather than simply be compensated for any losses or damage incurred from cyber risks, you are able to construct a strong defensive platform (for example, AIG offers a risk management tool with its CyberEdge insurance product called ‘CyberEdge RiskTool’). CyberEdge RiskTool is a single, web based platform that helps clients streamline the risk management process. The platform content is highly 14
customisable and can be tailored specifically to meet a number of risk management needs. Examples include assisting in a compliance initiative, educating employees on any regulatory requirements or training staff on security protocols to help prevent human error from causing a future breach. Risk management modules include, but are not limited to: - Security: Provides an interface where an IT department can manage a company’s shunning technology, Autoshun ®, a device offered with CyberEdge, which blocks known cyber criminals from communicating with a company’s network. - Training: Includes pre-populated training content and tests with an online assignment engine to deploy employee training and awareness with the click of a mouse.
If all this seems a little daunting, don’t worry; it’s part of the job of the insurer, or your insurance broker, to work with your business across the raft of highly particular risks your SME faces and explain the best and most practical solutions available, and how they work. The most important aspect is to keep in mind that an SME suffers from a ‘double-whammy’ scenario: it is likely to be more vulnerable than a larger business and it is also more likely to be targeted by Cyber criminals. So, good, specialist insurance cover isn’t simply a ‘nice to have’ - it can help protect the stability of the business you are working so hard to build. CyberEdge Mobile App AIG’s CyberEdge Free Mobile App for the iPad combines the latest cyber news, opinion, and risk analysis with realtime updates on data breaches, to put all cyber related information at a user’s fingertips. The App is available free on Apple’s App Store. The addition of CyberEdge RiskTollm Autoshun and the CyberEdge app round out the comprehensive risk management solution CyberEdge provides clients today. With CyberEdge from AIG, clients receive the tools and responsive guidance to complement their IT defences and stay ahead of the curve.
INSURANCE MADE SIMPLE // JUNE 2013
Corporate Governance and the role of insurance You don’t have to be the owner or director of a large organisation for Corporate Governance to play an increasingly important part in your working life. The UAE has an impressively strict attitude when it comes to breaches in corporate governance protocol – and you’ve got to be properly prepared. Good insurance cover plays a vital role in managing the pitfalls of the governance agenda: SME Advisor spoke to acknowledged expert, AIG’s Muhannad Abdulmajeed.
INSURANCE MADE SIMPLE // JUNE 2013
Muhannad Abdulmajeed is based in Dubai and serves as the Assistant Manager – Financial Lines for AIG’s operations in the Middle East. He oversees risks relating to Kidnap & Ransom as well as Management Liability, Professional Indemnity, and Crime for both Financial Institutions and Commercial Entities. The views expressed herein are from an insurer’s standpoint and do not constitute legal advice.
here’s a kind of ‘urban myth’ that because the recentlypublished draft of the new Companies Law makes Corporate Governance compulsory for all companies with listed securities, it’s therefore assumed that privately-owned SMEs don’t need to worry about their governance procedures. Nothing could be further from the truth. Corporate Governance, by definition, includes a broad range of activities that impinge on staff, stakeholders and the public, and if these are neglected
or poorly-performed, the owners and directors can easily find themselves facing civil or criminal proceedings. The best description of what Corporate Governance actually includes is found in Dubai SME’s “Corporate Governance Code for Small and Medium Enterprises: Guide to Execution.” This specifies nine key ‘pillars’, each tackling what is seen as a prime area of Corporate Governance duty. Many readers may be surprised to see that a number of the pillars cover quite basic aspects of company life - and may not have imagined that these fell into the realm of Corporate Governance at all. Here’s what the nine pillars actually are • Pillar One: Outline the roles of the Board, partners and shareholders • Pillar Two: Conduct a succession planning process • Pillar Three: Establish a timely, open and transparent flow of information with shareholders • Pillar Four: Endeavour to set up a formal Board of Directors to accompany the growth of the company • Pillar Five: Develop a clear mandate for the Board to oversee operational performance and improve business strategies • Pillar Six: Maintain credible and audited books of accounts • Pillar Seven: Set up an internal control framework and conduct a regular review of risk • Pillar Eight: Recognise the needs of stakeholders • Pillar Nine: Formulate a framework setting out the family’s relationship with the business
Clearly, the proper execution of all - or indeed, any - of these, requires a written plan of action and the awareness of the corporate governance agenda needs to be established and encouraged at a very deep level in the company. Yet it’s not difficult to see from the above list that an owner/director has an immense spectrum of activities to take care of, and it may be all too easy to make a simple mistake by omission. This is precisely why insurance plays a vital role in protecting the interest of shareholders / business owners, the Board and any directors, officers or employees the Board delegates authority to. In fact, when it comes to breaching correct protocols across the elements included in the ‘Nine Pillars’, for example, it’s important to understand that the same guidelines apply whether a company is an SME or non-SME. The Companies Law provides that directors are liable to the company, its shareholders and third parties for all acts of fraud, abuses of power, and for violations of The Companies Law or the constitutional documents of the company. Directors may also be liable for the mismanagement of the company, an offence that has the potential to be remarkably wide-ranging and extend beyond, by way of comparison, the duties and potential liabilities of directors under English law. Indeed, the potential liability of directors or officers is not necessarily limited to deliberate or serious acts of wrongdoing: rather, there is potential for relatively innocuous breaches of the law (e.g., enticing 17
the employees of another trader in competition with the company to take up employment with the company), or even failings in the performance of the company attributable to management decisions, to be considered tantamount to ‘mismanagement’. By having corporate governance frameworks that address matters such as business ethics, goals, strategies, organisational structure, reporting, transparency and accountability (to name a few!), a company and its management can minimize the exposures they face with regards to running foul of good corporate governance protocols. This is particularly
they are not one and the same. Whereas an SME owner could be any person or entity that has an equity stake in the SME, a board director would (usually) not have an equity stake. The SME owner’s main focus is usually obtaining a solid return on their investment, while a director, along with the other board directors, is responsible for the overall strategy, vision, and mission of the SME. A director is usually appointed by the SME owner or, where there is more than one SME owner that has the right to appoint a director, then each director would represent that particular owner for their respective interest.
governance point of view (and to ensure that their interests are being met) it is best that they are involved in the running of the business, whether hands-on or via a suitable board representative. One more challenge that SMEs often face is that owners may hold multiple roles within the SME such as simultaneously serving as director, CEO, or chairman of the board. While holding multiple roles is not detrimental in and of itself (particularly if the SME is still small), it is important to understand that the roles of owner, chairman, CEO and director all have differing legal capacities in the company and for this reason, from a good corporate governance standpoint these roles should be segregated. The role of Directors’ & Officers’ Liability cover
relevant today given that on May 28 the UAE Federal National Council passed the new Commercial Companies Law which is currently being taken through legislative formalities before being issued to the public. The new law will not only focus on corporate governance and directorship but corporate social responsibility as well, thus further reinforcing the need for any company to have proper corporate governance frameworks. Who’s in the firing line – owners or directors?
It’s important to distinguish between an SME owner and a board director, as 18
The GCC is unique as any locally incorporated SME needs a local partner who should own 51 per cent of the equity stake in the SME. This local partner may sit on the board of directors or appoint someone to sit on their behalf. If the local partner is also a director then they are definitely in the corporate governance firing line, whereas if they appoint a director to sit on their behalf that director would be responsible to the local partner while also being in the firing line. Regardless, the nine pillars mentioned earlier apply to all businesses and any local partner is in the firing line as they are ultimately responsible for the SME in the country, thus from a corporate
One of the reasons why Directors’ & Officers’ Liability Cover is so widely discussed is because it can protect against a very broad range of potential hazards across many key areas of the Corporate Governance agenda. For example, in terms of insurability, as long as there are no criminal findings, a Directors’ & Officers’ Liability policy would cover the costs of defending any claim brought against an insured person for any actual or alleged act, error, or omission committed by that insured person. This can include negligence, default, breach of trust, breach of duty, and misrepresentations of insured persons in their capacity as directors, officers, and managers. It is important to realise that the definition of ‘insured person’ is usually wide enough to encompass any employee of the company serving in a managerial or supervisory capacity within the company. What breaches of corporate governance protocol are uninsurable?
In essence, once a breach is deemed to be criminal in nature (as determined by a guilty court verdict) then policy coverage stops immediately. While the majority of policy wordings have clauses stipulating that the insurer will seek to
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recover any monies paid or advanced to the insured person in the event of a guilty criminal verdict, these clauses are rarely enforced nowadays as insurers recognize that the chances of getting any successful recovery is slim. However, it is important to note that a good Directors’ & Officers’ Liability policy will advance funds (typically legal fees) for the defence of any claim made against an insured person for any actual or alleged act, error or omission, since Directors’ & Officers’ Liability policies typically have clauses that state the insurer has the right (and sometimes, the duty) to defend any claim even if it is groundless, false or fraudulent.
act must relate to or involve an insured person in their capacity as a director, officer or manager of the company they’re working for (and which buys the policy). That said, the types of litigation covered are broad and a policy can respond to claims encompassing civil, criminal, regulatory or arbitration proceedings. Claims typically arise from stakeholders in the company such as shareholders, employees, creditors, and the government (market authorities, regulators, etc.). Depending on the wording, the policy can even respond to claims brought against an insured person by another insured person (for example,
Although the claim may lack merit, the insured can have access to defence costs up until proven guilty of a criminal act. Thus, regardless of the merits of any claim, an insured person will always have access to defence costs up until such insured person is proven guilty of a criminal offence. This is the key point that any Directors’ & Officers’ Liability policy buyer should be aware of. Types of litigation and incident you’re protected against
Directors’ & Officer’s Liability cover can protect you against a wide spectrum of incidents that are actually much broader than pure litigation. For example, it’s important to realise that ‘litigation’ does not mean ‘claim’. In most Directors’ & Officers’ Liability policies a claim can be defined as simply as “a written demand… seeking compensation for any ‘wrongful act’”. A good policy should then have a broad definition of ‘wrongful act’ which would encompass any act, whether actual or alleged, that is committed (or allegedly committed!) by an insured person. Thus, a court summons can be a claim, a litigation can be a claim, a civil proceeding can be a claim, an investigation by the authorities or any official body can be a claim, and so forth; the key point being that the wrongful
a director claiming against another director) or even by the company against an insured person. Examples of claims typically experienced in the UAE include: • Mismanagement of shareholder funds • Anti-trust • Default on loans / bankruptcy • Breach of international laws, such as Foreign Corrupt Practices Act, UK Bribery Act and Economic Sanctions
the actual final settlement or judgement passed by a court. Depending on the clauses in the wording and the insurance provider, funds available under a policy are either reimbursed to an insured person or alternatively, are paid directly to the defence council and/or claimants on behalf of the insured person. On another note, Directors’ & Officers’ Liability cover also has a potential role to play should an insured person be detained or imprisoned abroad due to business activities. Some Directors’ & Officers’ Liability wordings allow the insurer to pay the premium for a bond (or any other financial instrument) of an insured person so long as this is incurred directly in connection with a claim covered under the Directors’ & Officers Liability policy. Moreover, this type of policy cover can also be extremely useful for mitigating other types of corporate crises. For example, there are cases where a company would consider that urgent action is needed in order to avert or mitigate a crisis event, so some Directors’ & Officers’ Liability wordings allow the company to seek reimbursement from the insurer under the policy for the employment of public relations consultants to manage communications for a covered crisis event.
Coping with a complex legal saga
Does a company owner require a higher level of cover than standard Directors’ & Officers’ Liability?
Once an insured person files a claim under their policy or is aware of an event that may lead to a claim, then so long as they notify their insurer within the policy notification period their rights are reserved. Any insurer that underwrites this cover is aware that Directors’ & Officers’ Liability claims cases are complex and can take years to be resolved, and it is not unusual for an insurer’s claims reserve to fluctuate as the claim unfolds. However, while a claim is progressing, the insured person does have access to funds under the policy to cover ongoing legal and defence costs which often times can far exceed
As a company owner, having a Directors’ & Officers’ Liability policy will allow you to have some peace of mind with regards to running your business. The policy essentially serves to protect your own personal assets (which, as a private business owner, can also include your company and thus its balance sheet). Company owners (or rather, their companies) can also purchase Key Man Insurance, which is a sort of life insurance policy taken out by a company to compensate it for any financial losses that would arise from the death or extended incapacity of an individual who is important to the business. 19
Trade credit insurance
Using Trade Credit Insurance Late or non-payment of receivables can be a powerfully destructive force in the life of an SME. While so many businesses go to the time and trouble to protect plant and property, in the GCC less than 0.006 per cent of eligible transactions are protected by any type of credit insurance. Yet receivables can account for 40 percent or more of a company’s assets - and in many of the world’s most developed economies, it’s standard practice to protect that precious share with Trade Credit Insurance (TCI). How does TCI benefit an SME and play a vital role in protecting cashflow and capital? We spoke to acknowledged expert Shabnam Ansari, Head of Strategic Planning and Special Projects at Nexus Insurance Brokers.
he UAE has invested heavily in world-class infrastructure, including roads across the country, seamless seaport amenities at Jebel Ali, and state-of-the-art airports and cargo hubs in Dubai, Abu Dhabi and Sharjah. Due to these virtuous developments and its strategic location between Asia, Europe and Africa, the country offers optimum advantages
for international trade. As a result, the UAE has emerged as a dynamic hub for global commerce, with an unmatched infrastructure that offers impeccable connectivity for businesses worldwide. Consequently we have witnessed 75 per cent of Fortune 500 companies establishing their regional headquarters in the country. Small and Medium Enterprises (SMEs) comprise the backbone of the UAE’s economy. For example,
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credit insurance, is one of the many risk management tools employed by businesses to protect their trade receivables from non-payment or delayed payment. TCI in effect shields both the cash flow and the profitability of an SME. While TCI is often known for protecting foreign trade (and in this capacity it’s often known as Export Credit Insurance), there is also a large segment of the market that uses TCI for safeguarding domestic accounts receivable as well.
such as war, cancellation of import license or a whole host of government led changes that change the rudiments of the buyer-seller relationship. TCI policies can include a wider range of cover, depending on the circumstances. Such policies are flexible and allow the policyholder to cover the entire portfolio or just the key accounts. The most common type of cover is so-called Whole Turnover Cover, which covers all buyers of the policy-holder.
What is Trade Credit Insurance?
What kinds of risks are insured?
Many SMEs are not able to continue their upward drive because they have suffered heavily due to bad debt, stemming out of inadequate credit
TCI basically protects businesses against two broad categories of risks: 1) either a buyer does not pay, or 2) a buyer pays very late. A buyer may not
Why do SMEs need Trade Credit Insurance?
it’s estimated that in 2011, 78 per cent of the UAE’s GDP was exported to the Middle East, Africa and Asia region, mainly through SMEs. Against the back drop of the UAE being a trading hub, and the significance of the SME sector, it’s crucial for development of the UAE’s economy to support the trading activities of SMEs. This will best be done via benchmark trade instruments and risk mitigation tools - amongst which, Trade Credit Insurance has an extremely important role to play.
TCI is one of the many risk management tools employed by businesses to protect their trade receivables from non-payment or delayed payment. management of their portfolios. Even a single financial default can disrupt the success of an SME - clouding the company’s outlook for the foreseeable future. How best to take proactive action to prepare any SME which is highly vulnerable to such disruptions in its business life cycle? Usually the largest or the second largest item on a trading company’s balance sheet is the outstanding receivables. In spite of this, it’s quite normal to witness businesses protecting their tangible assets such as property and plant, while at the same time neglecting their receivables which, at times, can represent 40 per cent or more of their current assets. Trade Credit Insurance (TCI), also known as business credit insurance, export credit insurance or simply
be in a position to pay after he has been declared bankrupt or insolvent, if applicable and according to the prevalent bankruptcy laws of any country. Similarly a buyer may opt for a bankruptcy protection arrangement, which permits deferred payments for an extended period. Both instances are covered under a TCI policy. In addition to the commercial risks, TCI also provides coverage against political risks which are defined as financial losses resulting directly from government or political activities in an overseas country (such as government moratorium, non-transfer risks, cancellation of import licence and occurrence of war or revolution). TCI, in a nutshell, also covers the insured against government acts that make it impossible for the buyer to pay. Acts
SMEs need TCI for a variety of reasons, some of which are mentioned below: Protection against default TCI insures business receivables that in turn provide the businesses with confidence to provide better terms to the buyer(s) and hence it facilitates a win-win situation for the TCI policy holder and their client(s). The seller is assured of payment and therefore no adverse interference with their cash flow is expected. The buyer(s) on the other hand, receives better, easier and longer payment terms. By insuring the receivables against non-payment or late payments, an SME ensures to protect its cash flow and its profit against default. Sales Growth For an SME, TCI underpins the confidence to escalate business development knowing payments are assured. Business expansion can be done through greater penetration with existing clients and/or initiatives to discover new markets altogether, which, in the absence of TCI, were not possible earlier. Without insurance many trade transactions have to be concluded on a pre-paid or cash basis, or not at all. Having such coverage in place therefore permits an SME 21
Trade credit insurance
insures its outstanding receivables, the credit insurance company is therefore able to use all this needful knowledge to extend, reduce or decline credit for that SME. This in turn greatly benefits an SME in managing its own credit portfolios, since now an SME is able to find out more about the creditworthiness of its own customers by researching the database provided by the insurer. As a result, the SME is now able to oversee its credit exposures far better than would be possible in the absence of such information. Shabnam Ansari, Head of Strategic Planning and Special Projects at Nexus Insurance Brokers
to sell more goods on credit terms, take advantage of peak sales periods, and develop new product lines or territories with greater peace of mind. It’s because of these reasons that TCI is known to contribute towards increased sales growth to existing and new customers. Improved cash flows Without adequate protection provisions, late payments or non-payments pose a considerable threat to future liquidity of an SME. When an SME insures its receivables against non-payment or late payments, it is basically ensuring its cash flows, since now it can sell on credit, discount its receivables and greatly benefit its cash flows. Managing credit and hedging risks TCI can act as good financial instrument to hedge risks. Most insurance companies that underwrite TCI policies do so for numerous clients, guaranteeing huge customer debts in many countries globally. Hence they are able to manage and retain a database of hundreds of thousands of companies around the globe with data related to payment experience, financial updates, seller experiences, countries risks etc. When an SME 22
Bank loans It’s ironic that in spite of SMEs’ significant contribution to the UAE’s GDP - estimated to be over 80 per cent - less than 4 per cent of total bank loans are able to find their way into the SME
mitigation tools. When TCI covers the accounts receivables of SMEs, the trade debt is transformed as collateral, which can help SMEs to obtain bank loans or influence the size and terms of the bank loan available to them. What are other important aspects of a TCI Policy?
TCI as a risk mitigation tool In order for TCI to act as a true risk management tool, it has to function as a global scale service – spreading far beyond the normal insurance risk management arena. The key success factors for TCI are the use of sophisticated financial analysis and data management techniques for debts all across the globe, along with local knowledge and research competencies. To evaluate the financial position of buyers worldwide, credit insurance
When an SME insure its receivables against non-payment or late payments, it is basically ensuring its cash flows, since now it can sell on credit, discount its receivables and greatly benefit its cash flows. sector. (Although the trend is changing and we have been witnessing greater interest by the banking industry in the SME sector in recent years). The fact is, it’s natural for SMEs to be considered as a higher risk, on the basis of the view that small operators have a higher probability of failing. Many risk-averse banks are still providing credit only with stringent conditions attached to SMEs and at times even refuse loan facilities to the SME sector. One of the major reasons is that an SME can’t offer the solid collaterals or hard assets that could be offered to banks as security. In the presence of TCI, banks are more willing to provide finance since the TCI policy can be considered as one of the risk
companies have teams based in each of their strategic international locations, with regular evaluation and inspection capabilities. In order to further mitigate risks, other insurance techniques are also employed such as: • Dilution of risk by risk sharing and reinsurance mechanisms • Avoidance of moral hazard and adverse selection • Adequate spread maintenance both locally as well as regionally • Dynamic risk management • Risk sharing agreements • Debt collection. Cost Factors affecting premium for TCI Just like any other insurance policy, TCI is priced on the basis of standard
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actuarial techniques. Premium is usually charged monthly, and calculated as a percentage of sales for that month or as a percentage of all outstanding receivables. TCI is sold mostly on a whole turnover basis and premium rates are generally given as a percentage of the company’s turnover (including financially sound and weak customers). The cost of a TCI policy is directly linked to the risk any business is exposed to and is related to the amount of turnover that the SME would want to insure. Therefore the premium rate for TCI for any SME would reflect the average credit risk of the insured portfolio of buyers for that particular SME. The premium for one SME would be different from that of another due to factors such as the customers’ locations, the business’ track record in credit management, the nature of customers, the trade sector in which the SME trades, etc. Bespoke Trade Credit Insurance TCI policies can never be structured based on a product-focused approach. Rather, thay have to be need-based - stemming out of, and suitable to, the needs of any SME. In principle, this makes every TCI policy unique for each customer. Having said that, some trade credit insurers do offer standard policies, but they are not always aimed at the SME market. Although these standard TCI policies are usually structured with low administration, and competitive pricing, such a standard policy may or may not be suitable to an SME depending on the trade to be insured. It’s always advisable to investigate the particular circumstances and needs of the company. The result should be a custom-made policy at a corresponding premium. Hence, the role of a well-respected and trusted expert, who can structure a TCI policy while keeping in view the SME’s specific needs and credit portfolios,
NEXUS Group - Nexus Insurance Brokers is one of the Largest Financial Advisors in the region. offering a composite suite of insurance, savings and investment products to both Corporate and Individual clients from a range of international and domestic product providers. Nexus has around 500 staff members including over 370 qualified professional consultants supported by a cadre of over 100 dedicated and qualified support staff in the Middle East region, offering a broad range of licensed products from regulated providers. With over twenty years’ experience in the GCC (Gulf Cooperation Council), Nexus operations are located in Dubai, Abu Dhabi, Qatar, Lebanon, the Kingdom of Bahrain and Kuwait in order to underpin a professional and high-quality level of service to our clients.
can never be over-emphasized. Here in the region, it’s always a good idea to consult an unbiased expert with the ability to help and support SMEs by giving objective, need-based advice and able to structure fully bespoke TCI cover (for example, the company I work with, Nexus Insurance, is a leading expert in the field). Outlook for TCI in GCC region
UAE as an ideal launch pad for TCI The UAE is seen as the ideal launch pad for TCI in the Middle East due to its accelerated GDP growth, its perfect geographical positioning, its stable economy and political environment making it a thriving trade hub. In the GCC, TCI accounts for only 0.006 per cent of business in UAE despite there being a phenomenal potential for this type of risk protection. Much more ground is required by national drivers of good business management. Role of the Banking Industry Bank financing has been weak for some time in the UAE and last year it only arose by 3.3 per cent during 11 months of the trading period. However, recent appetite for credit protection has increased as banks seek and can access the safety of insurance before they extend lines of credit. Future of TCI in the region The growth in TCI reflects the UAE’s premier position as a regional and international hub for import and re-
exports. In the backdrop of increased global insolvencies (expected increase this year by eight per cent) and inadequate momentum of recovery in Europe, there is no reason why credit insurance in GCC shouldn’t experience a boom going forward. According to reliable industry sources, with an estimated market size of TCI in the UAE to grow by 50 per cent within next two years in terms of volume of transactions covered, it is expected that the value of TCI insurance will reach around USD 50 million (AED 183m) by the end of this year. Conclusion
TCI provides its clients with the ability to guard against bad trade debt and, once in place, this instrument encourages better and enhanced trade between buyers and sellers. Banks view this instrument positively and provide its holders with better terms knowing the risk is shared between major financial entities in the background. Buyers receive better terms as the seller is confident of receiving their dues. UAE is a hub of business in the region and without TCI-style instruments, the everneeded confidence in underpinning business risks for SMEs involved in trading activities would be lacking. TCI therefore is a vital cog in the business merry-go-round, with comprehensive benefits for SMEs and many advantages that can be primary catalysts for profitable growth. 23
Understanding risk management Rather than constantly worrying about the cost of repeat insurance claims, wastage of funds because of high stock levels, or the threat of cyber crime throwing the business into chaos, doesn’t it make good sense to reduce the likelihood of things going wrong in the first place? This is the art of risk management, where the motto is ‘prevention is better than cure’. It’s a discipline applicable to any scale of business, but the first step is understanding the essentials of how it works.
s an SME you might well be asking yourself whether risk management is applicable or practical for your business. Risks differ between SME sectors. Food and beverage businesses with perishable goods; medical or clinical establishments with high value electronic equipment on which there is
a huge reliance to provide continuity of services; schools and colleges that have potential liabilities to students, staff, and visitors - the list goes ever onwards. Risks also vary according to your distribution and service model. Internet based business models are exposed to risks that differ from businesses requiring an office/retail outlet and which hold valuable stock. Some businesses may have ongoing financial commitments (such as rent) even if they suffer business interruption that stops or reduces their ability to generate revenues. Onshore and offshore SME businesses here in the GCC also have different considerations in the form of licenses, the particular legal system that applies, and the style of regulation. Moreover, your business model, strategy, and marketplace expose you to business risks. In other words simply by being in business exposes an SME to risk. A few examples of the risks which might resonate with you as an SME are likely to include: • Cash flow. Customers and clients not paying in a timely manner (resulting
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in monies being due, however not accessible monies, as they’re needed for your own outgoings) • Errors or omissions. By staff who may be required to fulfill multiple functions (resulting in customer dissatisfaction or loss, and reputational damage) • Cyber attack. On your website, customer information, and/or banking information of your clients or customers (resulting in liability to customers for financial loss, breach of data privacy or protection). Tackling the risks in five key steps
One of the advantages of risk management is that while the risks themselves may be diverse and complex, the process of tackling them can be crystallized into a relatively simple five step process. This can best be described as 1 Assessing the key things that might cause an issue to, disrupt, and/or make your business fail. Focus on identifying the top five to ten items (these are your key identified downside risks). You do not need a huge list of risks, simply a representative one for your business. Consider both internal and external causes of risk. For example: • Economic downturn • Outsourced invoicing with receivables being collected (and held by a third party) • Reliance on one key person for your business to be successful • Large values of stock held in one location (theft/fire/obsolescence risk). Your internal staff and management team are better placed than any third party to identify the risks which specifically apply to your business. Third parties can however help by bringing cross-sector experience, deep industry knowledge, or by challenging the team to think more broadly. 2 For your top five to 10, record whether the issue identified in step one could possibly happen or might be likely to happen (likelihood). In addition, consider what the impacts
Audrey Weir is Chief Risk Officer with AIG MEA Limited, based in Dubai. Audrey brings to her role an in depth knowledge of risk and insurance earned over a 25 year career that spans the geographies of North America, Europe, and the Middle East. Audrey has held key risk and insurance management positions with global players such as PricewaterhouseCoopers, Fujitsu, Transport for London, and Aon. She commands an expansive career which crosses a wide array of sectors including Construction, Energy, Real Estate/Commercial Property, Financial Services/Institutions, Retail, Information Technology, and Transport. In addition to her corporate experience, Audrey spent six years as a University Lecturer, Careers Tutor, and Director of Studies in Risk Management.
would be (financial, business collapse, reputational damage, loss of licence, other). These are the possible impacts. Overall this is your risk assessment. For some of your top 5 to 10 you might decide to accept these risks (they are unlikely or have a minimal impact). For others in your top five to 10 you might determine that they are likely, or would have an unacceptable impact. For these risks, continue to Step Three. 3 Determine what you can influence or change. Can you reduce the likelihood, or the impact, or both? Before embarking on action, factor in the cost against the benefit. Spending USD50,000 to manage a risk that might have a maximum consequence of USD5,000 and no reputational damage can never be considered to be good business sense. This will provide you with a risk management action plan. Make sure that you take action in a timely manner. Address actions proactively, before that risk has become a reality. 4 After review of what can be managed and makes good business sense to action, consider whether there are still risks that the business could not recover from, or might have difficulty in recovering from. Can you transfer some of the risk, even if only the financial consequences to another party? Insurance is one such arrangement, and involves pooling funds from many to pay for the losses that some may incur. These are your risk transfer options. Remember however that the risk transfer will not be without cost.
5 If you opt to devote time to understanding your business risks, discuss these in your management team. Evolve your top five to 10 as you define or change your strategy; as you consider expanding into different markets or countries; if you are considering an IPO; as you become aware of external factors that impact your business changing. The investment that you may make in risk management does not need to be extensive to be effective. It does however need to be a living, evolving approach.
Is risk management worthwhile for you?
To conclude; is risk management for your SME: • Possible? • Practical? • Worth the investment? For your SME, only you can tell. If you believe it could be, then make sure that the approach is scaled to your business, and is specific to your business. Spin-off benefits that large corporate entities derive from investment in risk management include protection of business interests, and enhanced governance. Regulators, rating agencies and financiers derive comfort from any businesses able to identify, articulate, and manage the risks that might have a negative impact on business and revenues. For riskmanaged companies, prevention is better than cure. 25
Doing business overseas
Doing business overseas For many businesses, the step towards exporting their goods overseas is the catalyst for a new stage of growth. For others, it itâ€™s a nightmare of late payments and exchange rate deficits. What are the key steps to follow and how can insurance smooth the transition from would-be exporter to international trading house? SME Advisor spoke to AIG, a world-leading brand in protecting import/export risks. 26
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he reality is that the export of goods is a mainstay of the economies of the GCC. Take the case of the UAE, for example, where no less than 78 percent of the nation’s GDP results from export to the Middle East, Africa and Asia. A large proportion of that business is managed by SMEs; but if you want to be part of that success, what are the key building blocks and what types of business insurance will you actually need? The first thing to be aware of is that you will want to have completely seamless insurance coverage in every country your goods are travelling through. In order to achieve this, you have several different options. For example: • You can utilize separate, unrelated local insurance policies in each country where you have exposure. These policies are underwritten by carriers licensed in the particular countries to insure the multinational’s local offices, operations, subsidiaries, affiliates, assets and/or people. Locally issued policies are tailored to local industry practices and regulatory requirements: they’ll give you access to local reinsurance pools, help you fulfill local contractual obligations - and you’ll have a vehicle for local claim servicing and local payment of claims, premiums and premium taxes. • Alternatively, you could have a single global insurance policy issued in your home country to cover your business and its international exposures. Global policies are generally issued within the exporter’s home country by a carrier licensed only in that country. These policies enable your business to assess its risks and
insurance needs centrally and provide consistent terms, conditions, limits and umbrella attachment points for the organisation’s overseas operations worldwide. Both options have their advantages. Fortunately, you don’t have to choose one or the other, but rather, you can combine the best of both in what is commonly referred to as a controlled master program (CMP). This essentially combines multiple local policies issued in various countries with a global policy in your business’ home country. The global policy is often a ‘difference in conditions/difference in limits’ policy, meaning it serves as a backstop for all of the local policies, providing coverage if a claim is either not covered under a local policy or the local policy limit is exhausted (subject to the global policy’s terms, conditions and remaining limits). A CMP-style policy is highly flexible; it enables you to have seamless coverage if you just have one or two overseas markets, or if you’re undergoing expansion to the level of being a multinational - or even a global exporter. There’s another big advantage: because the global policy usually has a worldwide coverage, it also covers risks even in countries where there are no local policies. In a CMP the global policy and local policies are linked, often through terms in the global policy. Properly structured, a CMP can provide your business and export operations with the benefits of both local and global insurance protection. Making sure you’re compliant overseas
Whatever the business you’re conducting overseas, you will be using
an agency, contractor or affiliate for one (or more) elements of the export chain. Bear in mind that principles of international law dictate that the laws of a particular jurisdiction generally apply to any conduct within its borders or by its nationals. Since foreign laws generally apply to parties operating in-country, your business’ presence in a foreign country may subject it to some or all of that country’s regulatory requirements. Certain countries have laws and/or regulations that may (with varying degrees of clarity) indicate that in-country exposures be covered by a carrier that is licensed to conduct business in that country. These mandates may take the form of a prohibition, an affirmative requirement, or both. They may be specific to a particular type(s) of insurance, apply only to compulsory insurance, or apply to all insurance, compulsory or discretionary. Some of these mandates may expressly state the party(ies) to which they apply - i.e.,brokers, insureds or carriers resident in the country whereas others may not. The specific requirements vary country to country. If a given country clearly requires local operations to be covered by a local policy issued by a locally licensed carrier, if you have a local subsidiary - because it is resident in that country and thus subject to local regulation - you may be at risk of violating the mandate. This is the case whether or not the subsidiary is covered a global policy. Note as well that the local subsidiary, as an in-country resident, may also be required to calculate and settle local premium taxes itself, and failure to do so could result in penalties and interest. 27
Doing business overseas
Some key Compliance Questions
When crafting a program for your international exposures, you’lll need to consider: • Does local law require the local subsidiary to purchase and/or be covered by insurance from a locally licensed carrier? • Does local law prohibit the local subsidiary from purchasing and/or
Note, though, that while a carrier may be able to create a global policy solely from its home country, it may not be able to provide essential insurancerelated services locally, because it is neither licensed nor conducting business outside of its home country. It may be prohibited by local law from providing claim services or making claim payments locally. What’s more,
The first thing to be aware of is that you will want to have completely seamless insurance coverage in every country your goods are travelling through.
being covered by insurance from a carrier not locally licensed? • Will the parent company charge the local subsidiary for the allocated premium? • Will the local subsidiary take a tax deduction for the allocated premium? • Will the local subsidiary need to pay premium tax in-country? Claims: the need to respond locally
The laws of a country generally apply to companies operating within its borders. Global policies are generally transacted entirely within the home country of the carrier and the SME initiating the business. During the negotiation and binding of the international policy, the carrier does not undertake activities outside the home country. Moreover, the carrier underwriting the policy is generally not licensed or conducting its insurance business outside its home country - and it’s therefore likely to be entirely outside the scope of foreign regulation. Simply covering potential exposures, such as people or legal liability, in other countries without undertaking activities in those countries does not by itself subject a carrier to regulation in those countries. 28
– Are local operations required to obtain insurance from locally licensed carriers? – Does a contractual counterparty, government entity or other party need to be shown evidence that coverage has been obtained locally? – Will failure to provide evidence of locally obtained insurance breach contractual covenants or trigger any commercial, contractual or reputational consequences? A rule of thumb: the greater the exposures, the greater the need for local insurance protection
The fundamental question facing every SME looking to export is whether or not to utilize a local insurance policy in a given country for a particular line of even if it isn’t prohibited, a global business, either on a stand-alone basis carrier might refuse to undertake these or as part of a CMP. While this might activities in foreign countries so as to seem like a ‘yes’ or ‘no’ question, in avoid creating a scenario that could reality it can be a complex question to subject it to legal or regulatory scrutiny answer - and will often involve the same in the export market. analytical skills, judgment and risk assessment that risk managers deploy on a daily basis. Proof of Insurance: satisfying Local The more significant the risks, the Authorities greater the need for local insurance Depending on the nature of a protection. For many smaller businesses, multinational’s local operations, a local there may not be a need for elaborate policy issued by a locally licensed carrier additional local cover, while on the other may be needed to fulfill contractual hand, a more advanced medium-sized and/or other obligations. Consider the trader should undertake - annually - a following example: comprehensive risk assessment to A medium-sized business in the UAE determine whether a local policy is is a secondary exporter and is asked to prudent in a given country for a given supply pharmaceutical drugs for clinical trials in India. Following one clinical trial, line of business. This will include a review of the company’s products 50 individuals sustain bodily injury and and services, physical presence, are on the verge of litigation. The local subsidiary of the UAE business has a local corporate structure/capital position, lines of insurance and contractual insurance policy that expressly provides counterparties. clinical trials coverage. The secondary It’s important for all export firms to ask exporter only has an international policy questions such as: issued in the UAE. Without the local – Are there particular insurance terms policy being in place, both parties could and conditions local operations need face a complex chain of litigation. to be adequately protected? – Are the necessary terms and Likely local questions conditions available only under a local When crafting a programme for policy? international exposures, consider:
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The impact of different products and services
Whether or not the owner/manager of an SME wants a local policy in a given country may depend on the products and services its operation provides in that country. If the local operation manufactures an inherently volatile or dangerous product, the risk may be heightened and a local policy may be wise. A consumer-oriented product or a high profile product that attracts media attention also indicates higher risk and is more likely to merit a local policy. It’s also important to review if and how products or services are regulated, what regulatory bodies are involved and whether prior approval is a prerequisite for conducting business. Lastly, the types of claims and allegations that have historically arisen in connection with the local operation are another key consideration.
Your business’ presence in a foreign country may subject it to some or all of that country’s regulatory requirements.
Lines of Insurance Type of insurance is another important factor. If the line of insurance is compulsory, such as auto insurance, the decision to buy local is easy. However, most lines are not compulsory, in which case the decision may be swayed by whether the line is third-party liability or first-party, and/or whether it is a high frequency or high severity line. Moreover, if crucial terms and conditions are available only in the local marketplace, purchasing a local policy will be particularly important.
Contractual Counterparties Whether or not a local policy would be advantageous (or necessary) could also depend on local contracts and contractual counterparties. If the local counterparty is a private sector company and the contractual obligations are innocuous, the risk of not having local insurance may be minimal. However, if the contract is with a local government entity that imposes obligations to carry insurance from a locally licensed carrier, there’s a much more obvious need to purchase local cover. 29
KEY MAN INSURANCE
Key man insurance: protecting your people assets The wellbeing of most SMEs typically hinges on the presence of a cluster of key people – and one of those is likely to be you! If even one of those people was lost as a result of death or chronic ill health, your business might not survive the transition. So it makes sense to invest in a simple, practical insurance solution, which will compensate you if the worst should come to the worst.
ey man (or ‘key person’) insurance makes sure that if a central member of your team suddenly dies, the business will receive a lump sum payment - exactly like a life insurance policy, but one where the beneficiary is the company, not a family member. The payout can not only help you source a top-quality replacement, but provide a comfort-buffer if the lost member of staff was dealing with client and supplier relationships that have now stalled as result of the continuity being broken. The
key man cover can apply to a business owner, a founder or a key employee (perhaps two or three principal staff members). Whoever is covered, the point of key man protection is to help the company survive the shock of losing the person who makes the business work. If the loss is too great to survive perhaps in the case of a dynamic CEO or a uniquely-talented science officer - the payout will enable the business to close down in a proper and respectful way, paying severance to employees, taking care of all creditor invoices, and generally ensuring that the directors’
reputation is intact when they resurface to start a fresh enterprise. Note, though, that if you are the sole employee, you don’t need key man cover - a conventional life insurance policy is what’s needed to make recompense to your family and loved ones (key man will only make payments to the business). There are four key areas where key man can be great value to an SME. These are: 1 Losses related to the extended period when a key person is unable to work, to provide temporary
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personnel and, if necessary to finance the recruitment and training of a replacement. 2 Insurance to protect profits. For example, offsetting lost income from lost sales, losses resulting from the delay or cancellation of any business project that the key person was involved in, loss of opportunity to expand, loss of specialised skills or knowledge. 3 Insurance to protect shareholders or partnership interests. Typically this is insurance to enable shareholdings or partnership interests to be purchased by existing shareholders or partners. 4 Insurance for anyone involved in guaranteeing business loans or banking facilities. The value of insurance coverage is arranged to equal the value of the guarantee. Who needs to be covered?
What are the key functions in your business and are the people who run them irreplaceable, at least in the short term? Perhaps there is a CFO who was a partner in starting the business, who looks after receivables, books of accounts and special discount lines. Perhaps this person also leads key financial or strategic initiatives in your business, such as M&As and the accountancy protocols in the run-up to an IPO? Or at the very least, runs highly customized software, that other team members aren’t trained to use? If this person was lost, could the business survive? Certainly not at its present level. It’s also vital to think about the people who handle the top sales relationships - your big income generators. If they were gone, would the clients deal with you anymore? Wouldn’t it take the best part of six months to rebuild that lost income stream and reaffirm the confidence in your business? You might also use key man cover in relation to ‘succession planning’, eg,
perhaps you have someone very much in mind as your successor at the head of the business - so it would make perfect sense to have a ‘Plan B’ if that choice should go horribly wrong and your preferred person simply isn’t available. This is especially the case since you have gone to all the trouble of planning a successor precisely in order to avoid the commercial catastrophes resulting from a lack of continuity at the top of the business. Whoever is insured, note that the policy’s term does not extend beyond the period of the key person’s usefulness to the business. So you might specify a particular age limit, or stipulate that the policy cuts-off if the person changes department, or moves to a less central role. Remember as well that key person insurance does not actually indemnify the actual losses incurred but compensates with a fixed monetary sum as specified on the insurance policy. So it’s vital to ensure that you specify a practical, useful sum from the outset (and of course, the level of this sum will be reflected in your premium). How much cover is enough?
The ‘golden rule’ with key man cover is to buy as much as you can afford. It pays to get rates from a variety of brokers and providers - and it’s best to consult those who are known specialists in life cover. Also, be aware that some providers or brokers will try to sell a ‘whole’ or ‘variable life’ policy – but this will cost you significantly more and is, in fact, surplus to requirements. Always ask for a ’term’ policy, since you will only be insuring for the term (ie, the number of years) that the person is of value to the business. Before deciding how much to ensure for, it’s best to do some basic sums of the kind of values that will help the business survive in a time of crisis.
The, get quotes on • US$100,000 • US$250,000 • US$500,000 • US$1,000,000 Again, it’s worth buying the best cover sum you can afford – otherwise, when the worst comes to the worst, you may run out of money when you need it most. Does key man only recompense in the case of death?
No, you can also get customised versions that will cover the business in the event of chronic illness or incapacity. These will of course require some kind of medical authentication prior to payout, and in the case of the condition already existing when you take out the cover, they will require a significantly higher premium. (Note: policies that relate to ongoing illnesses or conditions will generally have a higher premium than those that are purely deathspecific, since they require the insurer to authorise medical checks, and they are also created on a more bespoke basis). There are also a growing number of ‘kidnap cover’ policies on the market, which will pay a ransom should a key executive be kidnapped and held to ransom. These will provide expert negotiation services to help local police deal with the kidnappers, and the payout is of course geared towards meeting the ransom demands. Policies of this kind are extremely useful if senior staff are travelling regularly to sensitive areas of the world, such as north-east or central Africa, Mexico or central America. One final point: key man cover doesn’t (except in exceptional circumstances) pay out in the event of the appointed individual leaving the company or joining a competitor. In these cases, you will simply cancel the policy, although keep in mind there may be a small penalty to pay if you cancel outside the stated policy terms. 31
Change management: the role of insurance For a successful SME, change isn’t simply ‘something that happens’ - it’s a fundamental requirement of the business as it grows and evolves, becoming more sophisticated in terms of both its offer and the raft of internal procedures. The secret is to make the business a ‘change master’, forging ahead with innovation and competitive edge, rather than being left behind by constantly-shifting market trends. SME Advisor explains the role of insurance in underpinning a progressive, proactive approach to change.
“The wise man is led by change; the unwise is dragged by it.” - Seneca
ost founders and owners of SMEs are already specialists in change management - after all, didn’t the Business Plan for your venture describe your vision, its growth and the market trends that it would capture and take advantage of? Didn’t 32
it plot a course of change and evolution and allow for factors such as the funding needed for new premises, new car fleets or machinery and plant, and the requirement for a top marketing director as you entered new sectors or thought about the growing impact of social media? If indeed it did all of these things, did you also remember to show it to an insurance broker to get expert input on the ‘hotspots’ that would be likely to challenge your business and make
sure that an effective raft of insurance ‘hedging’ was securely in place? Did you identify the risk factors that result both from changes in your business and from shifting market tastes and economics? In other words, did you cost-in the need to purchase insurance for situations such as: • Predicted growth in the size of your car fleet by Q4? • Key man insurance to cover your own involvement and that of your top sellers?
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• Third party protection for your investors if the loss of a director means the investment can’t be repaid? • Trade Credit Insurance to click in at Q3 to cover cashflow shortfall consequent on late or non-payers? • Life insurance and pensions plan incentives for staff on completion of three-months’ probation? If you didn’t, perhaps you need to consider the discipline of change management and what it might be able to achieve for your business and its effective contingency planning. The science of change management
Change management is nothing more or less than the science of taking a structured approach to ensure that – 1) Within your business, changes are smoothly and successfully implemented to achieve lasting benefits. 2) You have a predictive ‘buffer’ against external change; it can be absorbed progressively without catastrophic fall-out. It’s a truism that in the external commercial world, organisations face rapid change like never before. Social media and mobile adaptability have revolutionised business and the effect of this is an ever increasing need for change - which of course means there’s a concomitant need for good change management, too. The growth in technology also means an increase in the availability of knowledge, which means your customers are likely to be more aware of their options (and therefore more fickle) than ever before. It goes without saying that the ability to manage and adapt to organisational change is an essential ability required amongst all SME owners today. It’s also the case that the speed with which you can adapt to change is everything. The faster the pace of change, the more the need for insurance because it’s more likely that your SME will be
rendered temporarily dysfunctional (if only for a short while), getting caught out by a scenario that may have the capacity to derail your plans in a major way. Everyone’s affected!
Organisational change directly affects all departments from the entry level employee to senior management. This means that the raft of insurances you plan for with your broker must reflect everyone’s interests, from those of the CEO to the livelihood of the most junior new recruit. A classic example of change management in this context is the imminent arrival of compulsory employee Medical insurance in Dubai,
• Customising a response to meet your company’s particular needs. • Recognising what’s changing in your own business. • Putting adaptive training in place for everyone affected. • Getting everyone on board and winning support. • Understanding the risks to the business’ wellbeing that come with change (whether internal or external change) and transferring the risk to an insurer via appropriate cover. For each major change initiative, commit your actions in writing in a Change Management Plan. This should be available online for all staff and be as
Did you identify the risk factors that result both from changes in your business and from shifting market tastes and economics? which all employers will have to provide. Have you already budgeted for the impact this will have on your bottom line? It may be too late to absorb the financial impact if you wait until the official implementation deadlines. Moreover, because change impacts everyone, the strategies you have in place for dealing with it will often require everyone to buy-in and pull together. So while you might offer an attractive savings/pensions package to employee remuneration (or a raft of additional life insurance contributions), the deal is that you won’t expect employees to get up and leave the moment they are approached by a competitor. Dealing with change via insurance solutions therefore works as a two-way street. Interpreting and tackling change
There are six key stages in the change management process. These are: • Recognising what’s changing in the wider business environment.
specific as possible, eg, it should list the names of all the insurers you have involved and the relevant policy numbers, etc. Telling customers and investors
The fact that you are proactively preparing for change and have taken the necessary risk transfer measures is good news. So you might want to communicate this with your customers, to assure them that you are ‘ahead of the curve’ and that they will - as a direct result - receive heightened levels of service and can feel secure in a provider relationship that is underwritten by high-quality business protection (in other words, you show them ‘you are not going anywhere’). It’s also vital to communicate your change management initiatives to funding partners and investors: knowing that your business is resilient to change and prepared for it can make a huge difference to the confidence factor with which would-be investors will perceive and evaluate your offer. 33
LEADING PROVIDERS AND EXPERT SERVICES
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Globaleye Company Profile
Globaleye provides unbiased financial solutions to both Corporate and Private Clients. Our expertise in international financial planning has made us the first choice for over 7000 clients worldwide from our head office in Dubai, with additional offices in Abu Dhabi, Singapore, Hong Kong, Shanghai, Kuala Lumpur, Bangkok and Geneva. Our Wealth Managers are qualified and trained to international standards to ensure our Clients are provided with the best advice and service at all levels and since the Company is independent, no Bank, Life or Investment Company influences the solutions we offer. This provides added value for our Clients and a truly unbiased approach in creating tailored financial solutions. We have terms with some of the largest financial institutions in the world, so our due diligence and procedures have to be of the very
highest level. Our business partners include Zurich, Royal Skandia, AVIVA, Generali, Friends Provident, Prudential, Allianz, AXA Insurance and Royal London 360 to name but a few. As we are the foremost provider of financial planning solutions, we regularly feature on TV and radio, and are on the panel of experts for many industry and regional newspapers. Our unique online services, including our Globaleye Bulletin Service (GBS), have proved invaluable to our subscribers, keeping them abreast of developments that may affect them. Similarly, our Globaleye Portfolio Service (GPS) provides a monthly report on the progress of your financial plans delivered straight to your inbox and we have recently introduced the Globaleye Valuation Service (GVS) provides online access to all your financial plans when you need it. Globaleye’s commitment to an innovative, Client based approach has resulted in the accolades of “Personal Lines Broker of the Year” at the 2010 Middle East Insurance Awards and Gulf Insurance Review Awards at the 2011 and 2012 MENA Insurance Awards. We are also dedicated to the development and training of our employees to maintain the high standards that our Clients expect and this has resulted in the 2012 Investors in People accreditation for our UK based recruitment and training office. At Globaleye we firmly believe our Clients deserve choice, and by providing a bespoke service tailored to the Client’s needs, we are able to offer this. Tim Searle Chairman
For more information please visit www.globaleye.com
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Our Services: Pensions Pension Transfers • SIPPS • QROPS • International Private Pensions Protection Life & Critical Illness Cover • Accidental Death • Disability • Long Term Care Benefit • Family Income • Medical Insurance Education Fee Planning School & University Plans Flexible Savings Multicurrency International Savings Plans Portfolios Lump Sum Collective Investments • Portfolio Management • Online Fund Advisory Finance Property • Projects • Yachts International Mortgages Multicurrency • Fixed • Capped • Interest Only • Equity Release Wealth Protection Wills • Discretionary Trusts • Offshore Company Formation • Estate Planning Corporate Key Man Cover • Shareholder Protection • Double Option Agreements • Voluntary Benefit Banking Offshore Banking • Currency Services • Term Deposits General Insurance & Employee Benefits Personal and Commercial Lines Insurance • Individual Medical • Group Medical • Group Life • Group Pension Schemes
A world of risk - or a wealth of opportunity? If your business is in any sense a ‘typical’ SME, it’s very likely that it’s under-performing because it isn’t taking advantage of important financial planning options that can give real competitive advantage (not to mention peace of mind!) in a challenging climate. SME Advisor spoke to Globaleye, the UAE’s leading wealth management consultant, about the key strategies for leveraging growth and protecting your hard-won success…
irst things first. The majority of SMEs face two classic dilemmas. On the one hand, most of the time they can’t afford to bring valuable expertise in-house. For example, a top CFO can explain how to mitigate and spread your financial exposures, productively lead your business into profitability through effective M&A activity, and build expert risk management protocols to prevent the worst coming to the worst. Sadly, an individual of this kind commands a price tag commensurate with the budgets of a large, successful corporation. Secondly, an SME often won’t have the raft of ‘fixed assets’ - eg, plant, machinery, fully-owned property - that a potential investor (especially a bank) will be looking for. This means that it’s not only a whole lot tougher to get into an advantageous position, but places a huge reliance in the ‘people assets’ of the business - and with current rates of staff turnover and attrition, that’s a fragile way to build a platform for the future. All of which implies that it can be a very good strategy to speak to companies who can provide the skillsets and the spectrum of investment products that will allow your business to - quite literally - get out of the SME rut. As Tim Searle, founder and Chairman of Globaleye comments: “It’s part of our role to talk with the SME owner
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about the ‘what if?’ scenario and suggest solutions that are affordable, practical and totally suited to the needs of the individual in question. For example, it may be the case that the SME owner feels that at this time, all the budget has to go towards building the business, and that any other provision - however badly needed isn’t affordable. So let’s sit down and
review the options - and do our best to establish whether you can afford to take action or not. Working with a company such as ourselves, you’ll get the fullest possible picture of the financial tools that are available to you. We take this responsibility to give comprehensive, unbiased advice very seriously; it’s our job as a broker to give you the fullest possible choice, and we work with
Remember that there’s nothing more counter-productive than having staff worried about medical bills rather than being able to focus on the job at hand.
the most credible companies in the marketplace - names like AIG, Zurich and Aetna, to take three examples. “We work across a portfolio of about 1520 different product types, including Life insurance, Pensions, Medical, Directors’ & Officers’ Liability, Shareholder Protection, Professional Indemnity and Key Man cover. These can address crucial business needs - they’re not just about you as an individual - and can make a tremendous difference to the way your company can meet its responsibilities to staff and investors. Let’s take Medical cover as an example. Our objective is to provide your team with cover that works. Cover that won’t mean members of staff having to quibble with the clinic or the hospital about what’s covered and what isn’t. Remember that there’s nothing more counter-productive than having staff worried about medical bills rather than being able to focus on the job at hand. So we design a high-quality programme that works - and our team will be able to talk to you from their own experience, because that’s exactly the same kind of top-quality plan they have. “Having valuable ‘in service’ benefits gives staff members a lot of confidence and significantly boosts loyalty. This is particularly important in the context of an SME, where people really are the primary asset of the business - and you need to ensure that they are as resistant as possible to offers from elsewhere.” Quality - and capability - is king
Tim continues: “All of our team have studied for and hold the recognized industry qualifications - ACII, for example - and this means that we have the knowledge to source nimble, flexible solutions around a company’s very individual needs. One of the real tests of a financial planning company is the ability to cater to the entire spectrum of needs from understanding risk to asset management. We’re a multi-jurisdictional investment group with a chain of offices around the 40
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world, so you always have a wide range of resources and skillsets working on your behalf. Our philosophy is that if we can’t do it, we know someone who can. So we’ll be able to help you set up an offshore bank account, for example, or invest in the property markets in London or Mumbai. Not to mention being able to assist you with school fees planning and the classic raft of needs that you as a company director are faced with on a daily basis. We can work in a very transparent and flexible way because we’re not owned by a big company and we can be highly responsive to our clients’ needs. “One of the most valuable services we can offer is to provide a comprehensive online snapshot of your accounts and their performance - you can see at a glance exactly how your portfolio is performing. You don’t have to phone us and ask how your investments are doing, because the full picture is available instantly, online 24/7.”
Shareholder Agreement and Shareholder Protection Plan A Shareholder Protection Plan details how the shareholding should be allocated on the death or serious illness of a shareholder. It’s linked with a Life policy that provides the funds for the surviving shareholders to buy back the share issue. This answers a key concern for many businesses, whereby the director’s widow
Protecting your business - the risks and solutions
Critical Illness risks With 1 in 3 of us contracting Cancer by the age of 65, serious illness odds are not good. If a director falls seriously ill, there are whole range of complex issues to consider, including – • Whether or not the director would be expected to sell his/her shares? • Whether or not the director would be able to provide for loved ones? • Whether or not the other directors would expect the critically-ill director to strand down? • Where is the revenue replacement from the affected director. • What is the cost to the business to replace their expertise
Let’s look at four examples of how a Wealth Manager can put in place practical measures that can be a powerful catalyst in protecting your business against a variety of critical risks. Third Party Funding Investors are traditionally hesitant to invest in the SME model because of the lack of fixed assets, and the fact that an investment based on ‘good people’ alone may prove to be hazardous and vulnerable. A Business Protection policy, however, can be a powerful tool for encouraging investment, because it compensates the investor in the event of one of the key Directors suffering a serious illness or passing away, leading to a decline in company fortunes. Knowing the investment is protected in this way can be a powerful incentive for the investor and a key reason to choose to invest in your business over and above competitor firms.
Key Man insurance Many SMEs have a crucial employee - someone who brought in most of the business, handles the majority of customer accounts or who has a unique understanding of the systems, procedures and financial management. Key man insurance covers you in the case of this person dying or becoming too ill to continue
A Wealth Manager can put in place practical measures that can be a powerful catalyst in protecting your business against a variety of critical risks. legally has the right to sell the shares however she sees fit - even to a competitor! Shareholder Protection ensures that all these issues are settled while the key directors are still alive, so there will be no stressful or complex court battles.
A critical Illness agreement resolves these issues before they happen and provides the necessary income for the director/business when there is no guarantee of a permanent return to work. The instant cash on diagnosis allows the director and business face these challenges with confidence.
normal responsibilities, leading to a downturn in the business’ fortunes. Key Man cover provides the business with the ’buffer’ funds to manage a difficult transition and source a suitable replacement long-term. In the worst case scenario, it will provide the funds to wind down the business in a proper and legal way, ensuring that the directors’ reputations are intact should they wish to launch further ventures. Adding resources
Every SME owner knows that cashflow is king, and the role of the wealth manager is to make available - onbudget - the expert resources that may not otherwise be feasible or readily to hand. In other words, it provides a range of services that can let an SME ‘punch above its weight’ - and in so doing, empower it to behave like a bigger, more sophisticated business. Most entrepreneurs go into business hoping for the best but an event like the ones mentioned above are not only a potential reality but will have a serious impact on the venture. By taking some time with a company who understands these risks (and has done it themselves!) can ensure while you hope for the best, we also put in plans for the worst. 41
In the driving seat: the value of effective fleet insurance If you’re an SME running any size of car and vehicle fleet, the right kind of insurance cover isn’t just a legal necessity - it’s a catalyst to saving costs and maximising the operating margins on your dayto-day business. Yet many SMEs aren’t reaping the full benefits of cover with a reputable, key-name provider. SME Advisor spoke to David Harris, UAE Sales & Marketing Director at RSA (Middle East) Limited about the fundamentals of fleet cover and how the right choice of provider can unleash critical change across diverse aspects of your business…
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n 2009, the Federation of Small Businesses - the world’s largest SME organisation, with more than 200,000 members released a remarkable statistic: that 20 per cent of businesses which fail in their first year do so as a direct result of suffering an uninsured loss. The simple fact is that the damage to property, data systems or plant and machinery can represent a large enough sum to sink the business for good. Yet there’s another potential danger area, too: suffering a loss as a result of an uninsured vehicle being involved in a collision (with all the connotations of blood money and criminal proceedings that this might entail), or simply wrecking an expensive truck or earth-mover, might be more than your business can possibly afford. We all know the dangers of not having adequate motor insurance as a private individual, but apply this to a business setting and you have a far more worrying scenario - one involving the staff you are directly responsible for and the potential survival (or not) of the business itself. False economy
The irony is that while some SME owners and directors might be tempted to ‘cut corners’ when it comes to fleet insurance, the majority do not. In fact, the SME sector largely has an excellent reputation amongst motor insurers, because – • The decision-maker will often tend to be the company owner, and therefore interested in what’s best for the business, rather than cutting costs just to impress a boss (which might be the case with a larger corporate, where the insurer is dealing with a middlemanagement employee). • The majority of insured vehicles are used by managers or senior employees, whose jobs are office-based. So there’s not so much incidence of heavy mobile plant likely to suffer big risks out ‘in the field’. This means that insurers recognise the value of their SME market and tend to see it as one of the main drivers of their business.
This can have real add-on values - for example, while a business traditionally needed to have five vehicles to qualify for a ‘fleet’ policy, the importance of the SME sector has meant that figure will often be reduced to two. This is especially the case if the SME already has other lines of business placed with the insurer. Moreover, it’s exceptionally easy to take out fleet cover. Here’s the procedure: • Compose a list of all vehicles (make/ model/year of manufacture/value) • List the use of the vehicles and their claims histories (if any) • Complete a short questionnaire with nine questions related to your business (optional in some cases) Keeping the policy simple
Policyholders are often surprised that all their different vehicles can be included on one policy, regardless of whether they are steam rollers, coaches,
one for trucks in excess of 10 tonnes, and so on. This again helps keep life simple and reduces the logistical load of arranging a good fleet policy. How your business behaves
Everyone knows that on a personal motor policy, factors such as engine size, age of driver, location of premises and whether the vehicle is garaged overnight are key factors in determining the cost of the premium. With fleet insurance, some of the factors are the same, eg, driver’s experience, vehicle type in addition to business/trade/activities/function and the use of the vehicles. If the SME also shows that it has a good, proactive level of risk management in place, then of course premiums will be cheaper. Typically, the style of risk management activity that will affect the premium value includes: • The level of driver training. Many SMEs are increasingly sending drivers on defensive driving training courses.
The irony is that while some SME owners and directors might be tempted to ‘cut corners’ when it comes to fleet insurance, the majority do not. Hi-Lux vans or sedans. The secret is that while the rates may vary, the policy itself does not. RSA’s Fatima El Issa, Senior Underwriting Manager, Motor Portfolio Analyst, comments that: “Since 1988, the UAE, for example, has something called the ‘Unified Motor Policy’; although its provisions have been updateda few times since then, the same document applies today. Of course, policies such as those provided by RSA are much wider than the minimum policy, but the same principle applies. If the policyholder wants to have a separate policy for each vehicle category or type of cover, though, we can respond accordingly.” What’s more, there’s one common premium rate for each category of the fleet, eg, one for saloon, one for 4x4s,
• Driver selection. Whether drivers are vetted prior to employment and their previous driving histories/experience known. • Whether drivers are working over-long hours and become subject to fatigue • The maintenance histories and condition of the vehicles: are tyres run bald, and is bodywork in urgent need of repair? • Use of communication systems and mobile phones. • Understanding the road dynamics of the UAE road system. • Knowledge of the Highway Code and relevant emergency procedures. The role of the site visit
Of course, taking care of the above agenda will also help break the cycle of 45
repeat claims - a typically characteristic of all too many fleet operations. For example, it’s likely that vehicles may suffer a large number of ‘shunt’ accidents, such as broken exhaust pipes, dented fenders, broken and chipped windscreens, and so on. If an insurers sees a long history of repeat claims of this type, a company representative may visit the SME’s site, advising on factors such as • Configuration of the car park. Are vehicles parked too close to one another and will a simple parking grid design help facilitate entry/exit? • Security of overnight parking. If there is a gated compound with security, adequate lighting and CCTV, of course the insurer will take a favourable view of the risks involved and price accordingly. • The existence (or not) of a driver training manual and accident/incident reporting log. Changes - and benefits for the SME
Fleet cover has become increasingly flexible and typically, more and more responsive to the needs of the SME policyholder. Over the last five years, the terms of cover have evolved to include elements such as: • Coverage in Oman for commercial vehicles • Emergency medical cover • Windscreen replacement without excess • ‘Loss of use’ compensation • Cross liability It should also be pointed out that the loss of drivers’ personal items is also covered (especially important in cases where a vehicle has a team of possible drivers) although there will be a set limit to the value of the payout, as defined in the terms of the policy. One of the real areas of innovation has been the advent of tracking systems and ‘telematics’. In terms of telematics, the technology now exists to install a ‘smart box’ that will monitor drivers’ driving habits for a period of three to six months - and the insurer can then 46
With a career spanning over 30 years across various leadership roles, David Harris brings with him a breadth of experience in general management, financial and commercial insight, and strategic leadership skills. In his current role as Sales & Marketing Director for RSA Insurance Middle East, David is responsible for developing sales and marketing strategies for Dubai and Bahrain. Commencing his career with Sedgwicks back in 1981, David grew up the ranks before moving on to dedicated account management at AA Commercial Insurance Brokers. Soon after, he joined Lloyds Bank Insurance Services as Business Development Manager working with the Commercial arm of the UK Retail Banking company. In 1993, David switched allegiances to The Royal Bank of Scotland as a manager responsible for the development of their sales culture throughout the London metropolitan area progressing to Retail Manager of four inner city branches including the flagship Threadneedle Street Branch. The lure of the Middle East pulled David to the Kingdom of Saudi Arabia in 1997 where he grew his experience as Corporate Manager for the National Company for Cooperative Insurance (NCCI). After three eventful years David and his family relocated to the UAE, where he led the Sales Development team at Goodhealth Worldwide (now called Aetna) and then as Managing Director of HSBC Insurance Brokers before joining the RSA Group in the Middle East. He currently resides in Dubai with his wife and is an avid sports enthusiast and a proud supporter of the Westham United Football Club. Travelling and reading are amongst his other interests outside the workplace.
If the SME shows that it has a good, proactive level of risk management in place, then of course premiums will be cheaper. revise the premium accordingly (eg, what are each driver’s braking/accelerating/ overtaking habits?). While this technology exists - and is likely to become a good deal more common in the next 18 months to two years - it should be noted that most commercial vehicles already include computer systems with the potential to release a huge body of data to the insurer. Whether the computer can in fact be ‘unlocked’ in this way depends on the manufacturer, the style of service centre and - of course - whether an agreement has been struck with the policyholder.
in terms of risk management - which as we have seen, can play a crucial role in reducing costs. In terms of claims-paying ability - which is, after all, the fundamental reason why an SME needs the protection of insurance - it’s always a good strategy to visit a qualified broker and ask what an insurer’s claims payment record is actually like. An insurer that pays claims correctly and in good time will (quite literally) help your business ‘stay on the road’, and save you valuable sums in the medium term. Remember: this saving might be crucial in terms of realising your vision for the business and in maintaining its Go to a reputable insurer favourable perception by customers and Needless to say, with the broad raft of public alike. Not to mention having the risks that an SME faces, if you are going to reassurance of a tried and tested insurer benefit from the protection of insurance, it pays to go to a reputable insurer. A large, whose alliance with your business is an invaluable boon to peace of mind and credible insurer will be able to offer a staff wellbeing. spectrum of ancillary services, especially
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