As Arab governments promote SMEs, small business owners should invest in a sound risk management strategy to ensure their resilience amid a challenging business environment.
With low oil prices continuing to take a toll on Arab economies, the GCC governments are stepping up efforts in launching and adapting significant policy initiatives to reduce dependence on oil. One positive consequence is transitioning from economies that are powered by the hydrocarbon sector and driven by large public sectors to ones that are private led is now a shared goal for policymakers in the GCC.
In April this year, Saudi Arabia issued its ambitious Vision 2030 which aims to increase the private sector’s contribution to 65% of GDP from 40%, and more specifically to raise SME contribution to GDP from 20% to 35%, allowing SMEs to play a more prominent role in its economic transformation. In June, Kuwait’s National Fund for SME Development launched the 136 Call Centre to address regulatory uncertainty and excessive time spent dealing with government regulations, which was identified by a World Bank survey as one of the major barriers to SME growth.
In the UAE, the government is giving priority to SMEs across policies and initiatives as they are seen as the chief enablers of economic diversification, innovation and the shift to a knowledge-based economy as targeted by the country’s Vision 2021. More recently, the UAE government loosened rules requiring bank guarantees for SMEs to help spur growth of that sector.
“Tick the box”
As SMEs play a significant part of the GCC economy, they also face business risks as large companies, which in the worst case can cause financial distress and lead to bankruptcy, hence a responsible risk management culture is just as critical. However, many SMEs in the region pay little attention to risk management and often do not consider the positive role that it can play in their organisation’s survival and growth.
SME clients do not consider insurance as a priority and do not recognise the importance of the risk management process “until there is an unfortunate event of a claim”, Ms Melina Argyriou, Head of SME for AIG MENA said. “In the UAE market a significant portion of SMEs is still not insured unless it is mandatory, ie, Free Zones.”
General observation in the UAE and the region shows many SMEs unfortunately do not recognise the importance of insurance, which can be attributed to many factors, but predominantly, a lack of awareness and education, said Mr Phil Ashkuri, Head of General Insurance, Nexus Group.
He said: “What we find in this part of the world is that many SME clients focus on what is required, as opposed to what is advisable. In other words, they simply want to be able to ‘tick the box’, so that they can renew their trade licences with the authorities.
“And in relation to compulsory lines, the customers generally look for the cheapest solution. In this environment, SMEs are concentrating entirely on how much – or little – they are actually paying, instead of the value they will be receiving should there be an emergency.”
Supporting this view, Ms Argyriou said a recent survey on SMEs conducted by AIG reveals these motivations – it is mandatory; it is a contractual obligation; and it provides security/protection – to buy an insurance policy.
“Is it a surprise that the essence of an insurance policy, security and protection, is not the primary motive when buying insurance? Probably not.”
Protection is paramount
Indeed, bringing up the topic of insurance and risk protection among SMEs often leads to a tepid response. In particular, many small business owners view having a dedicated in-house risk management function as an unnecessary expense, while others who believe it to be important may see it more as a luxury instead of a necessity.
With increasing business opportunities; risk exposure is becoming increasingly inevitable, said Ms Tasneem Lakdawalla, Partner, KPMG Lower Gulf. With developing the SME sector being one of the top priorities for the government, “it is essential that these companies have appropriate guidance on how to build businesses that are equipped to take on financial risks that come with growth”, she said.
Insurance is one of the most obvious tools that all companies, not just SMEs, have in order to manage risk, said Mr Justin Carroll, Al Tamimi & Co’s Senior Associate, Transport & Insurance. However, on both the individual and on the commercial level, the Middle East is still very underpenetrated by insurance.
“Either way, when a loss occurs, the SME that has taken out insurance cover for all aspects of its business – property, business interruption, third party liability, employer’s liability, worker’s compensation and directors and officers insurance – is the SME that will best be able to recover quickly and to resume its business activities.”
Mr Carroll added that the low penetration of insurance coverage has “real economic and social consequences because it means that losses are not evenly shared or spread across a range of risk carriers. As a result, as things currently stand in the GCC, large losses tend to affect one or two persons disproportionately, often wiping them out and removing them from the productive economy”.
By contrast, he noted that where insurance coverage is widespread and/or is required as a condition of engaging in commercial activity, a virtuous circle is created which allows losses to be more evenly distributed across the relevant stakeholders.
Knowing the risks
With today’s business climate filled with uncertainties and challenges, it is important for SMEs to identify the risks that their business could face, as well as to understand how exposed they are to potentially damaging claims that can not only affect their reputation but also lead to business closure.
Very often, risk comes in the form of a lack of diversification, Mr Carroll said, adding that an SME should try to have as much diversification – in its suppliers, in its customers and in its insurers – as possible.
“That way, if there is a problem occurs with one of them then ideally, it will not have a disproportionate effect on the other aspects of one’s business,” he said.
Financial management, product and service management and people management are the most prominent early risks that SMEs face, said Ms Lakdawalla. In light of new laws and regulations, businesses are increasingly aware of the need to create policies, programmes and controls in order to address these issues, she added.
A general insurance scheme that is typically taken by SMEs comprised three main components: property, public liability, and workers’ compensation, Mr Ashkuri noted. “Following this, each business needs to identify the risks specific to its industry and accordingly seek the appropriate cover. So, for example, an F&B business would have a different insurance plan than that of a manufacturing facility. The first would be more focused on covering risks in relation to perishable goods, while the latter would look more closely at equipment cover. Regardless, there are possible risks in every business, and identifying them and taking action is the only way to avoid serious financial repercussions should a disaster strike.”
He added that SMEs often have a tendency to underestimate the likelihood of these occurrences – fires, water damage, or glass breakage. “SMEs are optimists by nature and do not want to spend money purchasing cover for situations that they think are unlikely to occur. But when an emergency hits, there is usually a strong sentiment of regret when they have to face the often damaging financial repercussions.”
Business interruption (BI) cover is also a classic example of a product that SMEs should purchase, but often do not, said Mr Ashkuri. “In the case that a business suffers an adverse and external shock, it will stop generating revenue. Research from Zurich in 2013 shows that 80% of businesses that suffer such a shock fail – and that is even if they have some insurance. For SMEs without insurance, the impact can be detrimental.”
Beyond insurance
Mr Carroll pointed out that insurance coverage will rarely, if ever, make an insured company, whether the company is a large corporate or an SME, completely whole following a loss-causing event. All companies need to sit down and take a close look at their revenue, their cost of doing business and their insurance coverage.
It is important to remember that, following a devastating event like a fire or a building collapse, there will be a time lag between when a claim is made and when it is paid, he added. “SMEs need to have a contingency plan in place during the period in which an insurer is assessing the loss and is yet to pay out under the policy.
“A useful question that an SME might ask before selecting one insurer over another is whether, in the event that a claim for a covered loss is made, the insurer will make partial payments under the policy while adjusting the loss. Partial payments can go a long way to relieving some of the stress and uncertainty that an SME might be experiencing in the aftermath of a destructive loss.”
Apart from insurance, there are a number of measures that SMEs can take internally to reduce risk and liability, said Ms Lakdawalla. For example, defining a corporate governance structure is extremely important as it builds investor confidence and provides the business with assistance in maintaining an oversight on business functions.
In addition, she said managing liquidity provides a clearer picture of how much cash the organisation has access to before making investment decisions to minimise liquidity concerns if an investor pulls out, while managing credit risk is an ongoing assessment which creates an early warning system to ensure organisations are effectively managing their loan portfolio.
Education is key
Despite their risk exposure, insurance penetration among GCC SMEs is very low, estimated at less than 2% in 2013. According to another data available, SME insurance penetration in the UAE stood at around 15-20%.
Ms Argyriou said uninsured SMEs represent a high growth potential and AIG’s finding also implies that it is the responsibility of the insurance sector to continue investing on educating the SMEs and making sure that businesses are well aware of the relevant and required cover.
We must not forget that the UAE and the region is still a young and flourishing market compared to other mature markets, which have a longer business history, and as a result more experience and a well-established track record, said Mr Ashkuri. “But that is why both brokers and insurers should double up their efforts when it comes to educating SME owners about the importance of deploying risk management practices to protect their assets.”
He added: “Continuous education of SMEs on the benefits of insurance and its protective role is critical to reducing the number of uninsured businesses. Educating companies should be a community-wide effort – financial advisors must guide their clients, and providers have a responsibility of tailoring products that meet the requirements of the local market.”
Approaching SMEs with insurance solutions that are relevant to their business needs is crucial in building a ripe business partnership, Ms Argyriou suggested. “Insureds should be informed about risk management and insurance coverage, for example, with one multiline policy, critical insurance needs can be covered around three main pillars: people, assets, and profit.”
With many SMEs in the GCC still not insured or underinsured, the insurance industry can deepen SME insurance penetration by collaborating effectively to educate the market and offer risk management solutions.