How SMEs Can Manage their Risks with Insurance
Companies may be protected by insurance, but it is important to understand what kind will benefit stakeholders
Covid-19 has taught us to be prepared for the most unexpected challenges. The SME (Small and Medium Enterprises) sector is one of the major engines driving the Indian economy. According to a joint report by the Indian Government and other industry bodies, a total of 95 per cent of the total industrial units in the country is driven by SMEs, which are estimated to be around 42.50 million registered and unregistered companies. When the pandemic hit and industries across sectors struggled to function, the SME sector was severely affected due to the liquidity crunch. Realising the contribution of the sector to the economy, SMEs need to take insurance.
Why is insurance for SMEs important?
Cash flow: A crisis in cash flow or a liquidity crunch is one of the main concerns SMEs face while running a business. The business should have working capital to maintain operations, pay its employees and grow in the market. Any unforeseen financial risks are usually mitigated with insurance coverage. For instance, due to a dip in the economy if a factory is forced to close SME insurance can be of aid.
Risks caused by third parties: SMEs depend on third parties for their supply chain. Any interruption at the third party's end can cause a lot of trouble for small businesses. For example, if the stocks necessary for a manufacturing unit get stuck due to restrictions in the state borders, the company will face losses.
Loss from explosions, natural calamities, and riots: From unexpected events like water damage due to flood or risks such as a fire or loss of money, SMEs need to have something to fall back on during such unexpected situations.
The following list touches upon the most important covers that SMEs can benefit from:
Public Liability: It is a third-party cover that provides coverage for any actions of the company that result in death or injury, loss or damage of property or economic loss for a member of the society. It covers you if a client or member of the public claims they have been injured, or their property damaged, because of your business activities.
SFSP (Standard Fire and Standard Peril): Fire insurance covers damage to your property due to fire and other events like explosions, natural calamities, and riots. Recently IRDAI launched two policies - Bharat Laghu Udyam Suraksha meant for small industries up to 50 crores and Bharat Sookshma Udyam Suraksha for micro-industries up to 50 crores.
EEI (Electronic Equipment Insurance) and PEEI (Portable Electronic Equipment Insurance): EEI covers the damage or loss caused to your equipment like electronic appliances like servers, desktops, UPS, voltage stabilizers. On the other hand, PEEI covers the damage or loss caused to your portable equipment like laptops and tablets.
MBD (Machinery Breakdown Insurance): It provides cover for machinery used in factories and industries against breakdown. It also covers the cost of repairs or replacement of the damaged machine parts.
Workmen's Compensation: According to the Ministry of Labour’s Workmen's Compensation Act of India, this cover is mandatory for all employees. It protects the employer in case of death or bodily injuries caused to any employee due to an accident while on the job. This is a product that offers wage replacement and medical benefits to employees who get sick or injured due to a work-related cause.
Management Liability: It is comprehensive coverage for the company’s management comprising managers, directors, and officers against risks the company may face due to their decisions or acts. Management Liability is therefore an important consideration for any business owner, as it can help make sure if you do face allegations of mismanagement, you will have the financial capability to defend yourself in court, as well as pay compensation if required.
GMC (Group Medical Coverage): It is a medical health insurance plan that takes care of the hospitalisation expenses and other allied expenses for employees. The group policy also provides Covid coverage.
While one can protect the company with insurance coverage, it is important to know and understand the kind of coverage that will benefit the stakeholders. For instance, the kind of coverage that an independent professional need will be different from that of a medium-size manufacturing business. SME insurance is suitable for business owners with a few employees, even family businesses run by a sole proprietor, midsize or medium enterprises are organisations with 100 to 999 employees and even independent professionals like a medical practitioner with their own clinic or a teacher who also owns a coaching centre. Hence, before making a decision, one must evaluate factors like the nature of business, employee strength, location, and the like to be able to take the right insurance that provides good coverage.
The author is Appointed Actuary, Digit Insurance
DISCLAIMER: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.