Risks facing businesses today and what this means for insurance

The private sector plays an important role in the South African economy, contributing significantly to Gross Domestic Product (GDP) and employment. Small- and medium-sized enterprises (SMEs) alone contribute 38% to GDP¹ and employ 60% of the labour force². However, businesses continue to face high failure rates due to the natural challenges in business ownership as well as the evolving business landscape. Unfortunately, South Africa has one of the highest failure rates of new SMEs in the world – estimated at 75%³.

Globally, there have been structural changes in the business environment due to factors such as technology evolution, and the changing economic and social landscape. These changes have caused companies to shift their source of value from tangible to intangible assets. Intangible assets have grown from 17% in 1975 to 87% of total value in 2015⁴.

The increasing importance of cyber security

The growth in the value of intangible assets introduces new risks for businesses. These include cyber risks, reputational risks, social media liability and business interruption due to non-physical damage losses.

Cyber crime is the number one risk facing South African businesses⁵. Over R2.2 billion is lost to internet fraud and phishing attacks in South Africa every year⁶. This emphasises the need for cyber insurance, yet 65% of companies still do not have cyber security⁷ and remain highly exposed.

Social media blunders have cost South African companies more than R750 million since 2016⁸. With 29 million internet users and 13 million mobile users⁹ in South Africa alone, a social media post can quickly escalate into a crisis. Research shows that 23% of businesses fail to recover their share price following such a crisis¹⁰.

Business interruption on the rise

All of these risks can also lead to business interruption. Business interruption is one of the main risks facing businesses, with 42% of respondents in one survey naming business interruption the greatest risk faced by companies today¹¹. Despite this, traditional business interruption cover is often dependent on material damage to property. However, 88% of business interruption losses originate from technical or human error¹², so these would not necessarily be covered under a traditional business insurance contract.

Business interruption can also result from damage to business vehicles which are key assets for many businesses. In a country such as South Africa, with a high vehicle accident rate, businesses need to invest in fleet management systems and ensure their drivers are driving responsibly. Poor driving not only costs employees’ lives, but it also increases fuel consumption by an average of 15%¹³. Furthermore, research shows that more than 90% of vehicle fatalities occur because of driver behavour¹⁴.

Increasing value of commercial insurance and how brokers can help grow the market

Despite this increase in risk, 50% of small businesses still do not have insurance because they think they are covered under their personal policy, or that insurance is too complicated or too expensive¹⁵. This is where the expertise of brokers are needed. Brokers can help clients understand why they need insurance, what they are covered for and how to tailor their insurance policy to suit their specific business needs.

The global market for commercial insurance products (excluding life insurance) is growing, increasing by 50% from 2010 to 2018¹⁶. The South African commercial insurance market is sizeable at R42 billion Gross Written Premium (GWP) as at 2016¹⁷, however this scratches the surface of business assets in the South African economy which remain uninsured. There is a real opportunity for the broker today to see higher success in commercial insurance penetration, and to do this brokers need to:

1. Undergo relevant training to understand emerging business risks
2. Offer solutions that comprehensively cover their clients’ needs
3. Employ effective tools to help clients understand the products being offered.

Brokers are more successful when they partner with insurers that enable them to be effective risk coaches, and who provide the necessary support, infrastructure and products that are relevant to current, modern-day risk exposures.

Discovery Business Insurance offers some of the widest range in standard multi-peril insurance cover as well as expanded cover for the business risks of today. They also provide online training tools for brokers. In addition to this, Discovery Business Insurance gives brokers and clients access to risk assessment tools and an online fleet portal at no extra cost.

Article by: Darryl Grater – Executive Head: Coastal Regions at Discovery Insure

Sources

1. SA SME Fund
2. http://www.banking.org.za/what-we-do/sme/sme-enterprise
3. http://parttimefd.co.za/blog/2017/09/12/5-biggest-reasons-small-businesses-fail/
4. http://institute.swissre.com/research/library/sigma_5_2017_en.html
5. Allianz Risk Barometer 2018
6. http://www.africanbusinessreview.co.za/technology/2585/Cyber-crime-in-South-Africa-top-of-the-agenda-for-CFOs
7. https://southafrica.moorestephens.com/news/december-2017/more-than-32-of-sa-companies-affected-by-cybercri
8. https://www.moneyweb.co.za/news/tech/social-media-considerations-for-companies
9. https://qwertydigital.co.za/wp-content/uploads/2017/08/Digital-Statistics-in-South-Africa-2017-Report.pdf
10. https://www.businesslive.co.za/bd/opinion/2017-01-24-counting-the-cost-of-the-different-ways-companies-respond-to-crises
11. http://www.businessinsurance.com/article/20180116/NEWS06/912318506/Business-interruption-tops-list-of-commercial-risk-exposures-Allianz/
12. https://www.fanews.co.za/article/short-term-insurance/15/general/1217/business-interruption-from-a-global-perspective/19924
13. http://www.infrastructurene.ws/2017/07/16/how-driver-behaviour-can-impact-your-business
14. Bob Joop Goos, Chairman of the International Organisation for Road Accident Prevention, April 2011
15. https://www.insurancebusinessmag.com/ca/news/breaking-news/brokers%E2%80%93make-insurance-easy-for-small-business-owners-83858.aspx
16. Finaccord Global Commercial Non-Life Insurance: Size, Segmentation and Forecast for the Worldwide Market
17. FSB Results 2016