The strategic value of business insurance in uncertain times

Businesses cannot afford not to have insurance cover.

Businesses cannot afford not to have insurance cover.

Published Dec 1, 2023


By: Khensane Mangwane, Alex Skhakhane

In tough economic conditions like the present, businesses may be tempted to forgo business insurance or reduce their coverage as a cost-cutting exercise. This, however, may be a short-sighted approach, given that the main purpose of insurance is to protect natural or juristic persons against the consequences of the manifestation of undesirable risks. How businesses across the country were affected by lockdown regulations during the Covid-19 pandemic, as well as by the torrential flooding throughout parts of KwaZulu-Natal in 2022, are two prime examples of the need to take a proactive stance on risk mitigation.

Businesses cannot afford not to have insurance cover. Commercial insurance is often seen as a grudge purchase when it is an investment into the financial security of a business.

The landscape of risk has changed drastically over the past few years. When we consider factors such as policy reform, certain legal developments, mounting economic pressures, environmental issues, and the pitfalls of doing business in the digital age, it’s difficult to deny that what we think of as ‘business as usual’ is in fact, risky business.

Risk and the ripple effect

An untimely event, such as a natural disaster or a third-party liability claim for personal injury or damage to property, could have a devastating impact on a business’s bottom line. If a business is faced with such an event and does not have an adequate level of insurance coverage, recovering from these losses out of pocket could hamper growth prospects, and may even lead to a complete shutdown.

However, beyond the immediate cost implications of unfortunate events, there are also other consequences to consider. For example, if a product defect results in physical injury to a customer, that customer may have valid legal grounds to pursue a lawsuit against the company. In these situations, a company may struggle to shoulder the financial burden of legal fees, which can add up quickly.

Beyond this, however, there is also the possibility of reputational damage. Social media and review sites have made it infinitely easier for disgruntled parties to air their sentiments about businesses in open, public forums.

News about faulty products, for example, can travel fast and cause a substantial disruption to sales volumes and sustained profits. Reputational risk is therefore something that needs to be factored in when businesses are planning.

Balance cost control and loss protection

These are undeniably tough times for businesses across the country, with the results of the economic downturn spilling over into multiple sectors. Insurance cover can, however, assist businesses in defending their profit margins and revenue against new and emerging risks. By bolstering insurance coverage with processes and policies to do as much as possible to prevent costly errors, businesses can combat risk internally as well as externally.

Setting an insurance limit, for example, is one way of doing this. An insurance limit is the maximum amount for which a business is indemnified and that can be claimed, in the event of a loss. By working with a broker to set a reasonable limit, businesses, can save on the cost of their premium while ensuring that they still have sufficient protection against risk.

Once this limit has been set, businesses still need to take reasonable precautions to protect their property, assets, and operations from potential losses.

Risk management involves both protection – provided by insurers – as well as responsibilities placed by the insured to prevent unnecessary losses and claims.

Change is the only constant

It’s also important for businesses to realise that insurance is not a once-off purchase or a static financial safeguard. Rather, it should be regarded as a dynamic financial product that should be updated as a business grows and evolves. With the acquisition of new property, equipment, vehicles, and physical assets, comes higher risk exposures. Likewise, employing more staff members or expanding into a new geographical territory or product or service offering, can come with a new set of liabilities.

For this reason, business owners should develop close relationships with their brokers. They are in the best position to offer expert advice on guidance, on how to ensure that all bases are covered, but at the same time, ensure that insurance policies are tailored, in the most cost-effective and comprehensive way possible.

Prudent business leaders don’t only think of their immediate challenges but use foresight to predict and prepare for what may lie ahead. Insurance is one of the most effective ways of ensuring that a temporary setback doesn’t become a major stumbling block.

* Khensane Mangwane and Alex Skhakhane are claims specialists at SHA Risk Specialists.