Home' Trinidad and Tobago Guardian : June 8th 2017 Contents JUNE 8 • 2017 guardian.co.tt BUSINESS GUARDIAN
ENTREPRENOMICS | BG19
Why SMEs need insurance
Life insurance is like a parachute; if you don't
have it the first time you need it, there is no
Luis A Ortiz Haddock.
Insurance is quite an old innovation
even though many may think it is a
20th century phenomena.
The first record of an insurance
policy goes back to the Babylonia
times. On a Babylonian obelisk was
inscribed the Hammurabi Code and it allowed
a debtor relief if he suffered from disability,
death, flooding, etc.
There are basically two types of insurance:
general and long term.
General insurance applies to property (build-
ings, cars, stock and other physical assets) and
long term includes life insurance, annuities,
medical plans, etc.
Does an SME need both?
Being in business carries numerous risks.
While entrepreneurs love taking risks, it does
not mean they will take all types of risks. Risk
arises out of uncertainty and we all know that
the increased levels of change means more un-
certainty and therefore more risk.
There are two types of risks: speculative
With speculative risks a business can make
a profit or a loss. But with pure risks, there can
only be one outcome if a certain event takes
place, and that is a loss.
Entrepreneurs tend to focus their efforts on
the speculative risks, but pure risks, if ignored
can wreak havoc on the survival of a venture.
Business owners need to practice risk manage-
ment to deal with these threats. There are some
risks which can be reduced, others avoided and
some can be transferred to someone else.
I will focus on more risk transfer to an insur-
ance company. These companies are paid a fee
(premium) to take the risk of a business and in
the event of a covered peril, the insurance firm
will pay based on the terms of the contract.
The insurance principle works like this; a
large group of insurers pay premiums into
a pool and if a claim is made, the insured is
compensated. It is like gambling in a way (or
is it hedging?), you bet on an event (a negative
one unlike the lotto prize), if it happens you
reduce your loss.
Despite the many advantages of insurance,
generally individuals and businesses in T&T
are underinsured. How many times do we see
stories in the newspaper of homeowners who
lost their properties and cry out that all they
have is the clothes on their backs.
So, what are the reasons you should consid-
er insurance as part of your risk management
When an entrepreneur starts a business, it's
not just for profit, but more to achieve a dream
and building a legacy. In a couple of minutes a
generation old business that was supposed to
be handed down goes up in smoke or destroyed
by strong winds. Entrepreneurs, at times, tend
to underestimate the risks involved in business
and they think if they spend money on insur-
ance, then less is available to grow the business.
But smart entrepreneurs know that a suc-
cessful business model comprises not only
of the revenue and cost components but has
an aspect of risk management in it. We saw
recently that British Airways had to cancel
all flights out of London apparently because
a power surge disrupted its IT systems. Think
about how much revenue was lost and the cost
incurred (to the brand). But sometimes this
is an entrepreneur's blind spot. If you sell in-
surance services, you can nail the reluctant
If you worked hard to build a successful busi-
ness, the obvious thing to do is to protect it and
your successors will have some inheritance and
they will love you for it.
2. Removing of fear
There is a psychological aspect of insurance.
If you always had to worry about employee
theft, fires, earthquakes, flooding, and other
things that can interrupt the business, can you
as an entrepreneur focus on your functions as
a business owner?
We all know fear and worry can affect a per-
son's ability to process information and make
decisions. This load can cause a business own-
er to lose an opportunity all because she was
preoccupied by fear.
3. Key person insurance
The core competence of any business comes
down to its knowledge and information it
possesses. The innovative genius of an en-
trepreneur is probably its future competitive
advantage. If this person(s) were to die or be-
come disabled, it is very likely the business
operations will be interrupted. Key person
insurance offers compensation for this loss.
While you might argue that if the founder of
the organisation dies and the insurance pays
the claim of the sum insured of $10 million, the
business still has to do without that person?
Insurance is not like Dr Frankenstein, it can-
not bring back the dead, but money can make
a difference, however.
If a business insures a key person and makes
a claim, the money is available to pay off debts,
hire a suitable replacement, use the funds to
train a successor, restructure the company or
pay off the shareholders of the deceased. The
last point is important, as in a family business
the shareholders of the deceased may not want
to own part of the business and so the firm will
not be burdened by a huge payout.
4. Nest egg
Most entrepreneurs I know mix their busi-
ness funds with their retirement money. There
is a real danger that if the business collapses
at age 60, what does a potential retiree do?
Insurance companies and banks sell annui-
ties and pension plans, while these are techni-
cally not insurance products, they offer a steady
stream of income over the remaining life of the
entrepreneur. While an entrepreneur can still
benefit from the dividends, an annuity is his
backup plan, if the business fails.
5. Health issues
One of the drawbacks of entrepreneurship
is the long hours and stress. It is quite possible
an entrepreneur could fall sick and a medical
plan can offset most of the expenses. If an SME
has a group medical plan, it can give it an HR
advantage over similar firms, as many workers
do value this benefit. In any case, how nice it
would be that a founder can show she cares
about her employees, by having a health plan
with a life insurance attached to it.
6. Disability, critical sickness
Sometimes the entrepreneur or any of his
family members working in the business may
suffer from an accident or disability arising
out of a sickness. Accidental injury could be
long term if it leads to loss of limbs or senses
or it could be short term that might make the
business owner unable to carry on.
Critical illness is any dread disease that could
include heart disease, strokes, cancer, loss of
vital organs, etc that requires a major medi-
cal intervention. This can be a nice top up to
your medical plan and there may be some extra
funds from the critical illness policy that could
be saved for any future recurrence.
Sajjad Hamid is an SME & family business
adviser. He can be contacted via email:
email@example.com or website:
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