Unknown unknowns

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Small businesses do not have the time to manage their risks, and insurers and brokers do not have the resources to do it for them. For now, it seems they will have to face the dangers in the dark, writes Marcus Alcock

Seasons change and cycles come and go but one thing remains constant in this world: the UK insurance industry's love of the small to medium-sized enterprise sector. Read the press and you might sometimes wonder if, in fact, anything else matters to insurance companies and brokers.

So perhaps it is hardly surprising that, in such an intensely competitive arena, increasing effort is put into the ways in which each company can differentiate itself from its competitors. One of the main ways insurers attempt to do this is to stress the value of a rounded service beyond the price of the product, particularly with regard to risk management.

In an increasingly regulated and litigious business environment, so the sales pitch goes, a decent insurer or broker can offer small businesses a service that can manage the risks they face appropriately and take some of the strain out of the process but just how does the industry really measure up in practice? Is there any substance beyond the rhetoric?

According to Brian Kerry, branch manager at insurance broker Towry Law, despite what some underwriters would have us believe, not all small businesses will receive the same level of service when it comes to advice on risk management. He does not blame the industry for this, however, but instead says that it merely reflects the commercial reality of dealing with such a diverse customer base.

"It's mainly about cost-effectiveness," he says. "The difficulty with the SME sector is that it's so broad. Corner shops, for instance, aren't going to get a visit from someone because it's simply not cost-effective. So with the smaller companies out there it's more a matter of common sense and adopting a culture of risk management."

Onsite visits

He goes even further, suggesting that even for the bigger companies that may well receive onsite visits, the benefits are not all they are cracked up to be: "There won't be any insurers that give specific discounts for doing specific things to improve risk management but at least if you're a bigger outfit you will have the ability to employ someone full-time to look after risk management. The problem lies at the bottom end of the market but from a broker's point of view it's all about presenting the best case to an underwriter in order to get the best terms, regardless of the size of the business, and, of course, risk management comes in useful there."

It is not only in terms of presentation to underwriters that risk management comes in handy, explains Kevin Pallett, managing director at underwriting agency Fusion, who believes that decent risk management advice can be found.

"I think help is increasingly being offered when it comes to risk management," he comments. "Basically there are two ways you can compete for the business - either you offer a cheaper quote or you offer something different. So for the insurer or broker, often the only option is to show that they can provide added value. And there's a need for simple advice on areas such as basic health and safety issues, or employment issues, just because there's an increasing amount of red tape out there. So from where we sit we provide a huge amount of support to brokers."

Although he believes that some good advice is being given out, Mr Pallett nevertheless concedes that this does not necessarily apply to all small businesses; some outfits are simply left out in the cold. The solution, he suggests, if the industry is really serious about proper risk management advice, is to charge for it: "At the smaller end people will try and deal with risk management issues over telephone but that's simply the wrong approach. What we should do is say to the client 'I'll charge you a reasonable fee for the service' but the problem is that where no specific advice is provided it all gets standardised instead - particularly if the policyholder has a loss and had business interruption cover, for example, and finds that the cover they had taken out won't actually have an extension for their major suppliers."

Naturally, insurers are keen to defend themselves from the accusation that what they say about risk management sounds good but actually translates into very little. Andrew Miller, manager for risk control surveyors at Allianz Cornhill, says the way forward for risk management for this sector - which the company defines as any business with a turnover under £4m - is through the online route: "We see in the future the online solution will become more popular, though we appreciate that not everyone wants to play on a computer."

Advice and help

As such, he outlines, Allianz Cornhill has invested in a new online guide to provide risk management for the SME sector. "We tend to say 'here are tips on how to run a safer business' because it's difficult to get the balance right. If you put too much information into the online service, they're not going to read it. What we want to do is say to the client: 'We're here to give you good advice and to help with your business'."

Is such advice necessarily required by the small businesses themselves? In Mr Miller's eyes, the answer is definitely yes, though he also admits that to some extent the website also serves as a useful marketing tool. "People are genuinely concerned that they don't have the time these days to attend to risk management," he comments. "The Health and Safety Act has been out since 1974 and people understand that they have to comply with its requirements but they simply don't have the time. And for many SMEs, spending time filling in lots of forms is simply a pain in the neck.

"What we try to do is make a technical subject easy to understand. So we are providing a step-by-step guide, which enables SMEs to do a risk assessment online. Of course, having conducted that assessment, if they want to take things further they can. If they want help we also have a preferred supplier scheme."

Insurer Groupama has a similar threshold for SMEs to Allianz Cornhill, which it says constitute companies with a turnover below £4m or up to 75 employees. According to Malcolm Smith, commercial underwriting manager, an increasing number of SMEs are interested in risk management, which is positive.

In his opinion, it is grossly unfair to suggest that insurers do not put their words into practice; however, he points out that Groupama actually provides a physical service: "We still survey many of the risks we insure, and any policyholder paying in excess of £1500 premium will have a survey conducted every three to five years, depending on the type of risks involved and the trade they are in. But to have a visit from a surveyor is costly and it's not always economically viable to fund such a visit out of the premium that a company is paying."

This is where, he suggests, the role of the broker can be key: "A lot of brokers are able to do this themselves or subcontract risk management to specialists, though again the issue is cost."

For those policyholders who do not qualify for an onsite visit, Mr Smith says that Groupama provides guides to risk management - a series of booklets up to 30 pages long, which focuses on a number of areas, including health and safety, property protection and fire protection. "We also have a step-by-step guide to risk management that we offer to professionals," he adds.

The price of peace of mind

As much as underwriters might come in for criticism when it comes to risk management advice to their policyholders, however, it would appear that some brokers are also falling short, especially in the current trading environment.

According to one senior underwriter who spoke to Post Magazine, at the moment national brokers are desperate to increase their turnover by whatever means they can to compensate for the revenue lost as a result of ending contingent commissions. In this regard, he bluntly states: "Some of the national brokers are merely using the pretext of providing risk management advice as a backdoor way to augment their fees."

Yet such criticism appears to be a little harsh. After all, surely one of the roles of the broker is to provide SMEs with exactly the sort of added-value service that encompasses precisely the sort of risk management advice that the industry is so keen on promoting? And if such a consultancy does cost a fee, at least - so the theory goes - the insured understands exactly what they are paying for.

However much one might want to criticise the insurance industry itself, perhaps in the final analysis much of the problem with regard to this area might simply be as a result of the attitude adopted by small businesses themselves.

Risk profile

According to recent research by the Institute of Chartered Accountants in England and Wales, SMEs are only discussing how to handle general business risk once a year. The findings of its survey of UK small businesses showed that 27% of respondents discussed the general risk profile of the business only annually or less often, and 19% discussed specific risks annually or less often. Such results would seem to indicate an alarming degree of apathy in the sector towards a subject, which could, after all, affect the very future of their business.

Despite the poor attitude found by the ICAEW, there are nonetheless encouraging signs for the insurance industry, with expenditure on risk management - including the costs of insurance, management and staff time, security and internal and external audits - found to be an average of £44,000 per year at the small end of the spectrum. For medium-sized businesses the average spend is substantially higher at £150,000.

And according to Clive Lewis, head of SME issues at the ICAEW, spending on risk management is expected to rise over the next two years, with businesses apparently now more aware than ever of the potential risks that can affect them.

Unfortunately, however, despite what external bodies predict and what the insurance industry itself would like, there appears to be little real evidence for the time being that risk management really will become a serious issue for the SME sector, especially at the smaller end. And until it becomes cost-effective for insurers and brokers to provide a more tailored service to smaller outfits, this situation looks unlikely to change.

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