Rising business costs and increased domestic competition, coupled with regional trade market turbulence, all pose challenges to SMEs turning a profit
Pic By TMR File
It SHOULD come as no surprise that small and medium enterprises (SMEs) face increasing cost pressures amid a slowing economy. In August, Bank Negara Malaysia had revised downwards the country’s full-year GDP growth for 2018 to 5% from 5.5%-6%.
Rising business costs and increased domestic competition, coupled with regional trade market turbulence, all pose challenges to SMEs turning a profit.
As a result, entrepreneurs tend to deprioritise insurance and risk management, exposing the business to unforeseen financial losses arising from incidences such as fire, flood or theft.
A look into AIG Malaysia Insurance Bhd’s statistics shows a clear trend of underinsurance as a vast majority of policyholders do not increase the value of sum insured annually, despite rising inflation and appreciation of assets over time.
While being without insurance is a poor form of managing business risks, being underinsured can be equally risky as many policyholders assume, wrongly, that an existing policy will provide adequate protection indefinitely.
Fire is Top Risk
Based on data gathered by AIG, over 85% of SMEs are exposed to business interruptions from fire or property damage as they are not adequately covered. In 2017, the Malaysian Fire and Rescue Department recorded RM5.2 billion in losses from fire nationwide, an increase from RM2.9 billion recorded in the previous year.
Claims data from AIG shows fire risk is the most significant risk for SMEs in Malaysia, accounting for a majority of SME claims in the last three years. Fire losses also increased year-on-year (YoY) in 2017 in both claims count and claims amount.
Despite these alarming figures, only close to 15% chose to buy business interruption insurance, also commonly known as consequential loss cover. This covers SMEs against loss of profit or revenue as a result of interruptions to operation due to fire or any other insured perils.
Floods, Burglary Concerns
Over the years, heavy downpour and unpredictable flooding have emerged as a growing risk for SMEs. The Ministry of International Trade and Industry reported that the harrowing Kelantan floods in 2014 affected over 13,000 SMEs, approximately 37.7% of all SMEs in the state. The Rural and Regional Development Ministry also reported that the 2017 floods cost the state more than RM30 million in damages.
In the Penang flood last year, close to 2,000 victims were evacuated. AIG SME was able to assist with 34 claims at an estimated reserve of RM2 million, proactively responding with interim payments of up to RM20,000 to some of the most affected policyholders within four days after notification.
Ominously, the Malaysian Meteorological Department expects the North-East monsoon to last until March next year, thus increasing the risk of flash floods in states like Kelantan, Terengganu, Pahang, Johor, Sabah and Sarawak.
With only close to 15% of insured policyholders having purchased flood cover, the low take-up rate raises concerns on whether SMEs fully comprehend the risk and consequences of natural disasters to their business continuity.
Burglary, or theft, is also a common insurance business claim. In the last three years, 15% of total SME claims were for burglary. This common theft can be detrimental to businesses — interrupting business operations and cashflow.
Insurance for burglary and robbery provides businesses round-the-clock coverage against thefts of goods and all properly locked and secured assets within the insured premises.
AIG forecasts that the greatest risks SMEs in Malaysia will face in the next 12 months are from damage to property and equipment. Last year alone, SMEs have made claims in excess of RM8.1 million from AIG and future claims are expected to persist on a higher range.
In the face of these increasing business risks, SMEs require a suitable packaged insurance policy that will protect their assets, liabilities and employees from the risks associated with operating a business.
One of the ways AIG is able to respond quickly to SMEs and provide superior service is due to its electronic platform, Transact, which allows seamless solutions including swift quotations and underwriting advice.
As traditional risks persist, and new risks emerge, SMEs need to understand that adequate insurance protection is the hallmark of any good business operation.
Krishna Moorthi Sri Ramalu is the SME head of AIG Malaysia Insurance Bhd. The views expressed are of the writer and do not necessarily reflect the stand of the newspaper’s owners and editorial board.