03 November 2014


Businesses of all sizes face a wide variety of risks every day. Some of these risks may be trivial, while others have the potential to close down the business. A key skill is therefore the ability to find a way of mitigating these critical risks. As Mark Hussain, Global Head of Commercial Insurance & Investments at HSBC explains, it may not be feasible to completely neutralise all these risks, but it is possible to devise a strategy that reduces them to a level acceptable to the individual business.

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The risks businesses have to manage today are extremely diverse, but most can be categorised under four main headings: business continuity, financial, trade and personnel.

Business continuity risk

Business continuity is about keeping the lights on. If some kind of disaster strikes, the business can continue to function, while any disruption is kept to a minimum. This requires the development of a viable business continuity plan backed by suitable insurance. However, any insurance has to cover more than just the physical damage caused by a disaster. Insurance for buildings and stock alone is not sufficient to ensure the survival of the business. It must be accompanied by cover for business disruption, such as lost production and sales, if it is to play its full part in a business continuity plan.

For some businesses, there may be more specific risks that are critical. In certain manufacturing firms, a particular piece of plant or machinery may be vital to the viability of the business. If it breaks down, all other production may also be disrupted. The cause of such breakdown may not even be a natural disaster, but perhaps just an operator error, but whatever the cause, some form of suitable insurance will be essential.

Manufacturing businesses also need to protect themselves against the potential costs and disruption caused by product liability claims. A single large product liability case can result in a closure of a business just as easily as a major fire or flood.

Effective business continuity planning also needs to cover the risks associated with key personnel. The loss of a key staff member with vital skills or client relationships through critical illness or death can have a severe impact on a business. Other staff members may be unable to step into the gap and customers may quickly lose confidence if a suitable replacement cannot be found immediately.

Financial risk

The key personnel aspect of business continuity risk is also an important aspect of financial risk. At the most basic level, the loss of a key person needs to be covered to provide sufficient funds to maintain daily operations, plus the recruitment of a replacement.

However, this does not automatically include cover for any outstanding borrowing the business may have. In an already stressful situation, where revenues will probably suffer some impact, other personnel will not want the additional concerns of meeting lending repayments. A related issue is how a smooth and successful business succession can be ensured.

Trade risk

Small and mid-sized companies are now far more active in international trade than previously. Apart from the more general opportunities of international trade, a significant driver of this internationalisation has been the economic aftermath of 2008 in many Western markets. Businesses in these markets have realised that their weak domestic economies do not provide worthwhile growth opportunities and so they are looking internationally (especially to emerging markets) to find these.

The downside to this search for growth is trade risk. Businesses will find themselves dealing with customers in remote locations, with unfamiliar civil law and business practices. Under these circumstances, dealing with slow paying or defaulting customers can be extremely challenging. A single major international credit incident can inflict terminal damage on a business.

Apart from the financial trade risks of trading globally, there also the risks associated with making deliveries over long distances. A domestic delivery of a hundred miles is one thing, but an international delivery over thousands of miles is quite another. Goods lost or damaged at sea are not just a risk because of the immediate financial loss, they also have important risk implications for customer relations and commercial reputation.

Personnel risk

In addition to the impact of the death or critical illness of a key employee mentioned earlier, there is also the risk associated with such an employee simply leaving the business to work elsewhere. In the worst case scenario they may leave to join a direct competitor, but even if this isn't the case, the financial impact can be considerable. The departing employee will probably be under-productive while searching for a new job, there will be costs incurred for temporary cover for the employee, and any replacement will not be fully productive until they fully learn their new role. Plus there will be the costs of the recruiting process for a replacement. One popular metric for this scenario is that the departure of a key employee costs the business between one and two times the leaving employee’s salary. [1]

Then there are the social costs of a key employee leaving. An employee of this stature may have developed important collaborative networks within the business that facilitate its efficient operation, especially among departments. If the employee had a client-facing role, there is also the risk that customer relationships and sales will be affected - especially if they join a direct competitor.

Conclusion: solutions

The good news is that the risks in many of these areas can be mitigated through various forms of insurance. In the case of business continuity, the various types of risk can be insured individually, but for some businesses it may be possible to cover all the relevant risks with a packaged commercial insurance policy. For financial risks, life and major illness insurance can cover key personnel, while borrowing can be insured through loan protection cover. Trade risks can be mitigated with a number of solutions, including trade credit insurance, while cargo risks can be covered with marine cargo insurance. Providing a competitive employee benefits package that includes such items as healthcare, pension scheme and group life cover can help businesses to retain key personnel.

However, while insurance cover is a potential solution, it is only a solution when it is matched with the individual priorities and needs of a business. An ideal insurance solution for one business may be inappropriate for another. This makes it absolutely essential to conduct thorough due diligence when tailoring insurance to fit a business's financial flows, activities and long term goals.


[1] "Investing in People: Financial Impact of Human Resource Initiatives", Cascio and Boudreau, 2008

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