Keeping up with risk

Risk management was once a specialist niche open only to the privileged domain of big corporate companies. But that has all changed. Today, SMEs are acknowledged as needing the same type of risk management advice, and arguably more, than their larger counterparts.

One major development in this field came recently from Airmic, which set up a company to promote understanding of risk management among SMEs and the wider business community. Called Risk Publishing Online, it builds on Prorim, the e-learning risk management course for SMEs, pioneered by Airmic and backed by the EU.

It has been two years in the making, with co-operation between risk management associations in France, Germany, Italy and the UK, under the umbrella of the Federation of European Risk Management Associations (Ferma).

David Gamble, Airmic's executive director, will lead the new enterprise. He says: "There are 23 million SMEs throughout Europe, so it is a very large market. What we are looking at here are five key areas: strategy, sales and marketing, finance, human resources and business continuity."

Gamble makes the point that those who run SMEs are usually good risk managers. "That is why they are in business, and stay in ' ' business. What we are doing is helping SMEs deal with their risks and prioritise what is most important and the biggest threat to their business. They can then deal with everything in a strategic order of priority."

And SMEs face a comprehensive list of priorities. Gamble says the biggest threat is cash flow. "Many a SME manager has been kept awake at night worrying about ensuring everything is paid out on time, and we supply important advice on this."

For Gamble, brokers also have a huge part to play in the whole SME risk management debate. "Brokers have an important role in helping SMEs know their risks and understanding how they can deal with, and prioritise those risks.

"The benefit for brokers is that they can act as resellers of the Risk Publishing learning course."

If recent research is evidence of the plight of SMEs, they do face a tough existence. According to a Hiscox survey, risk management is an increasing concern for SMEs. The insurer's report indicates 59% of SMEs are spending more time on risk management, while more than half of office-based SMEs expressed concern about possible legal action. 70% of SMEs are worried about the rise of a 'no win, no fee' culture.

"The SME sector is under considerable pressure, whether dealing with rising energy costs, fighting its way through business taxation rules or interpreting the myriad of government regulations they now face," says Gary Head, professions underwriting director at Hiscox.

But hasn't this always been the case for SMEs? "I think it has," concedes Head. "But the world is becoming a more competitive place, so SMEs have to run faster just to keep up."

IIB director general Andrew Paddick agrees: "There is no doubt whatsoever, that today's SMEs face far more business risks than what were once the traditional insurance perils.

"A fully integrated risk management and transfer programme is now absolutely essential for every business that intends to stay in business. This needs to include appropriate professional support, in order to comply with the plethora of laws that are churned out of both Westminster and Brussels at an alarming rate which SMEs cannot keep abreast of and interpret on their own."

Challenging landscape
For Mike Timmons, head of underwriting at DAS Legal Expenses, the changing legal landscape poses huge problems for SMEs. "Without professional assistance, smaller companies cannot be expected to keep pace with the constant barrage of regulation and law.

"Employment law is one of the most rapidly changing areas of law, so we include either a comprehensive online audit of a firm's current employment practices, with in-depth reviews from our specialists, or a site investigation as a prerequisite for our employment practices legal protection."

Following on from this, one big worry is the threat posed by the so-called compensation culture, says Head. "The continued growth in the UK's compensation culture is very much evident in our findings, which show that a majority of SMEs are rightly worried about legal claims, both spurious and real."

D&0 cover
Of course, with a rise in risks, real or perceived, comes more policy opportunities, which means more potential honey in the insurers' and brokers' pots. And one issue brokers should be up to speed on is that more SMEs are purchasing directors' and officers' (D&O) cover.

According to an AIG Europe (UK) report, the percentage of SMEs buying D&O policies has almost tripled in the past five years, from 19.8% to 58%. Issues faced by SMEs include: actions leading to disqualification; losses out of actions against companies; and actions against an estate or a retired director

David Woolard, UK corporate account manager, financial lines at AIG, says: "While there has been a great deal of attention paid to the risks facing quoted companies, in terms of shareholder actions, the managements of SMEs face a range of issues for which they need comprehensive and robust cover, that is broad enough to encompass the existing and emerging risks that they face and has both the financial security and expert support they need, if action were taken against them."

When looked at from this perspective, the possibilities for actions are wide and varied. Stuart Quinlan, underwriting director of Novae Insurance, confirms that he has seen a rise in this cover. "We have seen a rise in the interest and opportunities offered by D&O cover at the SME level and brokers are playing a part in that."

And from a buyer's perspective, he says D&O is relatively cheap. "All round D&O cover can be bought for less that £1,000 and that will provide cover worth about half a million pounds."

But Woolard warns that brokers should be aware that quality SME D&O cover is essential. "There is plenty of cheap D&O cover out there which may not cover wide enough areas, such as entity cover, but often directors don't realise these aren't included," he says.

And for Andrew Miller, manager of surveyors risk control at Allianz Cornhill, time is the major issue for SMEs.

"SMEs have to manage their time, manage all the potential business risks and also run their business effectively. There is no doubt that SMEs need advice to take away the strain on their time. They need help with tax and national insurance as well as other issues. Brokers have a major role here to advise them fully."

But Miller notes that today local areas are not necessarily made up of corner shops, but franchises of well-know brands like Tesco Express, and other supermarket chains. "The new challenge is to deal with these chains who are slowly replacing retailers." Does this offer opportunity or limits to a broker's book of business?

Shifting landscape
Within this shifting SME landscape some brokers are rising to the challenge. "Brokers for the SME market are finding strength in doing something bigger through networks and here they can offer something extra," says Kevin Pallet, managing director at SME specialist insurer Fusion.

"And SMEs clearly say that they want to be made aware of their responsibilities and offered simple and pragmatic solutions by their brokers. Helping them understand what is relevant from the raft of legislation and keeping them up-to-date with changes in the law is imperative."

SMEs want help and advice – with employment law top of the list, says Pallet. "So meeting their need for advice is a fantastic opportunity for brokers to differentiate themselves from those who merely compete on price." But he adds: "For some brokers, as far as risk management is concerned they have some way to go."

For Quinlan, it is down to education. "SMEs and risk management is something brokers are battling with," he says. "There is an education process taking place with seminars on the issue undertaken by local institutes. Brokers are pooling their knowledge with affinity and network arrangements. It is an issue brokers are aware of and doing something about."

But Gary Head from Hiscox gives a different perspective. "Brokers are capable of giving advice to their SME clients and they are doing that. It is whether SME companies have the culture to deal with it effectively.

"Many take the advice and outsource the risk function or don't do what is necessary to deal with the threat of risk, even though they have been given good advice. So the issue can be the wrong type of business culture and approach of the SME."

The problem is that many organisations approach risk management with the frequently held view that resources spent on it could have been used on more profitable activities.

But to smother this idea, Airmic is fond of quoting Stelios Haji-Ioannou, founder of Easyjet, who famously quipped: "If you think risk management is expensive, try an accident." That pretty much sums up the risk management challenge for SMEs.

Of course the control of risk will never be perfect, but brokers should take a lead from Airmic and help educate SMEs on how to prioritise the level of risks they face. If they can do that, half the risk battle will be won. IT