Peter Dunwell says brokers must help SME owners address risks to their business and the health of their employees

Running a business means accepting risks associated with actions, events and their consequences.

SME owners and managers can often seem not to understand the potential threat to which this sort of risk can give rise.

It is an area in which brokers are uniquely placed to offer their traditional service helping commercial customers understand and address risks to the business and to the health of those in the business.

Risks to the business fall into familiar categories. Phil Grace, casualty risk manager at Norwich Union says the various surveys of what keeps businessmen and women awake at nights tend to come up with a familiar list.

"Competition, shortage of labour, regulation and legislation, including EU Directives such as the Working Time Directive and the UK versions that flow from EU Directives, such as the Disability Discrimination Act as well as health and safety issues," Grace says.

SMEs might also be concerned about disruptions to production or service resulting from any kind of accident.

It is necessary for businesses to manage such risks and it is, in any case, good policy to keep a well-managed workplace where employees or customers will not be tripping over and involuntarily disconnecting (or worse) loose cables and the like.

This leads to people risks, also a familiar area, where people's health, welfare, or even lives might be in danger. Apart from trips or injuries from machinery, people can suffer stress and more physical damage as a result of the conditions in which they work.

Managing risks

Health hazards can include toxic emissions, slippery or unstable surfaces, bad light or even persistent noise and a whole range of other matters specific to each business and sector.

The risks themselves are important, but there is a need to manage them, which means first to recognise them. This is where SMEs are especially weak and that weakness has the potential to be very costly.

The statistics are worrying. According to the Health and Safety Executive (HSE), over one million injuries and 2.3 million cases of ill health are experienced by workers each year. Add to that 40 million working days lost to business and over 25,000 individuals forced to give up work because of injury or ill health (same source) and that amounts to the estimated annual cost to British business of £3.3bn to £6.5bn. Of that estimate, £910m to £3,710m results from accidental damage to property and equipment (and the HSE figures are based on 1995/1996 prices).

These costs are real with the full costs of accidents and ill health.

The Home Office estimates that one in five businesses will suffer a major disruption every five years, while one DTI survey suggests that seven out of 10 small businesses will go out of business within a year following a major disaster. Why do SMEs so often seem oblivious to this very real business risk?

There are a number of reasons. SMEs often lack the human resources to allocate a dedicated member of staff to risk and health and safety matters.

Also, because they may not have any experience of serious, cost incurring accidents, they often underestimate the costs of disruption and over-estimate the extent to which insurance will cover those costs.

As Grace puts it: "What is still missing (from SME thinking) is concern over fire, flood and the harm they can cause."

Of course an insurance policy will cover losses directly attributable to vehicle accidents, third party liabilities and property disaster but there are other costs that may not be covered by simpler insurance policies.

The HSE identifies these costs as:

- Sick pay

- Lost time

- Damage or loss of product and raw materials

- Repairs to plant and equipment

- Overtime working and temporary labour

- Production delays

- Insurance investigation time

- Fines

- Loss of contracts

- Legal costs

- Loss of business reputation.

There is, of course, much that can be done to address these costs and this is where brokers can fulfil their traditional advisory role. They can offer commercial clients not just the full range of insurance-based solutions (although the range is, these days, a lot more comprehensive than the HSE list might suggest), but also advice on risk management, business continuity planning and health and safety.

Having accepted that the risk may be more than previously allowed for, it must then be assessed.

Assessing risk is not always straightforward, although there is a standard formula that rates, from one to four, the likelihood of an event occurring and, on the same scale, the potential damage/loss/cost should the event occur.

Multiplying the two rates gives a risk assessment between zero (no risk and no loss) and 16 (almost a certainty and greatest possible potential loss); really, anything over four is significant.

This process should be applied to every stage in the business process from opening the doors in the morning to closing them at night and to every workplace and piece of equipment.

Positive benefits

Apart from reducing the risks faced by a business, a properly documented risk management programme will also be useful when talking to insurers about cover - nothing new there.

There are positive benefits from minimising risk and from addressing health and safety with their own programmes. Dave Priestley, sales director at PruHealth explains:

"Encouraging wellness among staff can play a large part in reducing the risk. Making employees feel valued by offering them benefits such as private healthcare and discounted gym membership can help reduce the risk (and cost of staff turnover)."

Armed with a credible risk assessment and policy, the broker will be better placed to procure quotes from insurers and to discuss those quotes in terms of how the business really handles this area, not just 'ifs' and 'buts'.

There are even post-event policies appearing on the market, although they are a lot more costly than the traditional 'before the event' solutions.

Risk is what insurance is all about. Brokers need to ensure that commercial clients don't simply go for the minimum legal requirement but treat insurance like every other aspect of their business with proper assessments, plans and actions.

And a business that respects risk and health is more likely to be a low risk, healthy business.