Why Do SMEs Need Insurance To Manage Their Risks?

Starting and running a business can be challenging in these tough years, but it is also rewarding. The world is full of SMEs ( small and medium enterprises), and is one of the heaviest contributors to economic growth. In a city such as Hong Kong, there are over 340,000SMEs. They make up more than 98% of Hong Kong businesses and employ about 45% of the city’s workforce. Additionally, according to the World Bank, 90% of companies worldwide are SMEs. Such statistics prove that companies don’t need to be enormous brands to impact the world or their city.

Each SME business wants to keep growing over time and reach different targets. However, along the journey to success and development, SMEs may face various risks. 

 These risks SMEs face can range from lawsuits due to the public, shareholders, employees or even unexpected cyber-attacks. Despite the business size or location, every company should be covered from these risks in the future.

The best possible way for SMEs to avoid or reduce the impact of these risks is with the right SME insurance(s). An SME must have a range of insurances to assist their path to success. This article will explain which insurances are crucial and why.

Most Important Insurance Needed By SMEs

Professional Indemnity (PI) Insurance

A range of SMEs provide essential services in the market, such as financial advice, health coaching, personal training, architecture designs, and many more. These professionals are liable to provide the best accurate advice to their customers or clients. However, even the most experienced professional may make mistakes. Unfortunately, clients may not understand if the error/negligence resulted in financial loss, injury or property damage. Clients have the right to sue the business, claiming the professional negligence caused them. 

For example, an engineer may provide a service to install all electrical components in a new house. A client may believe the lights and wiring are faulty due to their negligence, resulting in spending more to fix the error. The client could sue the professional and the business for reimbursement and compensation costs,

In such situations, professional indemnity insurance plays a large part in protecting the SME. The insurance will cover legal and client compensation costs to help the business. PI insurance is the best cover for all SMEs providing advice or services and will protect them from lawsuits due to negligence. No one is perfect; mistakes will happen- PI insurance will reduce the impact of the error to help the business focus on its future targets.

Commercial General Liability (CGL) Insurance

Every business deals with customers, clients, and members of the public, known as third parties. The business is responsible for the safety of all third parties. There are always possible risks that a third party may be injured in your shop or by your product. These risks include third-party injuries or property damage caused by the business. The company will have to pay for the outcome of these risks, which could result in a lawsuit.

For example, if a customer trips on a loose cable in your shop and is injured. Another example is if a product component explodes and causes property damage. The third-party may sue the business for injury or damage. In both cases, the company will have to pay for the injury and property damage costs.

The SMEs’ best solution in these situations is having commercial general liability (CGL) insurance. CGL insurance includes public liability and product liability cover for the business. The insurance will cover any injuries or property damage caused to a third party due to the business activities or products. It is crucial to be protected by insurance against most third-party risks that can occur at any point.

Director and Officer (D&O) Insurance

As SMEs grow, their duties and responsibilities increase. At these points, CEOs need more managers and heads of departments. The management staff and directors have a duty to the business and the board of directors. These duties include providing the best work for the company’s benefit and performing what is expected. Managers, CEOs, CMOs, CFOs, HR, and other management roles fall under directors and officers (D&O). When a regulator, board of directors or employee believes that a member of the management is breaking their duty to the company, they can sue the business for the breach of duty.

For instance, an investor may sue a director or officer for failing to disclose material facts and providing inaccurate and misleading information to the investors. It is the SME’s duty to protect their directors and managers from such claims as, at times, it can be just a mistake.

Many more D&O claims could affect the business. Damaging claims are why SMEs need to purchase D&O insurance to protect their management team and the company. The insurance will provide legal costs (including lawyer fees) and settlement expenses. The insurance gives the accused a fair chance to defend themselves and protect the business’s reputation. In such cases, the SMEs should do their best to protect themselves without worrying about expenses.

Employee Compensation Insurance

For SMEs to thrive, they need top employees, making employee safety a key responsibility for employers. If an employee is injured or contracts an illness, the employer is liable for medical expenses and must provide a fair salary during recovery. Work injuries can be costly and impact business success.

This is why they should purchase employee compensation insurance. The insurance will cover the medical, compensation, and salary costs post-accident. Unfortunately, no matter if an employee works in the office or a factory, there is a chance of a work injury or illness. The employer can provide them with the best coverage without worrying about the cost related to the injury.

Thankfully, employee compensation insurance is mandatory in many cities, such as Hong Kong. For example, a chef may suffer a severe injury while working for an SME restaurant. The employee compensation insurance reimbursed the business for the medical, salary and compensation costs they had provided the employees.

Cyber Insurance 

Technology has changed the business industry for good and allows SMEs to grow faster in their target locations. However, a growing number of cyber risks and cyberattacks can critically harm a business and its data. Cyber-related risks should be taken very seriously.

In fact, 2023 was one of the worst years regarding cyberattacks. There were around 2,220 cyberattacks daily, resulting to more than 800,000 attacks in the year. Moreover, each attack and breach costs a business a significant amount financially and may affect client relationships.

Businesses cannot avoid some cyberattacks, but cyber insurance can severely reduce the impact. Cyber insurance will help companies fight the attack and recover from it stronger. The insurance will cover extortion, data breach, third-party informative and first-party response costs (any costs related to the type of cyber-attack). It is one of the most critical forms of insurance that should be purchased when working online as an SME.

 The Benefits SMEs Gain from Having Insurance

Insurance is crucial in any industry; it can save a company in various ways. When insurance mitigates a crisis, founders appreciate their foresight in securing coverage.

SMEs can face significant financial losses without insurance. The right coverage mitigates these losses and reimburses expenses, allowing SMEs to focus on growth.

Insurance also provides a quick response, reducing the impact of lawsuits or cyber-attacks and helping settle cases efficiently.

Moreover, insurance protects an SME’s reputation, aiding recovery after reputational damage, even if the company is not at fault.

Numerous risks threaten SMEs, and insurance is the ideal safety net for protection and future growth.

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To learn more about SME insurance and get the best protection for your business in Hong Kong and Asia, contact Red Asia Insurance.