Sunday, March 07, 2021 / 10:00AM / by Chinyere Onyia  / Header Image Credit: Brand Spur

Small and medium-sized enterprises(SMEs) tend to cycle outside the insurance loop for reasons ranging fromignorance to cost. Corporate calculations at the lower part of the enterpriseladder appear to be different from calculations nearer the top, resulting insmaller enterprises preferring to take bigger uncovered risk. Insurance forsmall firms is like dashing into the rain without an umbrella the consequencecould be uncomfortable, but the choice is more the result of the lack of knowledgethan the lack of money.

 Analysts in growing numbers are beginning torealise that small businesses do not insure their assets not because they donot want to, but because they cannot afford to, or so they think. The problemwith small enterprise insurance appears to be a perception of cost rather thanan understanding of loss. Smaller-sized entrepreneurs tend to cost their goodsor services without considering cost of insurance, thereby undervaluing thecost of their goods or services. The consequence is that in a time of crisisthey end up sorry rather than safe.

Data from the Nigeria Bureau ofStatistics (NBS) show that local SMEs contributed about 48% of the national GDPin the last five years. With a total number of about 17.4 million, they accountfor about 50% of industrial jobs and nearly 90% of the manufacturing sector, bynumber of enterprises. The NBS report suggests that SMEs support industrializationand employment.  More advanced economieshave equally used SMEs to grow industries and promote development.

What is an SME? Running The Numbers

SMEs may look trivial, but they arethe bedrock of several stable global economies. Base research data indicatesthat the total cost of starting a micro enterprise (including working capitalbut excluding cost of land) is N5m but not exceeding N50m, with a labour sizeof 10 workers. The total cost of starting a small enterprise (includingworking capital but excluding cost of land) is between N5m and N100m, but notexceeding N200 million, with a labour size of between 11 and 50 workers, while thetotal cost of starting a medium-sized enterprise (including workingcapital but excluding cost of land) is between N100m and N500m, with a laboursize of between 51 and 200 workers.

Funding SMEs; The Search forLongevity and Stability

SMEs are usually faced with financialdark holes which have persistently led to their failure. Despite a few federaland state-sponsored funding schemes for smaller businesses, several SMEs havehit the deck as they quickly run out of cash or find themselves buried under aheap of commercial debt. Funding has been a key operational problem for SMEs aspoor management capacity, weak record keeping, lack of operational transparencyand no collateral conspire to keep SMEs out of the formal banking sector creditmarket. Aside the lack of funds, other challenges that face SMEs include thelack of skilled manpower, multiplicity of taxes, high cost of doing business, andthe low threshold for absorbing economic shocks.

...The Other Problems

Additionally, SMEs are confrontedwith risk-related issues ranging from, changing taste and preferences ofconsumers, economic vulnerability, infrastructural constraints such as poorpower supply, inadequate supply of potable water, poor access roads, high costof equipment, high rate of domestic inflation, , management risk, marketingrisk, reputation risk, natural disasters such as earthquakes,fire outbreak, and floods (especially in the farm belts), social unrest, and arson(like during the EndSARS protests).  

As an entrepreneur the best way tomanage risk associated with a business (asides risks associated with managerialor operational competence) is by getting an insurance cover. It is important tonote that risks might be the reason why a venture capitalist would not investin a business. Nevertheless, before getting an insurance cover it would bereasonable to profile the business's risk to determine the appropriateinsurance policy to buy. Admittedly, some of the risks of businesses areunforeseeable ('black swans') while others are known but the timing isunpredictable ('grey swans'). In identifying risks, it is important tounderstand that SMEs are businesses in the private sector, and they cut acrossall industries so, the nature of risk varies according to the industry. Theresponsibility falls on the business owner to identify the risk associated withthe industry and purchase insurance that reflect those industry-specific risks.

Some risks are uninsurable, in thissituation the entrepreneur would do well to still approach an insurance professionalto help in assessing the impact of an unforeseeable loss on the type ofbusiness the entrepreneur is engaged in and review the best risk-protectionstrategy. In such situations, small businesses could self-insure bysaving money for possible future losses.

A variety of insurance schemes orplans are critical to risk protection of SME businesses the kinds of riskprotection arrangements include: Liability Insurance, Business PropertyInsurance, Workers Compensation Insurance, Health Insurance, Life Insurance andso on.

All About the Plans

SMEs require standard fare insurance protectionschemes some of which include the following:

Fire and Risk Insurance Plan

Fire and Risk Insurance is a vital insurance plan forSME in Nigeria. It covers your business against, earthquakes,fire outbreak, tsunami, flood, social unrest, intentionally inflicted damagesthat may occur in the line of your business. An example was what happenedduring the end SARS protest that affected business premises and markets. Thisinsurance plan will protect your business against loss or damage because ofrain, flood, and storm.  Under this plan,your insurer will pay back all your losses, giving you the capital, you need toresuscitate your SME. 

Professional Liability Insurance Plan

Professional Liability Insurance plan covers businessowners from claims or legal liabilities from their clients. It protects professionalSMEs business against laxity claims due to damage that results from mistakes orfailure to perform and each industry has its own set of concerns that will beaddressed in a customized policy written for a business. This plan is crucialbecause claims can arise because of error, laxity, or omission during carryingout your professional duties. This insurance plan is for small business that sellsprofessional skills or knowledge. For example, doctors' lawyers, accountants,or other such professions, having this insurance cover will protect you againstdamages or claims brought by a client in a court of law within Nigeria. The policyalso covers financial losses or legal costs.

Product Liability Insurance Plan

This type of insurance plan for SMEs in Nigeriaprotects their business from liabilities, claims or damages that may erupt fromthe use of its products. There are some insurance companies in Nigeria thatoffer this to SMEs. Under this type of policy, financial coverage is providedfor SMEs owner, tailored specifically to his or her specific type of product. Productliability insurance is important, especially for SMEs in Nigeria thatmanufactures products for sale on the general market.

Business Interruption Insurance Plan

Natural disaster or bad government policies are thevarious issues facing SMEs. Small business usually goes through financialcrisis during course of these issues. Business interruption Insurance plancompensate this business for its lost income at such time. This policy appliesto companies that require a physical location to do business, such as retailstores been demolished by the government because of ongoing constructionthroughout the state/paving new roads.

New business owners usually witness the destruction oftheir hard work, so a business interruption insurance plan will take care ofall the cost related to the damage.  Italso replaces business income lost because of fire outbreak, lightning,explosions, or some other specified events which disrupt businessoperations.  Depending on the insurer,this SME Insurance Plan in Nigeria can sometimes cover profits that would havebeen earned had business operations not been disrupted, operating costs basedon previous statements of costs and employee wages. SMEs in Nigeria currentlythat have this policy will undoubtedly recover faster from the coronavirus lockdownlosses and the #EndSARS protest because they would receive the settlement fromtheir claims.

Commercial Property Insurance Plan

Commercial property insurance plan covers all businessequipment, signage, inventory, and furniture in the event of a fire outbreak,or during a crisis. The extent of the protection given by this SME insuranceplan depends on the standard each policy and therefore you should go throughyour contract very carefully. If the property you want to be covered is notprotected, do not be afraid to insist it be included or to look for a newinsurer.  Also, because of this pandemic,many SMEs in Nigeria are operating remotely. If you are operating your businessout of your home, ask your insurer for additional insurance to cover yourequipment and inventory in the event of a problem.

Goods-In-Transit Insurance Plan

For those running SMEs in Nigeria focused on haulingof goods from one city to the next, then one would consider protecting goods onthe road with this kind of insurance plan. Due to the poor states of our roads,many accidents take place each day and almost always involve lorries and cargotrucks spilling over their contents on the streets.

The goods-in-transit insurance plan covers your goodsfrom such perils on the load so that even if you lose the goods in transit, youwill not lose your money's worth as well. It also protects your goods againstfire, theft, or accidental damage while the goods are being loaded or unloaded,or whilst temporarily housed within the general course of transit. 

Back Cover-Planning the Future,Protecting the Business

Ultimately SMEs must grow their businesses with an eyeon sustainability. To ensure that unforeseen and perhaps unknowable events donot terminate the lives of the enterprises, SMEs need risk protection providedby insurance arrangements.

If businesses and their owners intend to last into thefuture, then they need protection schemes that provide opportunities to reducethe impact of shocks that could occur in the corporate lifecycle. Ignorance ofinsurance becomes a poor excuse when disruption knocks at the door, sensiblebusiness practice is about planning and a disaster recovery plan when life'slightning bolts strike. Preemptive business action is not about money but aboutknowledge.

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