By invitation: insurance from a risk management perspective for SMEs

CEO of Euro-Phoenix

All blogs by Les Nemethy

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BBN asked Les Nemethy from Euro-Phoenix Financial Advisors Ltd on how a business owner or manager should choose what kind of insurance to buy and how might these insurance products help manage the risks in your business? 

After all, there is such a myriad of insurance products available on the market, ranging from property and casualty insurance, to health insurance, from  product liability insurance and key man insurance to disaster insurance, from business interruption insurance to directors’ insurance and life insurance.  And the list is far from exhaustive. 

A business owner or manager should at any time have a full assessment of all the risks affecting his or her business.  These need to be prioritized, as few businesses can afford to insure against all risks.  You may be aware of the analogy that a hole below the water line will sink a boat; a hole above the water line will not.  You should always try to insure against potential holes below the waterline, if they are insurable.  Those holes that are not below the line can still cause a huge amount of damage, potentially destroy the earnings of a mid-sized company for a number of years.  So “above the waterline” risks should not be ignored either.

The hesitation that business owners and managers face in purchasing insurance stem from several sources:

· Complexity.  Few business owners who are working incredible hours can take the time to fully understand the complexities of insurance and read the fine print.  This is where a good broker can be of assistance.  Given that the broker typically makes a commission by selling an insurance product, it may be a challenge to find a broker for whom your relationship is more important than making the sale.  Trust is of the essence.

· Difficulty with collections.  Many insurance companies in Central Europe have developed a reputation for exploiting “loopholes” in insurance contracts.  (This might have something to do with the fact that there may also be more insurance fraud in certain Central European countries than in Western Europe). 

Once again, a good broker can help you pick the insurance companies that have a better payment record, and when it comes to collecting, the broker may also exercise some leverage to obtain payment.  (My personal opinion is that there is a fortune to be made by an insurance company in Central Europe who develops a stellar reputation for payment).

Always shop competitively for insurance; and always look at the fine print.  Once again, the former might be a role for a good broker; the latter should be reviewed by both broker and lawyer.  It is often a challenge to negotiate “boilerplate” clauses in insurance contracts, and costly—in terms of legal fees. On smaller contracts insurance companies sometimes refuse outright to negotiate terms.

One of the dangers in a financial crisis is that companies and individuals generally purchase less of the vast majority of insurance products.   Cash and liquidity is so tight, companies will choose to meet payroll or pay that invoice that has been outstanding for more than 100 days, rather than purchase an insurance product—and just hope that risks do not materialize!  The problem is that sooner or later, risks do materialize—and beware if it is of the “below the waterline” variety.

When you think about it, many Central European individuals and companies are underinsured at every level:  a surprising number of homes no longer have insurance; businesses are buying less property and casualty insurance in most CEE countries, as well as product liability insurance and other types of insurance.  When it happens on such a massive scale this also creates systemic risks, for example for banks.  It is also contributes to a number of households and businesses getting wiped out, tragedies for many business owners and families, when “below the waterline” risks do materialize.  Particularly if your company’s cash flow is beginning to pick up again after the low point of the financial crisis, it is time to take another close look at risk management and insurance.

Les Nemethy is CEO of Euro-Phoenix Financial Advisors Ltd. (), a Central European corporate finance company focused on Mergers & Acquisitions.  He is the author of “Unlocking your Company’s Value”, available at