//Consequential Loss Insurance for SME Business Owners

Consequential Loss Insurance for SME Business Owners

By Weng Eu Gene, Head, SME & Commercial Agency – Retail Division, AXA Affin General Insurance Berhad

Small & Medium Enterprise (SME) is among the most important segments that fuel the nation’s economy. Under the new definition by SME Corp Malaysia, all SMEs must be registered with SSM or other equivalent bodies.

What is the one important thing that is often overlooked by SMEs?
Many would think of insurance as “nice to have”, and some may think of it as an additional, unnecessary cost. But the truth is, operating a business without protection is very risky. For instance, most of the time SME business owners are unaware that the subsequent reduction in turnover and the increased cost after a fire related loss can be covered under Consequential Loss insurance. As a result, many SME business owner have to face the impact head-on, which could potentially wipe out their assets.

Sighting the recent Dec 2021 flood event, only less than 8% of the total claims have a consequential loss insurance policy with AAGI. This would mean that 92% SME business owner who have a fire and related perils insurance are compensated for the flood damage but are not compensated for any consequential loss insurance. These 92% SME business owners will need to bear the reduction of turnover and any increase cost of operation after the flood.


What is Consequential Loss insurance and what DOES it generally covers?
Consequential Loss insurance is known as one of the most difficult classes of insurance, even to this day and age. It covers the reduction of turnover and the increase cost of working following a damage that is caused by an insured peril.

How can SMEs protect their business with Consequential Loss insurance?
Consequential Loss insurance is an important coverage that helps SMEs to bounce back into normalcy after an unexpected setback. Many SMEs tend to focus on the actual damage of their physical properties, such as building, stock in trade, business equipment, renovation, furniture, fixtures, and fittings, without realizing that downtime can severely impact them, especially those who rely heavily on day-to-day operations to generate income.

Whether the downtime is as short as a couple of weeks or as long as the whole year, it is a critical period that requires adequate coverage. With Consequential Loss insurance, the gross profit in the form of reduction of turnover and any increase in cost of working can be covered.

  • Apart from downtime, SME business owners are at risk of experiencing different types of impact after a fire and related peril loss. Immediate reduction of turnover or sales or revenue when the business premises is damaged and operations are unable to continue.
    o Some SME business owners need to close temporarily throughout the repair period.
    o Some SME business owners can operate partially during the repair period.
    o Types of occupations which may face such situations: retailers, manufacturers, trading companies, restaurants, hoteliers, cafés, saloons, beauty parlours, etc.
  • Incur increase cost of running the business, by renting additional space to run their operations, on top of the existing standing expenses.
    o Some SME business owners may be able to operate from an alternative location/venue /space. In such a situation, the business turnover/sales/ revenue can be assisted, but they will run into           additional costs of running their business by way of additional rental.
    o Some SME business owners may find alternative ways to fulfill their customer orders, even if they are not able to produce the product themselves. This will require additional cost, as they are
    not producing at cost and they may incur other expenses, like logistics and storage costs to meet this demand.
    o Types of occupation which may face such situations: Trading companies, warehouse operators, logistic companies, restaurants & manufacturers

There are various reading materials, brochures, and product disclosure sheets relating to Consequential Loss insurance for SME business owners. The best way is to obtain them is via your trusted intermediaries or general insurance company website.

What can a general insurance company do?
Insurance companies should take the lead by ensuring sufficient information and knowledge are shared, coupled with suitable promotion and marketing activities to spur interest and awareness in the marketplace.

These actions need to be done continuously and consistently. The education and awareness should start from the insurer’s own employees to the intermediaries and their customers. Insurance companies should also address the fear factor within the organization about the topic. From underwriting, claims to the business team, everyone must show confidence in handling Consequential Loss insuranc

Once the insurance company has a better grip of the product, the intermediaries will gain confidence and acquire relevant knowledge as well. This will in return convert into a positive outward ripple effect for the benefit of customers and stakeholders. Hence, it is important for insurers to take the lead in educating more about Consequential Loss insurance in the industry. No one will have anything to lose.

How can we start?
We can start with simplification―the process of making something simpler or easier to understand. Tackling a technical and complicated product such as Consequential Loss insurance is never easy. However, this should not deter general insurance companies from making all effort to ensure Consequential Loss insurance is easily comprehensible, primarily amongst SME business owners. Currently, there are attempts in the industry to simplify the product and this is a commendable practice. It is recommended to produce bite- sized learning materials to entice and trigger self-learning. This will indirectly increase the overall awareness of Consequential Loss insurance. Surely, by patience and perseverance, the insurance industry can achieve better success in this area.

In conclusion, there are more advantages than disadvantages for SME business owners to learn more and get protected under Consequential Loss insurance. While the intermediaries can serve them better by preparing a more comprehensive cover to protect their needs, insurers can work towards having a more balanced property portfolio with the inclusion of Consequential Loss insurance. I believe the insurance industry can remain a robust and efficient risk transfer mechanism that could contribute towards the economy during any unforeseen circumstances. All it takes is some effort to deliver the right message and information through the right medium.