SMEs: A web of complexity

The UK's SMEs have embraced the emergence of the web-based economy and other modern technologies that are changing traditional business models.

Unfortunately, however, many are unaware of the new business risks this evolution brings and the danger these pose to their long-term success.

Many insurers and brokers also find themselves lagging behind these changes and, as professionals in risk management and transfer, they need to get to grips with these evolving risks to ensure they play the vital role that clients require.

In light of current economic pressures and recent technological advances, the rate at which SMEs adopt new ways of working is astounding.

The UK currently leads the way among its G20 contemporaries when it comes to online trading.

Research from the Boston Consulting Group shows the internet economy has grown by 40% over the past three years, and that it will grow at 11% a year in the UK until the end of 2016.

When one considers the benefits offered by moving a business online and working in a virtual environment, it is hardly surprising that so many have chosen to modernise their traditional processes and trading models.

The anonymous and virtual nature of transacting business over the internet creates huge flexibility around how and where people work, and there is no longer a need for many companies or their workforces to be office-based.

In turn this generates significant savings and reduces the traditional overheads that many businesses have had to carry.

At the same time, it introduces a level of flexibility in traditional opening hours, the use of a part-time workforce and the breadth of local presence that has previously been difficult to achieve.

The latest CBI and Harvey Nash survey found that 59% of employers offered teleworking to staff in 2011, compared with 46% in 2008 and just 14% in 2006.

Also, in 2011, People Per Hour reported a 68% increase in the number of UK businesses hiring remote workers in the previous 12months, on the back of a study of more than 45 000 companies.

The new normal
From these statistics it is clear that the move to remote working is happening very quickly and is now seen as a normal way of operating.

However, along with the opportunities presented by online processes and trading come new risks.

The challenge for SMEs is to identify and mitigate these risks, and brokers are the lynchpin in ensuring that clients understand where their move to an online world has changed the risk profile they represent.

While SMEs are enjoying the various benefits that come from home-based workforces, they do not always recognise that they still bear the responsibility for the health, safety and security of their staff.

It is important that they realise this and seek to control the environment in which their employees operate. If they do not, they risk opening the door to any number of unwanted public and employee liability issues.

And it is not just the traditional property and liability risks that have changed; it is also the wealth of risks that trading online with customers and suppliers creates in its own right.

The most obvious are the cyber risks that online trading attracts. Although they have drawn much of the attention in recent years, most would not be covered by the standard packaged policy offered to smaller businesses.

These cyber risks include risk from first-party events, including virus or malware attacks, theft or destruction of data and denial of service attacks.

They also include the resulting costs from data recovery, forensic investigations, replacement of hardware and the resulting business interruption from the event.

In addition, there are third-party events such as privacy breaches, data breaches, virus transmission to a third-party's systems and the resulting costs of corrective action, monitoring client accounts, defending legal intellectual property rights, law suits and legislative fines.

The more SMEs use online processes to power their business and trade online with customers and suppliers, the more they open themselves to these risks.

Similarly, with modern data-driven businesses, most SMEs will have cover for data reinstatement following a physical material damage loss.

However, this is likely to exclude cover for data loss arising from cyber events such as viruses or hacking. This level of cover is not appropriate for SMEs that have moved operations online.

Data protection
Working online also creates added responsibilities under the Data Protection Act. However, at the moment there is limited understanding of these responsibilities in the SME sector.

Research from risk management association Airmic shows that 65% of SMEs do not safeguard their data, while further research from Datamonitor claims that 40% of all targeted attacks are against SMEs.

The risks they face in regard to data are, therefore, significant. Again this is a great opportunity for the professional broker to discuss where the cover from existing insurance stops and where new extensions and policies are necessary.

In reality, cyber liabilities make up only a small part of the changed liabilities that SMEs face in the web-based economy.

In terms of public and product liability, for example, many packaged insurance products will not offer cover for North America, and where businesses are selling into these markets they will need to review the insurance they have in place.

Indeed, many SMEs may overlook this when buying a packaged policy online and, again, this is where a broker's expertise comes to the fore.

Supplier liability
In the same way that online trading opens new liabilities in terms of the new markets into which SMEs sell their products, it also creates liabilities from the new suppliers with which SMEs work.

China, in particular, has become the world's factory and increasingly SMEs are sourcing parts and products from this manufacturing powerhouse.

However, should something go wrong, it will be SMEs, and not their suppliers, that end up bearing the liability for product recalls.

It is highly unlikely that they will gain the outcome they require from suppliers so far away, and going through the process will be slow, complicated, time consuming and expensive.

So if SMEs do not have the appropriate cover in place to pay for the associated costs of a product recall, the financial burden may prove crippling.

With the frequent blanket policy exclusions for product recall on many SME policies, accessing a new supplier market may introduce significant exposure for some SMEs.

As the UK's SMEs lead the charge into the web-based economy, they need support in understanding the new risks they face and in recognising the best ways to mitigate and transfer them.

Brokers and insurers, as professionals in risk management, must evolve their understanding and risk management options for the changing nature of today's SME business risk.

Those that do it best will create long-lasting and mutually beneficial relationships for the future.

Russell Corbould-Warren
Head of SME underwriting, Zurich

Video: Online Threats
As the online economy continues to grow, businesses face an ever-expanding array of threats that could destabilise day-to-day operations.

And with SMEs now playing a growing role in the web economy, it is no longer just the multi-nationals and large corporates that need to consider the scope of these risks.

In this video, Expertise in action: Q&A with Zurich's head of SME, the latest in an ongoing campaign in association with Zurich Insurance, the firm's head of SME underwriting, Russell Corbould-Warren, discusses how insurers and brokers can work together to highlight the reality of these threats to SME clients.

Corbould-Warren outlines a number of potential areas of exposure, how products and services are evolving and the regulations brokers need to be on top of to help SME clients be more resilient.