Manage the Risk and Have a Special Interest from Insurers - Case Study Example

HOW SMEs IN THE UAE CAN MANAGE THEIR RISK AND HAVE A SPECIAL INTEREST FROM INSURERS By Name Course Instructor Institution City/State Date How SMEs in the UAE Can Manage Their Risk and Have a Special Interest from Insurers Introduction Risk management (RM) can be described as the process of safeguarding the company’s assets against risks or losses that arise while conducting business activities, by means of different types of instruments (insurance, retention, prevention, and so forth). Risk management can also be defined as the process of controlling, organizing, planning, and directing resources in order to realize the set objectives when events (bad or good) happen. A risk management strategy is one that allows business organizations to succeed in all their business operations. When a business does not have a sound RM strategy, it is likely to put its operations at risk and limit business expansion opportunity. Rather than offering suitable compensation and protection against damages or losses, insufficient insurance cover can lead to multifaceted issues. Ultimately, this will make the business entity to experience a higher financial loss. All small medium enterprise (SMEs) should understand the significance of taking insurance coverage and its value as a mechanism for transferring risks. Therefore, insurance as it will be evidenced in this piece can be used by all SMEs to safeguard their business operations against risks as well as ensure the operations are sustainable. SMEs can be defined as companies which do not surpass the threshold values of the total assets, annual sales turnover, and the number of employees. Insurers play a crucial role in helping SMEs to protect their business operations from risks such natural disasters, financial crisis, and so forth. Insurance can be defined as a contract whereby there is an agreement that one party will compensate (indemnify) the other party in case of damages or loss attributed to risks specified within the contract. However, the insured entity must pay the insurer a certain amount commonly referred as ‘insurance premium’. The majority of SMEs business owners in the UAE normally consider insurance as an unnecessary expense and somehow a luxury rather than a necessity. Still, some consider it to be very crucial, a necessary investment that helps them protect their business operations from different forms of risks. The focus of this case study is to examine how SMEs in the UAE can manage their risk and have a special interest from insurers. Discussion In Brau et al. (2011, p.437) study, they observed that it is imperative to pay attention to the various sources of risk; which includes the risks associated with community-based safety nets and government while designing suitable programs. Risk diversification attributed to exogenous shocks which can influence both NGO systems as well as government programs, for instance, have to be integrated into the micro-insurance products. In addition, microinsurance programs development has attracted a strong interest from the public with the view to SMEs’ under-investment in insurance cover despite the existing risk. Brau et al. (2011) suggest that the development agencies, regulators, policymakers, and donors have to collaborate in order to ensure the effectiveness as well as the solvency of the micro-insurers to prevent the undermining of individuals’ ability to transfer risks effectively and also generate more uncertainty sources. The SMEs have to cautiously examine the benefits and costs of taking insurance to protect their business operations. As mentioned by Pozen and Vinjamoori (2015, p.253), the majority of SMEs do not have sufficient resources to manage the financial volatility associated with related to the self-funded plans. Even though this volatility could be reduced through the purchase of reinsurers’ stop-loss policies, Pozen and Vinjamoori (2015) posits that most SMEs have no interest in controlling costs associated with health-care. The need for SMEs to use insurance as a way of transferring risks is increasing day-by-day. Failure to manage risks can result in financial and economic losses. As indicated by Verbano and Venturini (2013, p.187), risk infuses every human action, management area and business type. In many cases, however, the prediction of risks is based on experience. Basically, risk management (RM) is important for all SMEs since it help business owners to identify risks, measure their impact, and eliminating the risks using minimal resources. In their study, Verbano and Venturini (2013, p.187) observed that the SMEs must adopt a risk management methodology and strategy, since they have inadequate resources to effectively respond to external as well as internal threats, resulting in huge losses which threaten the survival of the business. Most SMEs are motivated to implement risk management strategy in order to protect their innovative projects, which Verbano and Venturini (2013) believe can help them become successful in the market and gain competitive advantage. Identifying and managing risks early can help SMEs control risks associated with their business operations and projects. Furthermore, risk management enables them to manage all their business operations successfully. Jayathilake (2012, p.229) argued that the SMEs are showing very little separation between firm formal planning system and the decision making as well as strategic thinking of the entrepreneur. According to Jayathilake (2012), the SMEs during start-ups normally experience high uncertainties level and the need for making swift decisions. Numerous empirical studies as cited by Jayathilake (2012) have demonstrated that the SMEs’ attitudes towards risks are different as compared to those of the large firms. In SMEs, the risk management is still a major challenge since they do not have the needed resources, pertaining to data base, human capital, and knowledge specificity to carry out a structured and standard risk management. The majority of SMEs have placed emphasis on their core business rather than the risks that could negatively influence their business operations. In SMEs, risk management practices are associated with the attitudes and beliefs of the business owners. Most SMEs as observed by Jayathilake (2012) are less likely to utilize special techniques for optimization of significant risks. Many SMEs have not adopted a positive approach that could help them manage risks more efficiently because of shortcomings like poor infrastructure, limited technical as well as managerial expertise, lack of resources (both intellectual and financial), poor investment in research and development, and weak information networks. Besides that, the majority of SMEs lack official risk strategy because of communication problems experienced while trying to delegate competencies of risk management to employees. The changing customer demands, increasing competition, and poor strategies because of inadequate market data have been pointed out as the major risks facing SMEs in Europe (Jayathilake, 2012, p.229). The main obstacles to risk assessment amongst the SMEs include lack of suitable guidance and time pressure. In their study, Falkner and Hiebl (2015, p.123) noted that SMEs play a crucial role in nearly all economies across the globe. In the European Union (EU), for instance, almost 99 percent of all economic-related activities are related to SMEs. Furthermore, SMEs account for more than 66% of all jobs in the EU private sector. In contrast to the bigger companies, SMEs’ internal organization is considered to be simpler; therefore, they are faster and flexible at adapting and responding to change. The SMEs’ non-financial and financial resources are normally small; thus, their survival is can be threatened more easily. For this reason, risk management is considered as a crucial tool for the SMEs in identifying and managing risks that can put the existence or success of their business at risk. Clearly, failing to identify or misjudging risks can lead to catastrophic consequences such as loss of customers, environmental damage, and bankruptcy. A number of SMEs do not have risk management strategy and this is attributed mainly to their inability to rededicate resources because of limitations. Falkner and Hiebl (2015) observed that insurance is primary tool that can be used by SMEs business owners to manage risks. However, most entrepreneurs consider insurance as an unnecessary luxury because it is often related to considerable cost. The majority of SMEs owners take insurance to protect their business against personal injury, flooding, fire, and property. UAE Perspective Akin to other SMEs across the globe, the SMEs in the UAE do not understand the value of risk management systems mainly because of insufficient wherewithal to control and manage risks because of the limitations associated with their very size. According to Panigrahi (2012, p.68), SMEs cannot be compared to large corporate entities with regard to risk assessment since the latter often have professional personnel tasked to identify and manage risks. Business managers in the UAE instinctively understand the value of having insurance policies in order to cover risks to property as well as life. Yet, they normally overlook and ignore other risks that their businesses face. This could result in possible losses because of the unmanaged risks. Having a sound strategy for risk management can help reduce the likelihood of a certain event happening and in case the event takes place, the risk management can help lessen the impact. As pointed out by Jadi et al. (2014, p.75), it is imperative for the SMEs to reduce losses by protecting their assets. Therefore, insurer plays a crucial role in the protection of SMEs’ properties and can also help protect entrepreneurs from adverse financial effects related to loss of lives and properties. Therefore, when an SME suffer losses it can rebuild its business and recuperate using the compensation paid by the insurer. In the UAE, the majority of SMEs business owners do not understand the benefits associated with taking insurance cover against risks facing their business operations. Using insurance as observed by Jadi et al. (2014, p.76) includes loan applications success and protection against losses. Therefore, it is very important for SMEs to make sure that they take adequate insurance coverage so as to make sure that all the risks in the business are well-covered. Having a poor risk management process could result in serious reputation damage and financial loss. Some SMEs in the UAE reactively respond to risk through conventional techniques such as risk transfer and risk avoidance. Many SMEs in the UAE normally face challenges while trying to secure finance due to the high risk level and inadequate return level related with the Industry. Even with its size, SMEs remain to be the economic foundation of UAE and other economies. It facilitates sustainable development and economic growth of UAE. Still, they are threatened with strategic as well as financial risk. The strategic risk is related to economic conditions as well as market competition which directly affect SMEs performances. Financial risks, on the other hand, are associated with funds availability, sources of money and cash flow to expand and opera the businesses as well as pay wages. According to Menon (2015), insurance enables SMEs business owners to competitively run their business devoid of worrying about unexpected events which could lead to business failure or major losses. The penetration of SME insurance as indicated by Menon (2015) is between 15 to 20 per cent. This is far lower as compared to the penetration rate in mature markets like the United Kingdom. Therefore, it is evident that some misconceptions are holding SMEs business owners back from taking insurance. Regrettably, the government has shown little commitment to change this attitude and enable SMEs to clearly understand the value of taking insurance cover. Most SMEs in the UAE are working hard to increase their profitability but they are less prepared to reduce the available risks. The SMEs in the UAE are not only facing commercial risks, but also political risks; therefore, it is imperative for them to have adequate insurance coverage which could protect cash flow, mitigate risks, as well as offer a stable foundation for business success. According to Saksena (2015), SMEs are the UAE’s central economic nerve and they contribute over 60 per cent of UAE’s gross domestic product (GDP). Local and international insurance companies in the UAE are generating as well as adapting products which provide the SMEs with the needed protection as their business operations become increasingly sophisticated. In the UAE, key risks to their business like supply chain disruption and fire are overlooked by SMEs business owners. The Global SME Survey carried out in 2014 in the UAE involving over 200 senior executives as cited by Saksena (2015) established that 11 per cent of SMEs considers fire as a major risk. This is despite the increase in the number of fires destroying business premises across UAE. The survey further established that only 8 per cent consider the failure of suppliers as well as partners as a risk that could affect their business operations. The majority of SMEs owners in UAE are more worried about risks that could affect their business profitability such as competition and low customer demand. Saksena (2015) asserts that there is a need for SMEs in the UAE to seriously deal with gaps attributed to their vulnerability to risk since business owners who recognize business risks as well as implement risk management are likely to experience business growth. The SMEs in the UAE have overlooked risks such as employees and customers’ health and safety since only 14 per cent of business owners are concerned by these risks. They have also overlooked other risks such as cybercrime and natural catastrophes. Without a doubt, operating a business is very risky, since the business owners have to invest their time, money, energy and talent in order to be successful.  As indicated by Nezeritis (2016), there are only a few SMEs in the UAE that understand how vulnerable they are to various risks which could influence their business’s reputation and result in its closure. In March 2016, UAE experienced a deadly storm which for the short term evidenced the value of insurance cover, but still, many SMEs business owners are not insured; therefore, they are exposed to damaging and volatile events. According to Ang (2016), the SMEs are playing a crucial to the GCC economy but they face many risks that can lead to bankruptcy or financial distress; therefore, it is imperative for business owners to understand the value of having a responsible culture of risk management. Still, scores of SMEs in the GCC member states, especially in the UAE are overlooking the significance of risk management considering that it plays a crucial role in the growth and survival of the business. Insurance is considered by the majority of SME business owners as less valuable. Many of them realize the significance of the risk management process after they are hit by a disaster. The failure to understand the significance of insurance can be attributed to numerous factors such as lack of education as well as awareness. In the UAE, most SMEs business owners are paying more attention to is required, rather than to what is desirable. Furthermore, they are focusing more on ways to pay little rather than the value they will get in case unexpected event happens. As maintained by Ang (2016), protection is paramount for all businesses, but many SMEs owners view consider risk management practices as a needless cost. Given that business opportunities are increasing across UAE, exposure to different types of risks has become more and more inevitable. Since the UAE government main priority is to develop the SME sector, Ang (2016) asserts that it is imperative for SMEs to be trained on how to develop suitable guidance that can help them handle financial risks associated with business growth. Insurance according to Ang (2016) is the most suitable tool for all companies regardless of their size to effectively manage risk. Still, the Middle East both at the commercial and individual level has a low insurance penetration rate. SMEs that have insured their business adequately are less likely to be affected by risks and are inclined to recover quickly in case of a disaster. However, the low insurance coverage penetration in the UAE has real social as well as economic consequences since losses cannot be shared equally or transferred across different risk carriers. For that reason, some of SMEs in the UAE are experiencing large losses, which eventually eliminate them from the productive economy. Therefore, an insurance coverage creates a virtuous circle that allows for evenly distribution of losses across all the stakeholders.  Knowing the business risks that affect SMEs is very important since it helps business owners to understand the value of risk management culture. Normally, risks are brought about by inadequate diversification; hence, the SMEs should try to improve its diversification in its insurers, customers and suppliers. In so doing, when a disastrous event takes place, the risk will disproportionately influence other aspects of the business. People management, service as well as product management, and financial management are some of the risks that start-up SMEs experience. In the UAE, new laws as well as regulations allows SMEs business owners to understand the need for creating controls, programs and policies to manage such issues. The main insurance scheme often taken by SMEs in the UAE includes three key components: workers’ compensation, public liability, and property.  Before selecting the insurer, the SMEs should inquire whether the insurer can make partial payments so as to help reduce uncertainty and stress associated with destructive loss. The majority of SMEs in the UAE underestimate some the probability of some risks such as glass breakage, water damage and fires happening. The optimistic nature of many SMEs owners makes them spend less money to purchase insurance cover for situations which they believe are less likely to happen. Conclusion In conclusion, this paper has examined how SMEs in the UAE can manage their risk and have a special interest from insurers. The case study has demonstrated that most SMEs business owners in the UAE have risk management systems that are less developed. The majority of these SMEs do not have a culture that encourages risk management practices. Besides that, the SMEs’ business owners’ attitude towards some risks has left their business more exposed to vulnerabilities that could lead to business closure. As evidenced in the case study, insurance enables SMEs business owners to effectively operate their business devoid of being concerned about unexpected events which could result in major losses or business closure. There is the need for business owners to take adequate risks that protect them from major risks such as natural disasters and also minor threats like fire, water damage, and robbery. References Ang, C., 2016. RM a vital link in SMEs' business strategy. [Online] Available at: http://www.meinsurancereview.com/Magazine/ReadMagazineArticle/aid/38387/RM-a-vital-link-in-SMEs-business-strategy [Accessed 20 January 2017]. Brau, J.C., Merrill, C. & Staking, K.B., 2011. Insurance Theory And Challenges Facing The Development Of Microinsurance Markets. Journal of Developmental Entrepreneurship, vol. 16, no. 4, pp.411–40. Falkner, E.M. & Hiebl, M.R.W., 2015. Risk management in SMEs: a systematic review of available evidence. The Journal of Risk Finance, vol. 16, no. 2, pp.122 - 144. Jadi, D.M., Manab, N.A. & Ahmad, S.N., 2014. Insurance as a risk transfer mechanism in Small and Medium Enterprises (SMEs). In International SME Conference. Kuala Lumpur, 2014. Jayathilake, P.m.B., 2012. Risk Management Practices In Small And Medium Enterprises: Evidence From Sri Lanka. International Journal of Multidisciplinary Research, vol. 2, no. 7, pp.226-34. Menon, P., 2015. Thinking Ahead: The Importance Of Insurance For SMEs. [Online] Available at: https://www.entrepreneur.com/article/252429 [Accessed 20 January 2017]. Nezeritis, A., 2016. SME Claims & Risk Management in the UAE. [Online] Available at: http://www.theintelligentsme.com/2016/06/sme-claims-risk-management-uae/ [Accessed 20 January 2017]. Panigrahi, A.K., 2012. Risk Management in Micro, Small and Medium Enterprises (MSMEs) in India: A Critical Appraisal. Asia Pacific Journal of Marketing & Management Review, vol. 1, no. 4, pp.59-72. Pozen, R. & Vinjamoori, A., 2015. Self-Funding Of Health-Care Plans By Small Firms: Risks And Reforms. Risk Management and Insurance Review, vol. 18, no. 2, pp.243-54. Saksena, S., 2015. Rewards outweigh risk for UAE SMEs. [Online] Available at: http://www.theintelligentsme.com/2015/08/risk-and-reward-for-smes-in-the-uae/ [Accessed 20 January 2017]. Verbano, C. & Venturini, K., 2013. Managing Risks in SMEs: A Literature Review and Research Agenda. 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