Emerging liability risks
Small to medium enterprises (SMEs) are one of the few areas predicted to double their growth in 2025. This prediction is informed by the Bureau for Economic Research predicting 2.2% growth and in light of the positive outlook assigned to South Africa by Standard & Poor (S&P).
According to an article by Didi Onwu (October 2024), informed by reports from the Small Business Institute of South Africa, SMEs make up 90% of all businesses in South Africa and contribute approximately 34% to the GDP. They note that this underscores the important role that they play in employment and, most importantly, innovation. In this article, I would like to explore the changes we are observing as a financial services provider and what these could mean for SMEs and also for insurers and intermediaries.
When a country’s economy is in a downturn, none are more affected than those who can ill afford to be. Basic goods and services cost more, as do food, transport and electricity, which are basic necessities. The spillover effect of the state of our local economy on the average South African business has been significant over the last five years.
And now, for occupations and vocations that previously had minimal overheads, basically skills and tools, this is no longer the case.
Obligatory insurance
There is an ever-increasing obligation for small business enterprises and even sole proprietors to hold significant liability insurance to even trade. A grass-cutting business, for example, with a turnover of less than R100,000 a year is now required to have liability insurance by their clients in order to get work. We have seen a marked increase in tradesmen buying stand-alone liability insurance. But this is not limited to that sector – we see it across the board in the small to medium enterprises sector, who are buying liability insurance not because they have realised the importance of it in protecting their business but out of necessity in order to get work.
I used the word ‘obligatory’ loosely in that while not always a legal requirement, this new market buying liability insurance does so mostly because they are obligated to by their customers in order to get work. With all companies looking to save costs, the increasing cost of liability insurance has forced liability to be passed down to the responsible parties. This helps businesses keep their loss ratios down to attract better premium terms. The enforcement of regulations like SASREA has also seen an increase in the demand for events liability insurance, with no less than three new insurers entering that market space in the last 12 months.
Sub-contractors
Requiring sub-contractors to carry their own insurance has long been a requirement in financed projects, for example. Their contracts would require sub-contractors to hold a minimum of R10 million liability cover, for example. There has been an increased shift from insurers in endorsing liability insurance policies to make it a policy requirement that sub-contractors carry their own and sometimes even equal insurance to that of the sub-contracting party. There is a marked increase in insurers requiring this for professional indemnity insurance as a way to better manage their risk and ensure more successful subrogation.
Diversified business
SMEs are increasingly diversifying and adapting to current market trends to stay afloat and hopefully grow. An example of this is the rise in solar system installers. This particular trend raises additional concerns for insurers and requires more comprehensive underwriting. Where clients could get a quick quote before, they are now being probed and have to answer more underwriting questions. Businesses are constantly pivoting according to demand, and it is now not uncommon to have
businesses offering multiple and often unrelated goods and/or services. An electrical contractor who also offers grass cutting and landscaping, for example.
What does this mean for intermediaries?
Liability cover used to just be recommended and added onto a client’s multimark policy with a limit of R1,000,000 and perhaps including products liability and defective workmanship cover – with little to no underwriting questions having to be answered. Intermediaries now have to probe business types more closely and more often to ensure that all of the client’s business activities are covered. More comprehensive products and coverage then have to be sourced accordingly. It also means that there is a growing market of previously non-intermediated clients who now could benefit from the services of an intermediary. With SMEs growing, not only in number but also in turnover, this provides an opportunity to grow with these clients and help shape their risk management and mitigation philosophies.
What does this mean for SMEs?
Although there is an increased insurance cost facing SMEs, I still believe that the positive effects far outweigh this. Obtaining specialist liability insurance cover often results in more formalised and sound risk management and mitigation practices. These are dictated by requirements for coverage and policy endorsements, for example. The effect of these on the success and longevity of a business is proven. This, coupled with the insurance cover, also improves the business’s odds of qualifying for larger contracts, for example, that they would previously have been excluded from. Liability insurance is essentially balance sheet protection and one of the tools of a successful business.
What does this mean for insurers?
While I mentioned earlier that insurers are seeing an increase in the purchase of specialist liability products, there are also serious obligations put on insurers: an obligation to make these products more understandable, accessible and also affordable. This is no easy feat. I do believe that as an industry we are tracking well on affordability and accessibility, but there is yet work to be done on ensuring policyholders’ full understanding of these products.
Auto & General Insurance Company Limited is a licensed non-life insurer and financial services provider.
Text | Storm Mhlambi
Photography | Supplied
To find out how Auto & General Business Liability Insurance can help your business today, contact us on 0861 00 02 09 or at liabs@autogen.co.za.
