Small and medium sized enterprises have experienced exponential growth in economies all across the world. Their prominence in global markets cannot be underestimated, as SMEs now account for the bulk of both economic expansion and business innovation everywhere. They are literally the engine that drives the worldwide economy forward, and yet for all they contribute and add, SMEs are still incredibly vulnerable in many ways.

Hong Kong is an excellent case in point. It is estimated over 85% of all businesses in the SAR are, in fact, SMEs, which makes them absolutely indispensable in the maintenance and promotion of economic prosperity here.

You'd think this crucial role would mean Hong Kong-based SMEs were all solidly protected and assured businesses with adequate safety nets for a complete variety of eventualities. However, you'd be wrong - SMEs remain a class of business quite likely to feature inadequate protection, particularly in the area of insurance.

This is doubly unfortunate since not only do SMEs represent a wholly dynamic and vital element of the economy, but they are further manifestations of personal investment and dedication: more often than not, SMEs are the products of the hard work and life savings of the individuals behind them. Should the SME fail, the people involved are forced to suffer the consequences directly.

However, insurance agencies are more than aware of the need to assess and address the insurance situation amongst SMEs. For example, HSBC has been looking into the insurance situation among Hong Kong SMEs, and this article incorporates many of their findings. For our purposes, SMEs are defined as having 50 or less employees, except those in manufacturing, with fewer than 100 employees. Primarily, the survey, of some 500 companies, reveals the disconcerting fact that over half of businesses queried do not have insurance protection, let alone adequate coverage. Additionally, a third report having experienced a major disruption to their business - this could mean many things, but for our purposes "disruption" equals coming dangerously close to ceasing operations. A third is quite a high figure, and certainly more than any economy should tolerate.

Focused on growth

Probably one of the main reasons SMEs do not have proper insurance and failsafe measures is that they are almost singularly focused on ongoing management and daily operations. SMEs are, by definition, growing entities still working on establishing themselves, and thus the constant effort to maintain forward momentum comes at the expense of preparing for undesirable scenarios. In other words, the sheer optimism most SMEs bring to the table is a double-edged sword: they may have the vision and energy to come up with great ideas, but they also have little time and patience to work on spinning their own safety net.

Under these circumstances, it's not surprising a lot of SME managers still think insurance isn't important and that things will somehow always take care of themselves. Sadly, reality begs to differ: SMEs have small capitalizations, few staff members (who all depend on the business for the livelihoods) and acute vulnerability to failure, making insurance by far a higher priority for them than for large, established companies.

And just as SMEs devote all their capabilities to growth, they also do so with regards to resources. Whatever funds are available are typically earmarked for purchasing equipment, research, development and the hiring of talent. Rarely do SMEs have money lying around for anything else, which means most of them consider insurance a luxury- which is a big mistake.

Doing the right thing

This misconception may have some founding in actual fact - quite often, SME managers are not clear on which insurance protection is right for their fledgling company, resulting in a sum zero proposition: they believe insurance packages on the market are too much for them, and therefore opt to get nothing.

But there's a middle ground in the form of insurance protection better suited to the needs of smaller businesses and the conditions they face. Below, we suggest what SMEs should be looking for when buying insurance, for while being covered is unequivocally important, it's also true that many insurance protection are inappropriate for SMEs and can be regarded as either unnecessary or "overkill".

The most important factors managers and business owners should keep in mind are physical assets, employee benefits and public liability. These are the key pillars of any business, but a disruption in any one of these could prove fatal to SMEs in particular, hence they must take proactive measures to better protect interests in all three of these categories.

Safeguard the basics

Here, at least, research indicates a good portion of SMEs do have some protection, probably because physical stock is quite obvious and people are used to protection their property. Statistics indicate over 50% of companies surveyed pay for property, or physical asset, insurance, guarding against both theft and damages.

Hazards and dangers are numerous, ranging from fire, through weather effects, to criminal activity. SMEs operating in trade, wholesale and retail are especially vulnerable in the area of physical assets, and also most likely to be insured. Insurance not only offers better peace of mind in event of loss, it also helps recoup costs incurred when returning to normal business activity - a process invariably associated with higher expenditure.

SMEs are advised to make sure they have complete coverage for all physical assets they consider essential to operations and even those that may be seen as peripheral.

The benefits SMEs provide their employees are also a key aspect of staying healthy. The HSBC survey found 48% of companies have insurance in this department, which is a somewhat good number but not nearly enough- it should be everyone!

When we speak of employee benefit insurance, it means the protection and coverage extended to any company's most important asset - its people. It seems many realise this, and therefore coverage against injury or accident is quite popular among SMEs in Hong Kong, although not popular enough. Another bonus to offering excellent people and benefit insurance is the added attraction it grants a company, helping it secure quality personnel and required talent. Providing benefits and insurance also boost an SMEs ability to retain people long-term, another must-have when striving to sustain growth. In almost every case, the cost of insurance in this category is really nothing when compared to the costs incurred when having to either compensate employees or constantly spend money on hiring and training.

Public liability is the third vital area we will discuss, and the one where coverage among SMEs is least commonplace. Only 19% of respondents in the HSBC survey indicate having coverage in this category, which is quite bad since public liability really includes the most significant financial risk factors. Highlighting the meaning of public liability, one soon finds it to encompass legal obligations to third parties, which by itself includes a whole range of possible problems and hazards. Third parties could be suppliers and customers, and since the trend in Hong Kong is towards greater litigation, the potential for liability is on the increase. Preparing for situations where third parties file legal action and seek compensation is therefore a must for SMEs.

What to look for

When shopping for insurance, SMEs should concentrate on those parts that are most important to keeping their operations smooth and safe. Extras are good, but may prove financially encumbering, so it's best to focus on vitals. SMEs typically respond well to insurance packages that offer multiple combinations, choices and levels of protection, with the more the merrier. This allows companies to pick and choose rather than commit to sweeping, deep insurance that covers too much and costs more than they can comfortably afford. The areas they should keep in mind above others are property (all risks), business interruption, money, fidelity guarantee, public liability, group medical, group life and group personal accident. The sensitive nature of SMEs also mandates simple and fast-acting insurance policies. They can ill afford to sit around and wait for their insurance to go into effect, nor do they have the personnel or time to spare for deciphering complex insurance policies. Streamlined applications, simplified underwriting and instant coverage are order of the day for SMEs. Finally, SMEs should aim at policies that can help them recoup the maximum value possible in the event of loss or difficulty. Thus, insurance packages purveying enhanced coverage are preferable - especially if they can deliver 100% reimbursement.

It's time to take action

SMEs who do invest in insurance and protection quickly realise the value of doing so. Sadly, in the real world, insurance become a necessity all too often: 30% of the SMEs in the HSBC survey admit to having filed claims, and 44% of those in turn reported claims based on accident or injury among employees, going back to employee coverage. Nineteen percent indicate loss of key personnel as a consequence of illness, injury or death.

Physical assets are also frequently mentioned when claims are discussed. In the survey, 34% of companies with insurance files claims over damage to property, with fire, water damage and robbery leading causes.

The bottom line is as simple as can be. Small and medium sized businesses are in a delicate situation, on the one hand lacking the affluence and abundant resources traditional firms often and enjoy, and on the other in much greater need of protection, for exactly the same reasons.

At any rate, hoping for the best is simply not an option - SMEs must act as soon as possible to obtain at least adequate coverage for the three main categories discussed above. Additional insurance protection is also a good idea, but going overboard is not necessary and often complicates matters. Just as striking a good balance is essential in building your business, so it is in finding the best, most workable, insurance solution.