Under-insuring your business has major repercussions

Companies throw the dice by cancelling or not renewing their insurance. Businesses that choose to cut down on insurance cover to save costs are playing a risky game more akin to gambling than good business practice, according to Gerald Juma, Corporate and Business Insurance Regional Manager at Standard Bank.

South Africa’s economy is struggling to eke out anything over 2% growth, while inflation has dropped below 4% – a four-year low. The slow conditions are placing pressure on businesses to cut back on costs – and insurance is often one of the first expenses to face the chop. 

“In terms of priority, companies need to ensure the lights stay on and that there is electricity, for example, but this shouldn’t mean insurance is a lower priority,” says Mr Juma.

Without adequate insurance coverage, a company could never financially recover if a fire were to raze it to the ground, for instance. “Instead of cutting insurance, companies should employ smart risk management strategies to create better efficiencies in addition to structuring cost-effective insurance solutions related to their risks,” says Mr Juma. 

For instance, factors such as reduced metals prices are placing a lot of pressure on mining houses to meet their commitments on loans or creditors repayments.

“Standard Bank Insurance Brokers is in a position to structure insurance solutions that allow mining houses to free up some working capital and in some instances this is often the difference between whether they can make it or not in the present difficult economic climate,” says Mr Juma.

Mining rehabilitation guarantees

A mining rehabilitation guarantee is a statutory requirement to cover the cost of rehabilitating a mine at the end of the life of mine. Normally these capital outlays are enormous and can often be enough to put off junior miners.

The Department of Minerals and Resources (DMR) in South Africa requires this guarantee at the beginning of the life of a mine for environmental rehabilitation. 

The starting point is a feasibility study that is submitted to the Department which estimates the cost of rehabilitating the environment to its pre-mine state.

“Over time, this can be a huge  financial liability on the mine’s balance sheet as the onus is on the mining company to rehabilitate the environment  at the end of life of mine, which  can end up costing hundreds of millions of rand,” says Mr Juma. “The insurance mining rehabilitation guarantee is a viable alternative and is approved by the DMR. The way it works is that whilst the liability grows over time, the insurance guarantee carries the cost of the risk without the onus of tying up much needed working capital at various stages of the life of mine and allows the mining house to grow the funds as the mining operation grows. 

Effectively, Standard Bank Insurance Brokers facilitate insurance guarantees with a reputable insurer who  provide the required guarantee up front as required by DMR and allow mining houses  to build up the rehabilitation funds over time so that clients have the amount needed for environmental rehabilitation at the end of the mine’s life. We are capable of structuring solutions that allow clients to free working capital so that the client  can get on with the business of mining.”

The reason this type of expense is such a problem and why more companies are looking for a structured solution is that acid mine drainage is occurring at a worrying rate from un-rehabilitated mines.

Environmental impairment liability (EIL) insurance

With new environmental regulations and increasing public awareness of environmental issues, businesses must face up to emerging and potentially costly risks. Costly in terms of the impact to the balance sheet, the company's reputation and in major cases individuals could face imprisonment. 

Environmental damage and pollution legal liability insurance coupled with risk management strategies can help protect businesses against unforeseen environmental risks.

Consider the possibilities…
  1. Your company acquires property to expand its operations. During construction, contamination from a previous use of the site is discovered.
  2. Your construction falls way behind schedule while you negotiate with regulatory authorities to find a solution.
  3. Your company receives a complaint from residents in the community alleging that you have caused contamination resulting in bodily injury and property damage. You must mount an expensive defence, even though it is likely that the contamination migrated through your property from an adjoining industrial facility.
  4. Your company has a sudden, on-site release that, despite your efforts, has caused the evacuation of nearby residents and impacted neighbouring wetlands.
Each of these hypothetical examples can happen. In today’s business climate, the scope of environmental impairment includes industries once thought to be invulnerable to environmental risks. Risks like these can crop up suddenly or lay dormant, unknown and unexpected, for years. Either way, they can represent a serious threat to any business.

With the risk of environmental exposures growing, your choice of an insurer has never been more critical.

Sovereign political risk coverage

The race for Africa is on, but doing business on the continent does not come without risk. Companies that fail to take this into account or cut down on their insurance will be playing with fire. 

Sovereign political risk coverage covers the risk of confiscation or expropriation of assets by rogue governments, political violence such as revolution, insurrection, civil unrest, government frustration or repudiation of contracts is becoming a more sought-after type of insurance for companies doing business in Africa.

“Clients need to be aware of their exposure and what insurance will pay for to ensure there are no nasty surprises and it is imperative to understand the cover you are paying for,” says Mr Juma.

Trade credit policies

Another important type of insurance is a trade credit policy, which is offered by insurers and government export credit agencies to business entities that want to protect their debtor book. Coverage can be negotiated for both foreign and local accounts receivables. It would cover defaults by customers occurring if, for example, a customer suddenly went into liquidation.

“The starting point is an understanding of the client’s needs and objectives before structuring a solution,” says Mr Juma. “Generally this insurance could cover as much as 85% of the debtors’ book.”

“Many businesses risk their own survival by choosing to forgo insurance in favour of more immediate, expenses,” says Mr Juma. “However, in the long run the short-term savings never compensate for the money and time required to repair, restart or rebuild your business in the event of a catastrophic event.”