The Great Australian Naked SME

The Great Australian Naked SME

It pays companies – no matter their size – to have a trusty and experienced backer.

One insurance market that has matured significantly in the last 10 years is management liability for small to medium-sized private companies – the backbone of the Australian economy accounting for over 99% of all enterprises. And yet within the financial lines sector, management liability insurance for SMEs remains a minnow in terms of market share compared with its peers such as directors and officers liability and professional indemnity insurance.

“There are a significant number of small to medium companies across Australia that don’t currently have any protection for a range of exposures that would be covered under a management liability policy,” says Delta Insurance Australia director Stephen Carey.

Brokers are telling Carey that only 3–5% of their SME clients have purchased a management liability policy, something the insurer is anxious to address, given the growing challenges SME managers are facing in today’s operating environment.

Carey’s main concerns are about the higher potential for claims against management as workplace regulations become more onerous and the economy starts to force tough decisions on staffing.

Insolvency levels are already back at pre-COVID levels now that pandemic-related government assistance and a temporary relaxation of insolvency rules are coming to an end, and more companies have recently announced layoffs.

“Companies are facing more potential challenges with increasing interest rates, which will put pressure on their solvency, especially if they’ve taken on significant debt and their profit margins are getting squeezed,” Carey says.

“These challenges, along with the prospect of downsizing workforces, are only going to continue the trend of increasing management liability claims from disgruntled employees, shareholders and the ever-vigilant regulators.”

Tougher economic conditions are leading to a high frequency of employees stealing from their employers. Another area that’s fraught with potential for repercussions on the cash flow of unwary SME owners are procedures around employee dismissal.

Regulatory change is also in play: recent rule amendments to the Fair Work Legislation Amendment (Secure Jobs, Better Pay) Act 2022 have introduced a range of new workplace laws that employers need to be across in order to navigate matters around pay secrecy, sexual harassment and flexible working arrangements, for example.

“There will undoubtedly be more employment claims bubbling up,” Carey says.

A massive opportunity

All these factors suggest that SMEs would be wise to give greater consideration to the benefits of management liability insurance in 2023 than they have in previous years.

While premium increases have been key to keeping claims in this area profitable over the last few years, Carey expects market growth to sustain it going forward.

“Our main hope for the market is continued growth not from premium increases on existing clients’ policies but rather from a greater percentage of new buyers entering the market,” he says. That’s because management liability shouldn’t be seen as a nice-to-have but as an integral part of a company’s insurance program.

“The exposures are very real and growing.”

Delta’s management liability package covers the core exposures across D&O liability, corporate legal liability, employment practices liability, crime, and commercial legal expenses. One of its most popular features is its Delta Legal Helpline, introduced last year shortly after the insurer entered the Australian market.

The helpline is provided through a partnership with a top law firm; it is part of a management liability policyholder’s legal expenses coverage and offers them free and unlimited legal advice.

Many SME owners have little experience with legal issues and often don’t have the leeway to retain the services of a law firm. The nature of these challenges can vary widely, from landlord disputes to dismissal matters to reviewing and signing complex large contracts with new customers or suppliers.

“You get that instant advice and get pointed in the right direction so [the business] can work through that challenging business legal matter,” Carey says.

Delta has seen similar tools in other markets become regularly used by clients as part of their risk management. “[We see it] improving their risk management and helping them avoid some disastrous business situation, but it also really helped cement the relationship between the broker and client,” Carey says.

“Our hope is to emulate that with small businesses that don't have HR managers or [access to] lawyers.”

Flow-on benefits

Delta’s approach essentially moves the role of insurer from ambulance at the bottom of the cliff to fence at the top, something that other management liability products can struggle to replicate.

“One part of our differentiator from a coverage perspective is around coming in earlier than other insurers would do to help assist an insured,” Carey says.

He gives the example of a serious workplace accident that involves a subsequent investigation by authorities.

“Under our product, when they have to make that notice to the regulator, we provide the costs for expert lawyers to help them undertake internal investigations to get their house in order, to make sure that all the evidence or information is correctly documented so that they're adequately prepared for when the regulator starts their investigation,” he says.

“[There are also] a lot of intangible benefits in terms of minimising disruption to the business, and protecting brand reputation, from having additional assistance and help so early on.”

Extra support for brokers

Delta puts a lot of emphasis on providing expert advice to brokers on the complex liability products it offers.

“That comes at a very high level around looking to build out and release white papers and content around the product exposure to the marketplace to help them understand [products] a lot better and be able to communicate that with their clients,” Carey says.

He points out that a cookie-cutter approach to servicing clients is not optimal because the complex organisational structures of companies need to be incorporated into the policy document for claims to go smoothly.

“That's been a common issue that a lot of brokers have had with other insurers who haven't necessarily taken the time to ask probing questions and really help them get the right solution,” Carey says.

“We know there isn’t a one-size-fits-all approach.”

Delta is also about to launch a new broker portal to further enhance its service and make transactions easier for its broking partners who want a more streamlined process.

Carey acknowledges that it may not be simple to convince some SMEs to take out an extra insurance policy in the current environment. However, he emphasises that seeing management liability coverage as a discretionary option is largely due to a lack of awareness of the risk, something that brokers are working hard to counter.

“I think a lot of clients just don't understand some of their exposure in the space.”