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04

Financial crisis 'has changed SMEs' approach to risk'

Open-access content Tuesday 16th April 2013 — updated 5.13pm, Wednesday 29th April 2020

Five years of economic stagnation and volatility have forced UK small- and medium-sized enterprises to significantly change their approach and attitude to risk management, according to research published by insurer Zurich yesterday.

Adapting in tough times: the growing resilience of UK SMEs details a major shift in how insurers manage risk, with 53% of businesses surveyed spending more time on their business strategy and risk management than they did before the financial crisis.

Over one-third (35%) of those questioned are doing more long-term financial planning and 33% are considering their business continuity plans more frequently than five years ago, such as by planning for the failure of key suppliers.

According to the report, which was written by the Economist Intelligence Unit, this shift is 'a hugely positive step for the long-term resilience and sustainability of SMEs and the UK's SME economy'.

However, the research also found that SMEs had become more conservative in their approach to risk taking, with 25% rating themselves as risk-averse compared to other companies in their industry. In particular, respondents to the survey raised concerns over the threat that weak demand due to economic stagnation and the potential for operational costs to increase both posed to their business.

Richard Coleman, director of SME at Zurich, said it was understandable why businesses were averse to taking risks, but that they would need to do so to help drive economic growth.

'It's great to see the increased sophistication and long-term view of many SMEs but for the SME economy to drive growth, we need them to regain their appetite for controlled, calculated risk-taking,' he explained. 'In the face of such a challenging environment however, some are understandably reluctant to do so.

'This vicious circle is likely to play out until either the context for risk-taking decreases for UK SMEs, or the wider economy starts to show signs of rebounding. SMEs are essential to the UK business and economic environment, so ensuring that a balance exists between risk taking and risk prevention represents a significant economic and policy challenge today.'

Zurich also highlighted what it said was a widening gap between 'winners and losers' in the SME economy, as firms with 'high levels' of confidence about their business were more likely to report growth in turnover over the past two years than those with 'low levels'.

Of the 59% of respondents with a confident outlook about their business, 39% reported growth in turnover, compared to just 9% of the least confident firms, while only 13% reported shrinking turnover, compared to 47% of the less confident SMEs.

Coleman added: 'In every market and economic cycle, there exist winners and losers; a natural process of organic firm failure, mergers and business acquisition. However, there now appears to be a growing and divergent turnover gap between these winners and losers. High performers are adapting their operational business model strategy - increasing potential competitive advantages in the long-term.

'Conversely, the tactical measures of low performers, such as freezing investment plans, which help to manage business survival today, have the unfortunate feedback loop of undercutting long-term competitive form.'

This article appeared in our April 2013 issue of The Actuary.
Click here to view this issue
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