It feels like a Catch-22 for Hong Kong small and medium enterprises (SMEs).
The COVID-19 saw many suffering from cash flow and business uncertainty. But as they shift to become more digital-centric to survive or pivot, many are also exposing themselves to considerable business risks.
The new QBE Insurance research shows that this situation is not going to get better. The SMEs’ vulnerability to cyber and business risks is set against growing pessimism about the prospects for the local Hong Kong economy over the next 12 months, with just under a quarter (23%) of those surveyed expecting it to improve, according to the new research. It follows an expected GDP decline in 2020 of 6.1%.
“The findings are significant because there are about 340,000 SMEs in Hong Kong, employing about 45% of Hong Kong’s workforce in the private sector,” says Lei Yu, chief executive officer for North Asia and the regional distribution head at QBE Asia. “It is essential they get the right protection to navigate these risks.”
QBE Hong Kong, part of QBE Insurance Group, commissioned the research that drew on a survey of 410 SMEs in late 2020. It uncovers SME challenges and offers the latest thinking on the economy, COVID-19 pandemic, insurance, and other issues.
Cyber protection trade-off
More than half (53%) of the SMEs surveyed accelerated investment in digital technologies to improve efficiency, resilience, and growth. The majority (59%) have digitalized their business process — up from 51% pre-COVID-19.
E-commerce platforms and software, employee systems, and online marketing are the key areas of digitalization investment. The survey notes that these areas remain central in the SMEs’ investment planning for 2021, with 21% saying e-commerce is the main priority for the year.
“It’s encouraging that SMEs show a willingness to invest in digital technologies, which ultimately — regardless of COVID-19 — will be essential for their businesses,” said Lei.
The surge of digital usage is also exposing cybersecurity gaps. Hong Kong SMEs’ top cyber-security concerns include theft or loss of customer data (61%), hacking by people outside the business (53%), and online criminal activities (50%).
Yet, despite these concerns, only 24% say they are “fully informed” of the possible cyber risks, and 23% note that they don’t have any processes or protection against such threats. Taking the top concern – theft or loss of customer data – as an example, the report notes that while 61% of SMEs say they are concerned, only 41% have put relevant policies or processes in place to mitigate the risk.
The appetite for cyber-security insurance also varies among different SME segments. Medium/large SMEs show a greater willingness to use such insurance — among those who do not currently have such protection, 45% will consider purchasing in the next 12 months. But only 28% of small businesses will do the same since they think the cost may be too high to be worth the investment.
Money protection thinking needs expansion
Inadequate protection will only get worse as Hong Kong’s economic conditions worsen, says the report.
Most Hong Kong SMEs (70% vs. 65% in 2019) are looking to implement more cost controls, downsize or streamline their organizational structure (40% vs. 32% in 2019). There is also a reluctance among SMEs to expand overseas. More than half (53%) of those already internationalized are considering scaling down their overseas presence.
“Clearly, local SMEs are under a lot of cost pressure and trying to streamline their operations as effectively as possible to withstand the headwinds. It is therefore even more paramount that the money they invest on protecting their business is money well spent,” said Lei.
While Hong Kong SMEs want to protect their cash and revenue streams, they do not seem to be taking advantage of insurance protection.
Nearly three-quarters (71%) of SMEs said they experienced at least one business issue in the past 12 months, up from 66% in 2019. But while 90% of SMEs have purchased some form of insurance protection to cope with such issues, the majority do not have the appropriate cover to address their specific protection needs.
For example, while 65% of SMEs cited “loss due to equipment breakdown” as one of their top concerns, with 31% being highly concerned, only 24% have bought the appropriate insurance. Among the 61% SMEs concerned about “damage to business property,” only 31% have proper coverage. Elsewhere, while 59% of SMEs are concerned about “loss of key staff,” only 10% have relevant protection.
“This shows us that SMEs will benefit from seeking consultation from insurance professionals who can help them understand their specific needs and explain the types of insurance coverage to fit their business instead of basing purely on the cost of insurance. Having the right insurance coverage will also help SMEs in the event of a claim,” said Lei.
Image credit: iStockphoto/William_Potter