Fidelity insurance: SMEs can buy policy to protect biz against internal frauds/thefts

Rajiv Jamkhedkar

Mr. Prakash runs a highly successful business in garments. It is highly profitable, spread over 7 cities, the business has a production facility (centralised factory) and 23 retail stores and employs around 70 persons. Despite running the whole company hands-on and the firm being family-owned and tightly run for more than 30 years, there is always an incident of theft, fraud and often one big case of embezzlement in accounts, purchase or billing department.

In my opinion, Mr Prakash would have lost at least Rs 50 lakhs over last few years through internal fraud. He sighs “what to do, this is the nature of the industry and cost of doing business.” He feels he can’t keep an eye everywhere in his factory and stores.

All small and medium enterprises (SMEs) suffer theft or fraud on the inside, petty or large, material or monetary, every year. This is just so common that businessmen have taken it as a given. SMEs do not have access to legal counsels, let alone legal department like large companies do, to pursue the culprits. Neither do they have the time to chase the police to help them. They simply accept loss and move on.

To run a small business is tough. In India, it is tougher than most places. My learning over 3 decades, as a curious banker to some of these SME businesses, is that the biggest risk in India is “Operational Risk”.

Operational risk is way bigger in terms of losses created by it than say credit risk, market risk, pricing/hedging risk, currency risk, etc. Operational risk occurs due to errors of omission and fraud in the day-to-day running of the business.

Within this, fraud is really the single largest cause of financial loss to small business. Some frauds are customer or market-related but really the key risk is internal or employee-related frauds. That is the one big whale every small business has to contend with, often enough.

Very few business owners know that there is a way to cover this highly prevalent risk. It is called a Fidelity Insurance policy for group of employees. This is offered by PSU insurers but hardly marketed or talked about by agents. Under this Fidelity Insurance policy, if any business suffers a financial loss due to fraud or dishonesty by any of the employees, the insurer makes good the loss of business.

Any business can take this policy to cover itself against fraud. Manufacturing, retail, professional services and financial services intermediaries are some of the most common users. Employee loyalty is a thing of the past. The nature of job market is such that employees don’t get blacklisted for their crimes. They can easily run away to a different location and find a job. Police action is often not adequate or effective.

This fidelity policy covers theft, embezzlement, and all manners of fraud. The business simply has to claim the loss within 6 months of employee being dismissed or terminated. Claim procedures may vary but an FIR stating the nature and size of loss must be filed with the local police.

Businesses that deal with the accepting/delivering or transport of cash or valuable commodities are especially vulnerable. They must take this policy as a mandatory tool for protection.

The second type of business that is especially vulnerable is a business that employs a large number of staff spread across different locations such as units or branches. Financial distribution, call centres, pharma and FMCG distribution – these areas are dominated by SME operations.

All these products are available very easily in India yet there is a woeful lack of awareness among the business communities around India.


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