Risk Management & Insurance for Ecommerce Companies
There’s no denying that ecommerce has disrupted the traditional retail market. Whether businesses are selling to customers or customers selling directly to each other, this business model has proven highly successful. However, it still has its vulnerabilities — no matter how booming the market is. Here’s a look at risk management ideas and insurance products to help keep ecommerce companies profitable in the long run.
Ecommerce Market Climate
In 2019, the global ecommerce market size was valued at over $9 trillion. What’s more, industry experts expect the market to grow at a compound annual growth rate of 14.7% from 2020 to 2027. Plenty of reasons contribute to the sizable uptick, including the ongoing worldwide health crisis.
Influence of the Smartphone
For starters, people of all ages are using smartphones more than ever before. Over 95% of Americans own a cell phone, and 77% are using smartphones. It’s no surprise that these same individuals are shopping on their device, too. Over 70% of mobile searches lead to action in an hour! About one dollar of every four generated on ecommerce comes from a mobile device. That said, many people also have retailer apps on their phones because “it’s more convenient.”
Brick and Mortar vs. Digital Storefronts
With four out of five Americans being online shoppers, brick and mortar stores shutter quickly nowadays. But this departure has been a trend since 2010 and pegged as the “retail apocalypse.” Over 12,000 physical retail stores were estimated to close in 2019 alone. Some of the most prominent retailers have closed or plan to close their doors soon include J.C. Penney, J. Crew, Toys “R” Us, Pier 1, GNC, and plenty more.
But the ecommerce industry doesn’t only bring a message of doom and gloom to brick and mortar retailers. With a revenue of $700 billion in the US, ecommerce sales are predicted to grow well past $4,500 in the next few years. For businesses that currently have a physical location, this boom opens a door for expansion. In other words, ecommerce companies benefit traditional brick and mortar businesses by offering another outlet.
Many physical stores can remain open because they’re backed by their products’ online buying and selling. Ecommerce helps companies to go global and creates the potential for passive revenue, too.
Customer Experience
Lastly, the ecommerce market grants physical storefront the chance to be more of an open concept experience than merely a shop-and-go stop, per se. Guitar Center is a prime example of this strategy, inviting customers to play their instruments instead of window shopping.
Naturally, most people point to ecommerce as the primary cause for all the closures. And this market might be guilty for the overtaking — to some extent. Nevertheless, some of the most significant online retailers are:
- Amazon.com, Inc.
- Apple, Inc.
- JD.com, Inc.
- Flipkart Private Limited
- Walmart, Inc
- eBay, inc.
- Best Buy
- The Home Depot
Even with the COVID-19 health crisis impacting the entire world, the future of ecommerce remains blindingly bright. With Americans spending an average of four hours on their smartphones each day, ecommerce will only become more profound with each purchase.
What Risks Do Ecommerce Companies Face?
As mentioned, ecommerce companies must manage unique risks. Here are a few examples of these exposures.
Online Problems
Connectivity issues, website layout trouble, or payment software glitches remain significant online problems ecommerce companies might face. What’s worse is having to battle cybercriminals or hackers simultaneously.
Let’s suppose your digital storefront experiences issues with the “add to cart” feature, stalling checkouts for an entire day. Fixing the problems is one check on your to-do list, but reclaiming that lost revenue is likely never going to happen.
Customer Dissatisfaction
It’s not possible to please every single customer seven days of the week. However, customers experience digital stores much differently from physical retailers and hold them to a different standard. Rather than clean bathrooms or spacious dressing rooms, online customers want smooth navigation on the website and ample product descriptions, to name a few desires.
If your ecommerce company fails to deliver the experience a customer was hoping for, they’ll probably click elsewhere. A positive, comfortable, and safe user experience is a must to thrive in the ecommerce industry.
Product Failure
No matter how meticulously you design or handle your products, a flaw might slip through the cracks. Perhaps an article of clothing was damaged during shipping. Or maybe the clothes didn’t fit the customer correctly from the get-go. Product failure happens to the best businesses, and sometimes it’s not your fault.
Still, developing a sophisticated return or exchange policy is in order. Aside from simple fixes, customers might have more significant issues with your product.
Cyber Issues
Cybersecurity is a risk that most companies face in the modern world. Nowadays, cybercriminals are more avant-garde, executing intricate and multi-tiered attacks. Ecommerce companies play a massive role in the online world by collecting customer information during transactions.
Collecting first-party data means ecommerce companies must also protect that information at all costs. It’s a tall order to collect, store, and use all that data safely. Additionally, ecommerce companies are more at risk of fraud, data breaches, and cyberattacks than most other industries.
Fraud
Technology is a double-edged sword, offering massive innovation but exposing ecommerce companies to new ways for fraud to occur. Lamentably, fraudsters have several “favorite” schemes, including account takeover, identity theft, re-shipping, phishing, triangulation, and plenty more. Account takeover fraud alone rose by 45% in Q2 2017, which cost ecommerce companies $3.3 billion.
As you might have imagined, handling fraud comes with a hefty price tag. Broken customer relationships and an injured reputation are bad enough, let alone dealing with chargebacks. Combating fraud requires ecommerce companies to be vigilant by establishing a risk management infrastructure, intelligent transaction controls, and internal fraud avoidance files.
Chargebacks and Loss Recovery
Handling transactions puts online retailers at risk of chargebacks organically. Unfortunately, chargebacks can stack up quickly for ecommerce companies. For one, you lose the dollar amount of the sale, and you also rack up processing costs internally. The most jagged pill to swallow is that many chargebacks are avoidable with proper staff training.
However, no retailer — ecommerce or brick and mortar — can sidestep chargebacks entirely. Customer disputes, fraud, processing errors, and authorization issues are to blame for many of them. Sometimes cardholders and card issuers cause significant chargebacks issues, as well. The best approach to avoid chargebacks is to gain as much knowledge as possible about proper transaction processing and fulfillment procedures.
Inventory Loss
Despite geography, ecommerce companies all have one thing in common — inventory. Most online retailers ship worldwide and accept returns from customers, too. When your stock information is out of date, or you’re facing back-orders, it can cause dissatisfied customers.
Consider what would happen if a fire or natural catastrophe occurred at your inventory site, damaging much of your stock. What is plan B? How ecommerce companies recover from a massive loss depends on their recovery plan. Sadly, many ecommerce companies don’t have one and end up throwing in the towel due to inventory loss.
Essential Coverage for Ecommerce Companies
Managing the vulnerabilities ecommerce companies face, it’s imperative to take a strategic approach. Here’s how specific insurance products can help to mitigate these unique risks.
General Liability
A General liability (GL) policy is usually the foundation on which any ecommerce company can build. This policy covers the basic risks that come with operating a business, including an online retail business. That said, GL coverage works to protect ecommerce companies against third-party lawsuits of bodily injury, property damage, personal injury, or advertising injury.
Many times, this policy is a contractual obligation. For instance, if you work directly with a fulfillment center or a major retailer, GL will be the must-have insurance product. However, suppose one of your delivery drivers accidentally hit their head on your bay door while dropping off some product. General liability insurance would help to cover the cost of repairs to the bay door and any incurred medical expenses.
Errors and Omissions (E&O)
Also known as professional liability insurance, E&O steps in to protect you from lawsuits claiming that your product or service didn’t perform according to the customer and industry standards.
Consider what would happen if you failed to ship a product on time or accurately. The miscalculation or shipment gone awry caused a customer to lose money, and they blamed your company for the financial loss. Many ecommerce companies are under contract with other businesses, after all. If the customer sued your company for the damage, an E&O policy would help to cover litigation costs and settlements.
Cyber and Media Liability
This policy works to protect ecommerce companies against third-party lawsuits that arise from digital activity, such as hacking or a data breach. Additionally, cyber insurance also reimburses your ecommerce company for direct expenses, such as breach notification costs, credit monitoring, data restoration, and forensic analysis. It also helps to cover fines and penalties from regulators.
Imagine if you leave your laptop in a cafe after morning coffee one day. A cybercriminal picks it up, hacks your files, and attacks your business, causing a data breach and exposing your customers’ vital information. Correcting the situation — contacting customers, reclaiming the data, etc. — could cost you a hefty chunk of change.
Or suppose you publish a weekly blog post on your ecommerce site, and a reader claims that you slandered their business or product somehow. Some of the most common claims relate to libel and slander and often lead to steep defense costs — cyber and media liability helps mitigate these genuine business risks.
Product Liability & Product Recall Insurance
Design defects, manufacturing defects, and inadequate labeling are all reasons for product liability claims. If your ecommerce company designs, manufactures, distributes, or sells products, you are liable for that particular product.
For example, IKEA recalled 29 million chests and dressers in 2016 because of a tipping hazard. This particular product defect caused the death of three children. On a smaller scale, suppose your line of clothing contained a substance that caused severe allergic reactions. Handling the third-party claims for bodily injury could be a nightmare.
Product liability insurance helps to protect your ecommerce company from lawsuits against third-party claims of bodily damage or property damage because of using your product. Product recall insurance safeguards your company against the cost associated with product recalls, such as overtime, shipping costs, reimbursements, additional product testing, etc.
Ocean Cargo and Inland Marine Insurance
Ecommerce companies frequently depend on shipping operations to get their product from point A to point B (and beyond). Ocean cargo and inland marine insurance are two different policies that cover inventory being damaged, destroyed, or lost while in transit. Naturally, this risk is a significant one in the ecommerce industry based on the business model alone.
Let’s say that your quarterly shipment of organic cotton comes directly from the distributor in India. However, the load never makes it out of the country, delaying your operations in the US. This policy works to protect your inventory while it’s out of your control, i.e., on a plane or ship. It offers reimbursement quickly, which lets you focus on growing your ecommerce business.
Property Insurance
Ecommerce companies typically have a physical location for inventory storage, whether it’s a shed in the backyard or a full-blown warehouse. Suppose a natural disaster or theft caused damages to your property. How will you fulfill shipments, make up for the lost products, or pay for repairs to equipment or the building itself?
A loss of this magnitude could set your ecommerce company back ages — but a property insurance policy could help to reimburse covered contents and repairs. Without such a plan, ecommerce companies pay out of pocket to get up and running again.
The bottom line is that succeeding as an ecommerce company in such a competitive market requires founders to be savvy and smart. Knowing your risks and how to mitigate them is an excellent way to protect your business and keep your professional momentum.
