Does your Insurance Programme compensate you for the customers you have lost, or enable to keep customers
Insurance is a recognised Business Continuity Strategy but has wider applications in the design of business continuity programme. When designing your business continuity programme, your Business Continuity Strategies will be driven by your Business Continuity Objectives, specifically around your Recovery Time Objective.
There are 7 recognised Business Continuity Strategies illustrated below; the shorter your required Recovery Objective (mins/hours), you should be looking at the Diverse Site Strategy/Replication Strategy. Insurance is typically used as a financial mechanism to pay for the reinstatement of Assets and or to indemnify the business for its loss of profits; the latter is known as either "Loss of Profits Insurance", "Business Interruption Insurance" or "BI Insurance". You can read more here.
When Business Continuity and Insurance are not "joined-up."
Insurance programmes are often arranged separately from the Business Continuity Programme, even though they are inextricably linked, and the fact that there is a Business Continuity Plan in place will be seen as a positive risk feature by Insurers as it means the business is more likely to recover from the event. Axa Insurance regularly quotes statistics that 80% of businesses that have a major loss fail within 18 months without a BCP. This is being amplified by the current insurance market cycle, in which insurers become more selective about risks they are willing to accept – more info here.
Business Interruption Insurance is complex, particularly when settling claims, and it uses terminology, such as Gross Profit, which has a completely different meaning to the Accountancy term. It is usually purchased for an "Indemnity Period" – the period that the business will take to get back to pre-event trading. This is typically expressed in months, for instance, a 12-, 18- or 24-month Indemnity Period.
An important concept of Insurance is "Indemnity", which is putting you back to where you were before the loss occurred, not to a better position. In the context of Business Interruption Insurance, it will not spend more than £1 to save £1 of lost profit.
In simple terms, Business Interruption Insurance pays out for the clients you have lost.
When buying Business Interruption Insurance, if the business has not developed a Business Continuity Plan or only has a Disaster Recovery plan, this can introduce some challenges. "How long will it be after you have a major incident before you are back to normal trading?" can be a difficult question for the Client to answer. In this case, the Insurance Broker, when asked by the Client for their professional advice, will generally advise them to buy for as long as an Indemnity Period as possible.
This can then have a further complication as a longer Indemnity Period increases the "£" risk exposure for Insurers, which can, in turn, reduce the number of Insurers willing to consider their risk and the imposition of conditions such as having a fully tested business continuity plan. More information about this is here.
What’s more, if Business Continuity and Insurance fall under different areas of responsibility within the business, the Insurance may be focussed on indemnification of a financial loss, rather than a more important application, which can shape the design and effectiveness of the Business Continuity Programme.
The objective of your Business Continuity Programme is to retain your customers.
If we step back to think about one of the key functions of our BCP, it’s to reinstate our operations within our Maximum Tolerable Period of Disruption, minimising the impact to our organisation, which will include keeping our customers. Time is the critical factor; when we consider which Business Continuity Strategies to use in our Programme Design, our Recovery Time Objective should be a defining factor.
Given that speed of response is going to be critical, it’s likely we will have to pay premium prices for the fastest delivery, warehouse space etc. We will need to throw money at the problem.
So when designing the programme, it will be shaped by our financial resources. But it 'doesn't have to, because despite what we have said above, Insurance can provide a solution.
The money no object solution - Additional Increased Cost of Working Insurance
There is an extension for Business Interruption Insurance called "Additional Increased Cost of Working", usually shortened to AICOW. It allows you to spend more than a £1 to save a £1 and so is particularly relevant to Business Continuity Planning - it can allow you to throw money at the problem. It costs more than conventional Business Interruption Insurance but offers much more flexibility from a Business Continuity perspective and creates more options in your Programme Design.
Here are a couple of examples.
European Sister Company
We worked with a company to develop their Business Continuity Programme, which was being driven, like so many businesses, trying to grasp Business Continuity, by their Insurer. This came about following a recommendation from the broker to increase the Indemnity Period - the period over which the business experiences loss of gross profit after a loss!
It had a sister company in Europe and had many processes replicated across the two businesses. They also outsourced part of their process as well, which could easily be increased.
As we worked through the Continuity Strategies, we documented the steps they would go through to recover the supply of products to their customers. Some of these actions would need money thrown at them but would allow them to recover activities within the Maximum Tolerable Period of Disruption. One, in particular, would be travel, accommodation and living expenses costs for a proportion of their workforce. The understanding that these costs were potentially insurable as Additional Increased Cost of Working began to change the shape of the Business Continuity Programme and identify these costs for discussion with their Insurance Broker.
Reducing Transit Times
There's another example where a business needed to develop its business continuity programme ahead of a management buyout. It had most of its components manufactured in China with a UK Assembly and Distribution facility. One of the areas they need to address to achieve their recovery time was the transit time from China if they were to lose their current component stock holding – at that time 4 weeks.
Whilst they would have product on the water, if they experienced a business continuity event that resulted in a total loss of their Assembly/Distribution site, they 'wouldn't receive enough components through their normal schedule of transits. This, in turn, wouldn't allow them to produce sufficient finished products to meet their ' 'Client's requirements.
The options were to increase stock holdings at a diverse site, which has cost and cash flow implications or consider Air Freight, which would reduce delivery times from 6 weeks to 10 days – a significant improvement in recovery time and without the need to tie up cash in stock holding. This again was insurable along with many other items.
What is your “Money No Object Solution” ?
This is a question that should be asked in the Business Continuity Programme Design phase. If money were no object, what would we do? This helps reframe the thought process away from what we currently think we would do or have the financial resources to think more conceptually.
As a further example, in this case a plastic extrusion moulder that was embarking on the business continuity process, when the Operations Director was asked “if money were no object” how would you reduce recovery times on tooling a critical asset for the business giving it the ability to outsource production. His suggestion was to have soft tooling made, which has reduced production time, but they don't last as long as hard tooling.
So, in this case, the cost of soft tooling to reduce reinstatement time could be insured as AICOW, whilst the hard tooling continued to be insured as an Asset and reinstated in due course.
Using Insurance in your Business Continuity Programme, not just for Financial Compensation
Effectively, this application of Insurance allows us to reduce the Recovery Time and therefore changes how we apply the strategies and the costs these incur for the organisation. And with the examples above, provides a more cost-effective solution.
Whilst Insurance (Risk Transfer) and Business Continuity (Risk Management) are both Risk Treatments, they tend to operate independently of one another. There is a benefit of involving your Insurance Broker/Adviser in your Business Continuity Planning process to see what alternative solutions can be brought to bear in your Business Continuity Programme.
More information on Business Continuity
To assess your Business Continuity arrangements, download our Business Continuity Scorecard below or get in touch for a discussion.
If you found this article useful, you may also be interested in our related insights such as:
- Risk Management and your Insurance programme
- Choosing the right BC strategy
- What is a Business Continuity Management System