Are you sitting comfortably?

Graham Heale explains how a company also needs a proper plan for getting the business up and running again, with risk prevention and business continuity management being the key areas on which a company needs to focus.

When a major unforeseen event such as fire or flooding affects a commercial customer, how well-prepared will they be? Picking up the pieces after such an event is always a challenge. Very often, the affected company will have some kind of business interruption cover.

But business interruption is only part of the solution. The payout on a client's business interruption policy will not get them far without a proper plan for getting the business back on its feet. That is where business continuity management comes in. Business continuity management is seen as a key area - along with risk prevention - on which brokers and insurers should be focusing if they are to deliver effective business protection solutions to their mutual customers.

It is probably fair to say that the insurance industry as a whole has not kept pace with the changing face of the UK commercial and industrial economy in the way it defines and delivers business interruption cover.

If the product is not always fully understood or properly valued by businesses - particularly at the lower end of the market - we, as an industry, should probably accept some collective blame for not properly clarifying the issues, making the case to the customer and explaining the practical value that business protection provisions can offer.

Part of the problem is that a lot of specialist expertise around business interruption - and what we would now call business protection in general - has been allowed to drain out of the industry. Dedicated business interruption departments are the exception rather than the rule. The more enlightened still recognise the value of residual specialist expertise in the sector and are taking active steps to maintain and pass on that expertise through succession planning and active knowledge transfer.

But, it seems clear that there is a dual requirement to preserve and apply in-depth business interruption expertise to the task of developing updated and improved business protection solutions for today's business community.

The key to this is putting the customer squarely at the centre of the picture. It is about working with the customer in considering all aspects of the business and potential for loss. What do they actually do, and how will they continue doing it? There will be many questions following a major incident - questions that should all be answered in a business continuity plan.

What would actually happen if a fire took out the company's factory or offices? Has anyone really thought all the issues through? Business interruption cover will see that the customer is relocated to alternative premises with some funds to cover their loss of profit/revenue and increased cost of working during the specified indemnity period. But, what is actually going to happen at these new premises - and what could fall through the cracks to undermine the exercise?

Technology

For example, one of the main ways in which business has changed in recent decades is the extent to which we all now rely on technology. This presents both challenges and opportunities in a business protection context. On the plus side, the hardware on which businesses run is now relatively interchangeable and widely available. The flip side could be that businesses and their records are increasingly centralised.

Most companies now carry out regular back-ups of data - but many also operate specially configured or bespoke software in running their operations.

Is this still going to run on a replacement IT infrastructure? The question is not whether it will run a couple of weeks down the line, but will it run on day one following an incident?

Business moves fast. Customers and staff may not wait around to find out whether a business is really going to recuperate. If customer, supplier and other business-critical records are not readily available in the aftermath of an incident, the management will be fighting for recovery with one hand tied behind its back.

Communication is another absolutely central aspect of any properly conceived business continuity plan. A key component in the plan should be provision for communicating rapidly, confidently and authoritatively with customers, staff, suppliers and the media - explaining what has happened, how the situation is being addressed and resolved, and why they should retain their faith in the company. If any one of these audiences is left to make up its own mind, the outcome could prove damaging.

Factory fire

One such example is that of a metal treatment firm that suffered a factory fire outside of working hours. When the managing director arrived on the site he found the local press had got there first. When reporters asked about the damage, he simply responded "no comment".

Passing up the opportunity to put the incident in perspective effectively left the press free to make up their own story, which they did with relish.

"Factory burns down", the papers reported, accompanied by dramatic pictures of smoke and flames. In reality, damage to the plant was limited, but the public relations damage was already done.

The managing director and his fellow directors rolled up their sleeves and worked around the clock for days on end to put the company back on the route to recovery. But lack of communication, again, almost proved to be the second costly mistake. It was not until 10 days after the fire that management called the staff together to explain what had been done and that their jobs would be secure.

At the end of what had seemed a successful meeting, one experienced worker in a key department revealed that - in the absence of any real information on the company's future - he and the other members of his team had spent the week looking for new jobs, and all were due to start their new positions the following Monday.

Those of us that have been in the insurance industry for a number of years have seen these scenarios played out again and again. We have built up a detailed practical knowledge of how business continuity management applies in the real world. We understand how, and how not, to approach these issues. Because of this, we believe business protection is one of the key areas in which insurers can deliver added value to non-specialist brokers and their customers.

Equally, there is the belief that companies with a commitment to sound business continuity management should see this reflected in the cost of cover. The British Standards Institute's PAS 56 Guide to Business Continuity Management provides an objective benchmark against which to evaluate a company's business continuity plans. However, the simple fact of having a business continuity plan in place is not necessarily that influential.

Experience suggests that some are better than others. As a minimum, they should always be current, continually maintained, subjected to periodic practical testing and, of course, likely to be properly applied in practice.

Many are not. But the fact that a business' management has started out down the business continuity plan path is an encouraging indication at least - and with some experienced input from the broker or insurer, plans can always be improved upon.

The essence of a good business continuity plan is that it is not something that is devised once then left on the shelf to be dusted down if and when something happens. It should be constantly reviewed to take account of the changing circumstances in which the company operates. Input from business continuity management practitioners employed by insurers often can improve business continuity plans.

A classic case is that of a snack-food manufacturer whose plan suggested that, in the event of long-term factory outage, capacity could be sourced from a similar company in another part of the UK. This sounded fine in theory, but it turned out that contact had not actually been established with the other company. It was an aspiration rather than a strategy.

Once the issue had been raised with the client, contact was indeed made.

A mutual continuity support plan was then put in place and, separately, the two companies even agreed to provide each other with overflow capacity at times of peak demand - a real business benefit.

The business continuity dialogue between brokers and insurers on the one hand and client companies on the other, can and does generate real value for the customer and helps build stronger relationships. It is a question of working proactively together on a combination of complementary approaches - risk control and prevention, business continuity management and, of course, insurance cover -- to protect all aspects of the company's future operations.

As insurers, we are ready to give a lot back in terms of contributing knowledge and experience in recognition of a proactive attitude to risk on our clients' part - protecting both our bottom lines and future income streams.

Flooding

A good example of how far a positive attitude can go is the case of a brewery, for which Royal & SunAlliance was one of the insurers providing the business interruption cover. The brewery did not have a business continuity plan in place at the time, but had recognised the potential risk of flood damage and had begun building flood defences. As fate would have it, a flood occurred just before the defences were completed and the premises were flooded.

The company's business interruption and property cover both paid out, but the lead insurer on the business interruption policy declined to renew following their loss. However, in view of the firm's obvious commitment to risk management, RSA decided to take over as lead insurer and began talking to the management and its broker in detail about risk control and business continuity management. They proved highly receptive and the result was a strong relationship based on a shared commitment to risk management and business protection. That, surely, is what this industry should be about.

Incidentally, the beer that was brewing at the time of the flood was fine. If anything, it had improved from its extended fermentation period and was sold with a special commemorative label.

Graham Heale, Underwriting director, property, Royal & SunAlliance.