Reconnecting business

Recent weather events across the UK and continuing large fire losses are a timely reminder that, often, not enough attention is paid to the cover arranged for protecting the revenue and profit streams of businesses and to the preparation for an interruption to trading. This is particularly apparent when it comes to setting the sums insured, a realistic maximum indemnity period and preparing a workable business continuity plan.

A BCP has two primary objectives, to minimise the risk of a disaster happening and to maximise the ability of an organisation to recover from a disaster if one occurs. There are three key stages that make up a BCP. The first involves risk assessment to identify the risks facing the company, the second a business impact analysis that estimates the consequences of a business not being able to perform its essential functions, known as a business interruption. The final stage involves writing a disaster recovery plan to outline emergency procedures.

Businesses should be fully prepared to cope with a disaster and in addition should have a workable BCP to ensure that they have accurate business interruption sums insured and a sensible maximum indemnity period.

Indemnity

Many businesses continue to set a maximum indemnity period of 12 months, based on the assumption that if an incident occurred then any interruption would be short and the company would be return to operation without too much impact on trading. Many businesses assume that machinery, buildings and stock can be replaced quickly and easily and that customer bases will remain loyal if an interruption were to occur. The reality, in fact, can be very different and a BCP needs to prepare the company for the worst-case scenario.

Equally, having inadequate business interruption insurance can be extremely damaging for a business and can lead eventually to business failure. Therefore, in order to plan efficiently and accurately for an interruption to trading, insurance intermediaries need to make sure that businesses are fully aware of the factors that need to be taken into consideration.

Following several large events over the past few years it has become apparent that, even for small businesses, indemnity periods of less than 24 months are no longer appropriate and the impact of the business exhausting its cover at a critical point in its recovery phase could result in business failure.

One major issue to consider when preparing for a disaster is the availability and cost of the necessary skilled tradesmen to assist with rebuilding work. Any significant surge in demand for these services could have a substantial impact on reinstatement times. For example, businesses affected by the recent floods, many of which were left without electricity and running water, would have needed immediate assistance to recommence trading. Tradesmen came from all over the UK to provide assistance, which had a knock-on effect for other businesses that subsequently suffered damage to their premises and required this type of service.

With contractors and builders in short supply, the impact on rebuilding and reinstatement times can be dramatic and therefore it is key to take recent events into consideration when setting the maximum indemnity period.

Regeneration

Aside from natural disasters, large-scale regeneration projects that are taking place in the locality of a business can also have a similar effect on the availability of tradesmen. For example, though the Olympics is still a long way off, many builders and service providers will be employed between now and 2012 for the ongoing construction and regeneration of the area surrounding the Olympic village in East London. This could result in local businesses having difficulty sourcing the necessary workers quickly and cheaply.

There are also issues that can affect one industry more than another. In the manufacturing industry, machinery and equipment is key, so in the event of damage it is crucial to have the necessary business interruption cover for any downtime. This can be determined by how difficult the machinery is to replace, as specialist equipment will often be custom-built or available only from overseas. It is often the case that the replacement of damaged machinery or equipment can take 12 months or more to be put in place and this needs to be incorporated into the maximum indemnity period chosen as well as the BCP.

Two additional factors that have grown in importance recently and must be accounted for when setting a BCP are climate change and legislation. As part of its measures to tackle climate change the government is looking first at how best to manage UK businesses' carbon footprint.

Part of this is to assess rebuilding and planning guidelines and businesses should be aware that major rebuilding work following a loss is more likely to be subject to scrutiny and debate regarding the future sustainability of the building. For instance, following a recent fire in London it took one of our policyholders seven months to obtain planning permission. This involved several discussions with the relevant authority and several changes to the original rebuilding plan to cater for environmentally friendly design and use of energy. For hazardous risks the process can be even longer and you need only look at the debate surrounding the rebuilding of the Buncefield oil terminal to see the issues involved here.

The second part of the government's plans is to introduce legislation to protect the environment. Local authorities are putting more and more pressure on businesses to use the latest designs and materials that are kinder to the environment, which means that building compliance costs are likely to rise and the time taken to rebuild is likely to increase significantly.

London is especially stringent when it comes to environmental issues, with councils in the capital imposing a rising level of regulation to control the carbon footprint of new buildings. Following a disaster, one London-based business was required to ensure that 10% of the energy from the building came from renewable sources. In this instance, the time taken to get the business back up and running was two months longer than predicted originally and the cost was significantly higher.

Inflation

The impact of inflationary trends is another important consideration when planning for a potential interruption to business and setting the sums insured. Inflationary pressures can affect production costs and the profit margin of a business. Certain industries will rely on the provision of raw materials to function, however, global pressures on these materials caused particularly by the rising demand from countries such as China and India are having a severe impact on their price and availability, therefore having a negative knock-on effect on UK businesses. This highlights the importance of keeping a BCP up to date, as the constantly changing environment could result in a business being left with inadequate cover.

Further to global pressures there are also seasonal peaks and troughs in trading that must be taken into account. This affects the tourism industry in particular, which experiences high and low seasons. If a business were to experience a severe loss it could be unable to run for an entire season, stretching even to two seasons, which would be extremely difficult to recover from.

Businesses susceptible to peaks and troughs need to build up stocks in preparation for busy periods, and this should be considered when setting sums insured and indemnity periods to ensure enough time is allowed to rebuild buffer stocks and realign the business to trading cycles.

A BCP should enable a company theoretically to trade again within a reasonable period, but it is clear that in this changing environment it is not possible to envisage every possible event. Having accurate sums insured and a realistic maximum indemnity period can make the difference between surviving a disaster and the business failing. Insurance advisers must make sure policyholders have considered all the necessary factors that could have a serious effect on a business's bottom line.

- Martin Singleton, Technical manager for property, Norwich Union.

BUNCEFIELD: TWO YEARS ON

On the second anniversary of the Buncefield explosion at Hemel Hempstead, Paul Redington, property claims manager at Norwich Union, explains the factors that should be considered in preparation for a business interruption.

The modern portal steel-framed structures of the commercial buildings were severely damaged in the explosion, while glazing and curtain walling, fixtures, fittings and suspended ceilings were torn down. The levels of success achieved in returning these businesses to operation varied; those that had a business continuity plan in place coped better than those who did not. The explosion highlighted the real importance of keeping sums insured up to date and having a realistic maximum indemnity period.

These are some of the issues businesses faced following the incident:

- With the larger buildings, testing and examination took time in order to make them safe and expertise was employed to survey the damage and put plans in place for early rectification.

- The proximity of some buildings to the oil terminal meant that they had to be demolished. This in turn led to planning issues, a few of which still hang in the balance today.

- Seeking alternative, temporary accommodation with the same location benefits was crucial for some businesses, particularly those that deal in supply and distribution that were in need of suitable warehouse premises.

- This large-scale incident resulted in huge and immediate demand for contractors. Businesses should try to make an exclusive agreement with a local, reputable contractor and include this in their BCP to ensure that only the minimum time is lost.

- Backing up data regularly is crucial. Important paper documents must be kept secure.

- The explosion caused thousands of glazing panels to be destroyed, resulting in a huge demand for replacements of which some had to be sourced from abroad.

- Many businesses found vulnerable stock damaged by the explosion and its aftermath, examples of which include falling glass and scattered debris. Business continuity plans should consider lead-in times for items like replacement stock.

- Many businesses throughout the country were reliant on firms within the Hemel Hempstead area. These businesses were indirectly affected as a result of the explosion, highlighting the importance of considering the need for adequate supplier extensions on commercial insurance covers.