It could have been worse ...

- Insurance Age staff
- 17 Sep 1999
- Indicative reading time: 3 minutes

Having the right business interruption cover can save a business from collapse. Martin Savage explains how to carry out a full BI study.

The role of insurance reaches far beyond simply doling out payment
following a loss. Identifying potential causes and minimising the impact
of any incident is a pivotal part of the risk management process - a
process which these days few companies can afford to ignore.

For companies with business-critical risk factors, a carefully planned
business interruption (BI) study provides a vital safety net, allowing
them to identify potential pitfalls and develop solutions. It enables them
to identify the extent to which their business is likely to be disrupted
following a loss. Based on the findings, brokers and insurers can make
recommendations to enhance a company's resilience, improve damage
limitation procedures, and achieve a prompt and effective recovery in the
event of loss.

Back to BI basics

A BI study requires a detailed methodology that addresses all pertinent
elements of the client's business. The study should comprise a site survey
and structured interviews with key managers, combined with an in-depth
examination of the organisation's most recently published report and
accounts, as well as any other publications that would provide an insight
into the development of the business.

A typical BI study will look at a wide range of factors and
activities.

Firstly, there is the company's business - its activities and processes.
Then there is the customer base. Here, the study must take into account
the marketplace, competition, customer loyalty, seasonality, and
proportion of sales to particular customers.

The broker should consider whether the company requires specialised or
standard premises and what alternatives are available in a specified
location.

When assessing the re-build period, are there any particular planning
considerations and could there be any problems with access?

If the company is reliant upon utilities, what is the reliability and
resilience of supply? Check the interruption history, the standby
arrangements (including capacity and maintenance) and find out whether
there are any issues with hazardous waste and effluent disposal.

The study should look at plant and equipment, including: 'pinch-points',
lead times, susceptibility to damage/breakdown, moulds, and fixtures.

With tooling, the key factors are duplication, source, and
criticality.

With patterns and plans, is there duplication and back-up, where is it
held and, importantly, whose property are the patterns and plans?

What levels of stock and materials are held, where are they located and
what are the 'worst case' levels (lowest quantity, highest demand)? You
must look at raw materials, finished stock ('just-in-time' or are buffer
stocks available?), factored goods (is direct supply possible?), and the
availability of replenishment.

What activities and processes are reliant upon IT? The key factors are
location, confidentiality, integrity, availability (in line with BS 7799),
physical protection, mirroring, incremental and full system back-up,
hardware and software replacement, maintenance contract conditions,
computer-aided design (CAD), uninterruptible power supplies (UPS), and
contingency arrangements (are there contracted disaster recovery
facilities?).

The study should look at the reliance on suppliers and
sub-contractors.

Are they unique, are there alternatives and is there back-up of
intellectual property - drawings, CAD output - held by
sub-contractors?

Finally, there should be a section under the heading of mitigation,
covering group or external assistance (verified); business continuity
plans (completed, installed, maintained, and exercised) and 'change
management' arrangements.

The material damage exposures will have a significant bearing upon the BI
risk. For example, electrical power is a business-critical
requirement.

The risk issues will extend beyond fire within the confines of the site to
whether, for instance, there is duplication of supply, the risk of
interruption, the need for fall-back facilities such as ring supply and
back-feed capability, transformer capacity, replacement/re-instatement
times, stand-by generators and UPS. Their impact in the event of a
short-, medium- and long-term power outage is crucial.

The study will enable the broker or insurer to give their client clear
advice on cover. This may include supplier and customer extensions, public
supply franchises, increased cost of working (ICW), and additional
increased cost of working (AICW). It will also assist in identifying the
most appropriate length of indemnity period to meet the business'
needs.

The BI study must provide an assessment of the extent of loss. If clearly
calculated and with a justification of the figures, this is invaluable to
insurer, broker, and client alike. A recently-published ABI document
provides the basis for calculating a BI loss assessment and a benchmark
against which to measure it.

A detailed BI study offers brokers the opportunity to add value to their
proposition by offering their clients advice on related areas such as loss
prevention, damage limitation and business recovery. This may range from
the simple - eg improved segregation of tooling or reliable information
back-up - to the more complex requirement of a full consultancy service in
business continuity management.

The best way for brokers to gain acceptance for risk improvement is to
promote the concept of business survival rather than premium saving - if
the client accepts this philosophy, then the rest will follow.

- Martin Savage is a business continuity consultant at Royal &
SunAlliance.

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