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delivery process, to intellectual assets and other ongoing stakeholder
support; and
* The second mismatch is that the insurer, to be able to assess and cost the
risks that are to be assumed, needs to have the cause of the loss as the
primary driver in the covers and negotiations. The ˜insured™, consider-
ing potentially critical or catastrophic loss, sees the impact, not causes,
as the primary concern.
These mismatches need to be managed in themselves if the parties are to
deliver effective insurance protections that meet the business need.


There is a further aspect that needs to be said. Organisations need to ensure that
their cost of risk is evened out over a period of time and they will be consider-
ing a period of some years; maybe even a decade or more. In other words they
are not able to maintain stakeholders™ support if their stability varies dramat-
ically year by year. Insurers do have a history of withdrawing the availability of
cover just at a time when it is most needed. This may entail an outright refusal
of cover in some trades or a significantly reduced market capacity that has the
effect of dramatically increasing premiums. Examples include the cover against
terrorism (see also above) and also some liability covers when claims patterns
show increased claims frequency.
We will now move on to consider the product range of the insurance indus-
try then come back to these needs and explore where, if at all, they join in with
each other.


Insurance products: the headlines
The headlines are that the primary level and conventional insurance prod-
ucts usually come in two forms:
* The ˜material damage™ policies that protect against physical damage or
loss of assets, occasionally extended to include some resultant loss of
revenues; and
* The liability policies that will reimburse monies should the policy-
holder be successfully sued “ or indeed incur costs being unsuccess-
fully sued “ by another person or legal body.
We do not have the space in this article to explore these in detail but there
are a couple of relevant headlines worth consideration within this article.



Material damage policies
These are aptly described and are concerned with the loss of physical assets.
The perils insured against do vary with the type of policy. The cause of the
Part B “ Overview of the Economic Aspects of Business Risks
194



damage “ known as the proximate cause “ must be one of those perils that are
mentioned in the policy. Some perils are quite specifically excluded to avoid
any confusion in the wordings. These include nuclear damage, emerging dam-
age such as pollution, war risks, (increasingly) terrorism, the consequences of
the loss of electronic data and any others. The fact that these perils are not
insured or insurable does not mean that they will go away; they remain a con-
cern for the risk manager.
Conventional insurance protection may not concern itself with what the
damaged things do for the insured organisation, nor the dependencies on the
insured items. The policy may not concern itself either with the question
whether a precise fit of a replacement item is or is not available immediately.
When a replacement commodity cannot immediately be delivered it is not an
issue for the insurance contract nor especially the insurer.
˜Increased cost of working™ or ˜business interruption™ covers are available
from the insurance market. They set out to replace revenues, sometimes profits,
and maintain those ongoing fixed costs that do not reduce directly as sales
reduce. The policy can cover also any increase in operational costs of working
to meet deliveries while the main delivery faculty is being rebuilt.
The first item of interest to the insurer is that the interruption must be as a
result of an incident that is simultaneously insured by a material damage pol-
icy. If it is not, then generally the revenue covers will fail too.
The second interest is that the replacement of lost revenues and extra costs
is over a period of time that is defined in the policy. This is called the indemnity
period. At the end of that period, cover ceases and the ˜insured™ organisation is
on its own. The part of the cover that indemnifies the ˜increased cost of working™
is valuable to an insured, which needs to spend additional sums to ensure that
it stays credible within its marketplace and to its stakeholders. Such expend-
iture may, for example, include marketing costs to keep the brand value alive,
and the costs of outsourcing supplies that were previously built in-house.
There is an important additional constraint related to this period of indem-
nity. Any such increased expenditure must, to be recovered from the insurer, be
˜economic™ to the insurer. In other words that expenditure would need to bring
about a reduction in the insurance claim at least equal to the amount spent.
Needless to say therefore that the claim amount is constrained by both what is
insured and also the contracted period of the indemnity, and the board my need
to think much longer term and feel the need to spend much more on emergency
deliveries and marketing. This must be at the insured™s own cost, just at a time
when revenues, assets, cash flows and even credit ratings are already under
great strain.

Liability covers
These policies will be structured to protect against the liabilities the insured
may acquire to their employees and to third parties. There are a couple of
important aspects for the risk manager when considering business survival
exposures.
Chapter 8 “ Business interruption and risk management 195



The first aspect to stress is the importance of the adequacy of the liability
covers, both in the range of cover and in the adequacy of the limit of indemnity.
Liability awards can be so large that they can be many times the net asset value
of the organisation. In other words a successful claim combined with a failure
of the insurance protection can destroy the very financial stability and lead to
closure of the entire company. That insurance failure may not only be in the
inadequacy of the limit of indemnity. Policies will have exclusion clauses. One
exclusion may be claims brought in the jurisdiction of American or Canadian
courts; another may exclude any products or services sold to the aviation
industry.
Policies may also have warranties that will demand certain activities or
controls must be maintained for the cover to remain in force. The task of the
risk manager, and indeed it is a business survival issue, is to stay in touch with
the detailed activities around the organisation and ensure that those activities
remain within the insurance policy understandings. Finally, in this flying visit
to liability insurance we need to remember that insurance will never protect
against a deliberate act. Fines by a regulator or the criminal justice system are
not insurable.
The second case illustrates that it is not just the finite sum that catches the
breath of an organisation but the relationship between that sum and the ability
to pay, and also to continue as before.


Summary
To fully appreciate the value of insurance protections in catastrophic loss situ-
ations we need first to remind ourselves of the dependencies on the back of
which an organisation continues to survive. These are the issues, rather than
the cost of replacing buildings and machinery, that will drive the board™s con-
centration during these difficult times. They are the issues which, if lost, will
lead to threats to the very survival of the organisation.


Timeout of marketplaces while workplaces are reinstated
Material damage insurance covers can provide the funds that will enable the
rebuilding process to begin. The physical work of rebuilding has to go through
many stages, however, before the factory or office is back in business ˜as nor-
mal™. The site needs to be cleared. Decisions then have to be made on exactly
how the new facility is to look; and planning approvals are very likely to be
needed. Only then can the tender document be prepared, estimates obtained
and negotiated, and decisions made again. There follows the wait until the
builders or the machinery manufacturers can begin work and a further wait
until the facilities are completed and delivered. Material damage insurance
does not offer any assistance in meeting delivery problems during this wait,
other than the infrequent use of business interruption policies; the weaknesses
of those policies are outlined above.
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The ˜timeout™, however, may be because of a failure that is not related to the
loss of physical property. The supply chain, whether it is external or internal,
can fail for a variety of reasons. They may include financial failure of a supplier,
transport blockages such as the petrol strike in the United Kingdom, non-
renewal of supply contracts and a failure of raw material supply. With a conven-
tional insurance programme, the organisation is facing these issues on its own.
Fines and penalties are not insurable; neither is the often greater resultant
damage to confidence and brand values.

Stakeholder™s loss
Policies do not go on to protect against losses, many times more costly than the
original incident, when a consequence is that customers and other stakeholders
lose confidence and walk away. Furthermore it is not normally possible to
insure against becoming illegal; however, unwittingly. This cause can bring
about the fastest way that an organisation can come to a complete closure.
Information, whether it be corporate, customer, or other information, is the
very lifeblood of a modern organisation; as is the ability to ˜mine™ that informa-
tion in particular ways for marketing, management information, regulatory
needs or otherwise business control. Intellectual assets go much further than
just data. We can extend the description to include computer software, designs,
patents, research output and research verifications, audit trails for auditors and
accountants, recipes, and current work on software, product and other develop-
ments. Certain contracts can be regarded also as an intellectual asset, as indeed
can relationships and trust from the supply and delivery chain through to the
wider list of stakeholders. The very reputation of the organisation can be
described as an intellectual asset, with the brand dependencies of reputation,
goodwill, credit rating, stock market analyst support and of course the avoid-
ance of media attack. Last, but by no means least, is the culmination of experi-
ence and skills right across the workforce. These are crucial; business threatening
dependencies yet insurances against the full cost of their loss are not generally
available in the insurance market. Some insurance even sets out to avoid
indemnifying intellectual asset exposures by specific exclusions.
The insurance market is undoubtedly useful for rebuilding balance sheets
and revenues from losses caused by some damage and by some litigation. This
use is for organisations looking to protect themselves against degrees of finan-
cial loss that they cannot comfortably bear internally.
The real concern, however, is that such an insurance claim is useful to
rebuild balance sheets only if the insured organisation is lucky enough “ or
well managed enough “ to keep its dependencies going and thus actually sur-
vive a major loss. Should the organisation be neither lucky nor well managed
the real value of the insurance claim is insignificant in the scheme of things
that then unfold.
The real driver for this debate in modern organisations are the risks that can
lead directly to destruction and where the placement of a monetary value on the
loss is peripheral to the real issue; or even of no real purpose at all. Such losses
Chapter 8 “ Business interruption and risk management 197



are when the very foundation stones of the organisation are removed; the skills,
information, other intellectual assets, the brand, the confidence of its stakehold-
ers and a failure in the ability to supply mean the departure from the marketplace
is long enough for competitors to take away the customers; probably for ever.
It is clear that the greatest damage that a major, modern, multinational can
face is too often not monetary; it is operational and intellectual. It is clear also
that insurers are driven by the need to identify individual causes of damage;
whereas the continuity/risk managers are concerned primarily with the poten-
tial for destructive damage to one of the crucial cornerstones of the organisa-
tion™s survival. They are entirely different approaches.

To reinforce the point we list below the top 10 concerns that emerged from
a survey by AON among the UK™s top 2000 companies. They are listed in
order of importance.
1 Business interruption
1 Failure to change
3 Employee accidents
4 Employee recruitment/retention
5 Loss of reputation
6 Failure of key strategic alliance
6 Professional indemnity
8 General liability
9 Product liability/tamper
10 Political risk
10 Physical damage

Unless the underlying conflicts can be brought effectively together, insurance
may continue to have very little real value in the survival stakes of the modern
organisation. Nevertheless, we have set out to encourage the reader towards a
realistic assessment of the values of a conventional insurance programme to a
modern company and, above all, to be quite clear where insurance is not able
to extend assistance to an organisation facing potentially catastrophic damage.
The responsibilities for understanding and managing risk lie still and
irrevocably within the organisation carrying those risks and sadly there are no
easy options for passing those risks on to others. Too often directors have been
heard to say, ˜we don™t need risk management as we have insurance™. Food for
more thought perhaps?


Educational programmes
An outline of a Business Continuity and Crisis Management Syllabus is pro-
vided in Appendix F, an summary of the programme is as follows:
Understanding the risks;
Stakeholders and their role;
Part B “ Overview of the Economic Aspects of Business Risks
198



Governance, good practice, standards, regulation and the law;
Culture, strategy, performance, risk and business continuity;
The business continuity management cycle;
The business impact analysis (BIA);
The business impact analysis: a hitchhiker™s guide;
Application and uses of BIA information;
Technology exposures and continuity;
Dependency management: supplier management, outsourcing and business
support;
Other applications for business continuity tools and principles;
The role of people;
The values of insurance products in a crisis situation;
Communications in a crisis;
Relationships with emergency and governmental services;
Rehearsals and exercising of plans and risk decision making;
Maintenance, benchmarking, assurance and audit; and
The continuity plan and its role.


Chapter summary
It is clear that businesses need to prioritise this aspect of sustainable business

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