Most entrepreneurs today have insured their asset-related risks, and many have acquired insurance against the interruption of business, i.e. in the case of a major insured event the insurance pays indemnity for fixed costs and additional costs following the insured event, as well as for the loss of profit.
Traditionally, insurance against interruption of business has been linked to the place of business of a production unit or sales unit. An insured event is, for example, a situation in which major property-related damage occurs in the insured company (fire, flood, failure of the main production equipment, etc.), resulting in partial or total suspension of main operations and a decrease in planned business volumes.
In today's fast-changing business environment, it may not be enough to insure assets related to the traditional place of business or against the interruption of business. According to the Austrian company Risk Consult, a year after the recovery of the production or service unit from a major insured event, four companies out of ten are still insolvent or have a new ownership structure. This is also the case if the company has received both the indemnity for property insurance and the compensation for the interruption of business, i.e. the situation before the insured event has been restored. If there is no insurance cover, the likelihood of insolvency or ownership change is close to 100%.
So what should be the focus in addition to traditional insurance?
In the context of growing competition and specialisation, companies are increasingly dependent on suppliers and on the reliability of supply chains in providing services to their customers. Companies, for example, depend on the operating reliability of the service provider's server or on the timely arrival of the sub-contractor's product component. Often, all the parts of the supply chain are not even known, such as the second and third-level subcontractors. As margins do not allow one to keep larger stocks for unexpected reasons or enter into multiple supply contracts, this in turn means that the risk related to the security of supply increases and customer service may, in turn, be affected by the supplier, and not only property damage to the entity's own unit.
In ensuring business sustainability, another key component is maintaining customer service. If service or supplies cannot be sustained after a major insured event, then it is highly probable that it is game over for the company, so to speak. Customers are simply forced to re-arrange their solutions and find alternative service providers, whether they are customers of a bakery with their buying habits or engineering enterprises that use metalworking products. It is not always possible to win back lost customers, and at the end of the indemnity period of the insurance against the interruption of business, the entrepreneur may still wonder whether they can continue their business and how.
The third significant issue to be taken into account is the availability of production equipment and, in particular, the corresponding time factor. The principle "we don’t produce in warehouses" also extends to suppliers of production equipment, and therefore one must be increasingly prepared for longer delivery times. This particular period is often underestimated, because the process of the procurement of equipment is the last resort.
What do you do to reduce the risks in the case of interruption of business?
Small and medium-sized enterprises should map, in a simple and detailed manner, the impact of the necessary resources on their business, and an assessment of the realisation of the risks of respective suppliers. In order to ensure the sustainability of customer service, there could be a proactive plan for potential actions in the case of various failures. Perhaps solutions should be found to situations where, for example, there is a major failure in the main supplier’s factory, transport chain, production equipment or site. Is it possible to proactively agree on temporary new subcontracting with some entity in the same industry, as under certain circumstances it might be in the interest of one or another party? How quickly can the supplier roll over the planned activity or how should an alternative supplier be used? How long does it take to deliver a new production unit and to install it? What and, in particular, how does one effectively inform our customers and partners about our situation after the insured event, and what can we promise them?
Insurers can insure risks whose probability and extent they can reasonably estimate. Dependence risks can be insured separately. Covering of the corresponding losses and possible extraordinary expenses by the insurer is possible and welcome, but in particular, it requires all the abovementioned circumstances to be tied together. There must be an understanding and description of the risks and an action plan in the case of the realisation of potential risks – this enables the insurer to assess the risks and offer additional risk management solutions suited for a particular company.
Insurance Director, Compensa Vienna Insurance Group, ADB Estonian Branch