Starting a business is a huge achievement, while the greatest challenge is to sustain and develop it. There are many threats to a business that can take it from profitability to extreme financial hardship in an instant, and many risks are entirely beyond our control. When a constrained economy combines with other unexpected physical mishaps, the results can be as calamitous as the effects of throwing a spanner into the pistons of an engine.
One of the most important business conversations an entrepreneur can have is with a professional risk advisor who can objectively interrogate the nature of your business, its unique needs, reliance on its supply chain, the range of likely risks and how to mitigate the impact of such in a worst case scenario.
“Many businesses have the usual property and assets cover for their buildings, vehicles and other essential equipment,” explains Clayton Ellary, senior account executive at global insurance brokerage and risk advisory Aon South Africa. “All good and well if you have an accident, theft or fire and your policy is able to take care of the replacement of the physical assets, but what happens if you are also unable to trade for weeks, even months and your revenue declines or even stops altogether as a result?
“If the only road to your luxury B&B in the Drakensberg is blocked off for a month due to a landslide or sinkhole, how would you recoup the lost income of no guest bookings? If your fast-food franchise burnt down and it took three months to rehabilitate the site and rebuild the store, how would you pay staff, rent, taxes, franchise fees and so on? If a multi-million rand, imported machine in your component factory explodes and the replacement from overseas is three months down the line, how will you pay your creditors? None of these costs stop simply because you’re unable to trade due to a physical disaster or force majeure.”
This is where business Interruption insurance becomes a necessity. It can mean the difference between surviving a disaster with your profits and turnover intact, or shutting your doors, permanently. Business interruption insurance is designed to compensate the business for the financial impact of the interruption/interference as a result of physical damage to the insured property or other key external events, for example damage at a key customer or supplier’s property.
Businesses can purchase contingent business interruption coverage, an aspect of business interruption insurance, where the insurance is triggered by property damage at the premises of a supplier or customer, or other trigger such as loss of utility, denial of access or the act of a local authority which results in a financial loss you may suffer.
The intention of business interruption insurance is to restore the business to the same financial position as if the loss had not occurred as well as to cater for additional increased costs/expenses incurred to minimise further loss of revenue and lessen the time to do so, subject always to the terms and conditions of the policy. Business interruption claims are normally linked to material damage/property damage.
“While your property or assets insurance covers the damage to physical property or equipment and replaces the actual assets, business interruption is vitally important to tide your business over in terms of the lost income as a result of physical damage, until you get back to operating your business as usual,” explains Ellary.
What does business interruption insurance cover?
Although the specifics of cover vary from one insurer to another, the basic tenets of BI are:
• Payment of a specified amount of money that reflects the difference between what you should have earned versus what you actually earned in the period following the disaster. This figure is determined at the inception of the policy and is based on audited financials and turnover determined through a thorough risk assessment conducted by a professional broker.
• Payment of a percentage of the sum insured to help you make temporary arrangements to get your business back up and running.
• Business Interruption Insurance is not sold as a stand-alone policy. It is linked to your business property insurance, and is triggered if the business interruption is as a result of one of the insured perils on your property insurance policy for example fire, flood, explosion.
Manage insurability through effective risk management
“While covers like business interruption play a fundamental role in seeing your business through a major disaster to trade again, the need for effective risk management and mitigation simply cannot be emphasised enough,” adds Ellary.
Consider the case of a manufacturer committed to risk management that has in place the best controls possible. His supplier may not be so dedicated in this respect. Where there are a large number of suppliers, the manufacturer is less likely to have a problem. He will merely buy from the others.
However, where there is, for example, a duopoly and one suffers a serious interruption, the other may not be able to cope with the demand. Also, foreign markets may need to be accessed but usually at higher cost. With the ‘suppliers extension’ in place on a BI policy, this additional cost would be covered. If no alternative source of supply can be found, the manufacturer may well find itself unable to produce its product.
“The resultant loss of sales will also be covered by the supplier’s extension, assuming it will respond. In a worst case scenario, assuming the supplier’s extension did not respond, a company could even go out of business as a result of an occurrence which was beyond its control,” says Ellary.
“It’s vitally important for businesses that are reliant on others for supply of critical stocks to address the potential risk associated with suppliers throughout the supply chain. If not, the potential knock-on effect could be both severe and far reaching as end users find themselves let down by their suppliers.”
Finally, Ellary advises that it’s important to engage with a qualified, expert broker who can assess how your different business insurance covers mesh together to create a veritable safety net against the many challenges besetting SMES.
“Business Interruption cover is simply one of a number of important risk products that businesses need to safeguard their continuity. A clear description of a business and its operational environment is central to the drafting of a well-conceived insurance strategy. A comprehensive risk assessment will greatly aid in identifying the potential hazards, in addition to determining what physical precautions and management processes should be in place.
“It’s also very important to have an accurate assessment of the replacement costs of buildings, contents, vehicles, IT, stock and other assets, particularly in the event of a catastrophic loss. By linking professional advice to an aligned insurance program that covers virtually all the ‘what if’ scenarios of not only physical damage, but the knock-on implications for business continuity, Aon clients get to experience the real depth of value of a comprehensive risk analysis backed with professional advice and expertise,” Ellary says.