5 minute read
Prevention is better than cure
Prevention is Prevention is
better than cure
Considering the impact of the pandemic and the recent violent looting which resulted in the widespread destruction of property and businesses across South Africa, the first question many business owners and shareholders asked was: “Do we have insurance and are we covered for a major business interruption?”
By Claude Hamman, IRMSA Certified Risk Management Professional
Business interruption (BI) refers to any event that stops a business from trading or generating an income. Typical examples include fire, flood, explosion, and theft. BI is a catastrophe type of risk, meaning that it doesn’t happen often, but if and when it does, business owners need to ensure that they are prepared with good business continuity management and that their insurance policy will respond appropriately.
Prevention is better than cure, especially when it comes to insurance. Claims may be repudiated due to control failures that were said to be in place, may be applied in the event of asset values being understated. Claims may also take several weeks to be paid or the business may require expensive legal assistance to convince insurers that a claim is valid, resulting in further financial strain. The bottom line is that insurance is a financial safety net but there is a lot a business can do to mitigate risk before calling upon their insurer.
Identifying risks
Not only do you need to know and understand your business risks, but also those of the extended enterprise. Do you understand your supply chain exposure, and have you asked yourself what your customers and suppliers’ (extended enterprise) interruption plans look like, and what, from those plans, do you need to include and account for in your own BI plan?
Whether you are a small or big business, you need to consider what your insurable and noninsurable risks are. Start by identifying the major events that can cause your business to grind to a complete halt. Then determine the type of risks that can cause a partial loss of income. Every business and industry has a series of scenarios that have the potential of playing out. You can determine the risks thereof and prioritise those that can cause your income to completely cease operations for an extended period. By way of example, if you owned a fish and chips franchise and your fryer packs up, you wouldn’t be able to sell any food until it is replaced or repaired – a 100% loss of income.
Identifying income streams
You need to consider all the revenue streams that your business survives on. This will enable you to determine what the impact and duration would be on the business’s finances if any or all of these become unviable, as well as identify the appropriate indemnity period.
Ask yourself these questions: 1. What could the possible causes of income shutdowns be? 2. Are the causes deferrable or insurable? 3. How will a loss of market share affect your income streams? 4. How reliant is your business on external parties/ players? 5. How long will it take to return to normal business operations?
Risk mitigation
Developing a business continuity plan is a practical way of getting your business up and running and staying operational, in the eventuality of an adverse event. No business is too small to have a business continuity plan in place.
It could be the difference in a business recovering from an adverse event or not. Proper risk management informs your business continuity. Consider each risk and the appropriate controls required to ensure that they remain within your appetite and tolerance for financial or reputational loss.
Risk management
Risks are uncertainties in your business operations and operating environment. When an event occurs i.e. the risk materialises, you fall back on a business continuity management and disaster recovery plan. It is important to understand the context of
your unique business and the internal and external uncertainties it faces. It is vitally important that risks are identified, evaluated against your risk appetite and treated to ensure the inherent risk exposure is reduced. Unfortunately, even the best controls fail. We cannot have controls in place for every eventuality, but we can be prepared for most catastrophic events by remaining agile in our thinking and ensuring we have adopted good business continuity practices in a robust business continuity plan.
With the increasing adoption of widespread work-from-home strategies by organisations, the claims trends suggest that cyber-related events are increasing. Have you considered a Disaster Recovery Plan (DRP) that focuses on the continuity of Information Technology (IT)? How quickly are you able to start up again, in terms of servers, data, etc? Your business might still be standing but will you be able to operate without your key operating system, communication infrastructure, and customer/ supplier information? Cyber risks, like hacking and data extortion, increase the need for effective DRP’s.
Risk transfer
Risk transfer commonly takes place through an insurance contract or via an outsourcing contract to a third party. Consider insurable versus uninsurable risk carefully, you need an effective business continuity plan (BCP) for both insurable and uninsurable risks.
Often your insurer will insist upon effective BCP’s as this is key to reducing any downtime and reinstating normal operations as soon as possible. Many previously insurable risks may become uninsurable or unaffordable. Already, we can see almost all types of infectious disease cover has been removed from insurance policies and we can expect significant increases in SASRIA and Political Violence related cover from 2022 onward. It is in your best interest to consider possible loss scenarios and how they will impact your business.
How resilient is your business?
In other words, how equipped is your business to handle adverse events? If you have a super resilient business with a continuity plan in place covering a multitude of eventuality and resource requirements, you will be able to adapt to any adverse event that materialises, activate your plan, and get on with business.
Are you prepared for the next uncertainty?
Often, we think of recovery only in terms of having the business up and running but we forget about the loss of market share and customers that will need to be converted back to your brand. This takes time. When an event occurs, you need to react as if you are uninsured and action your business continuity plan swiftly, so that you can get your business up and running.
If in doubt, speak to a specialist risk advisor for guidance on how to identify, evaluate, treat, and transfer risk effectively and in a cost-efficient
manner.
Claude Hamman, IRMSA Certified Risk Management Professional
