Insurance is an essential aspect of any business continuity programme, as it provides a financial mechanism to pay for the reinstatement of assets and indemnifies businesses for the loss of profits. However, business interruption (BI) insurance is often arranged separately from the Business Continuity Plan (BCP), even though they are inextricably linked.
BI covers your loss of gross profit if there is a claim under your commercial insurance policy, and your BCP will help you recover your business before your clients experience too much disruption and seek alternatives. And insurance is a recognised business continuity strategy when you look to design your BCP.
But if the BI and BCP don’t collaborate, another critical application of BI insurance is missed that can fundamentally reshape the design of both the BCP and the BI programme.
BI insurance is complex, particularly when it comes to settling claims. It uses terminology that may have a different meaning than the accountancy term. It is usually purchased for an “Indemnity Period,” the time it will take for the business to get back to pre-event trading. This is typically expressed in months, such as a 12-, 18- or 24-month indemnity period.
An important concept of insurance is “indemnity”, which puts you back to where you were before the loss occurred, not in a better position. In the context of BI insurance, it will not spend more than £1 to save £1 of lost profit.
Your BCP, provided it is not a Disaster Recovery Plan, should be designed to reinstate the supply of your products or services within a pre-defined timeframe that ensures minimum disruption to the customer relationship. So the speed of response is critical, and this can mean throwing money at the problem.
This is where business interruption insurance and business continuity planning start working together and where the sum of the whole is greater than the sum of the parts.
There is an extension to BI insurance called Additional Increased Cost of Working (AICOW), and it allows you to spend more than £1 to save £1, in effect, “throw money at the problem”.
So, if you don’t know about AICOW and what it can do, it can limit the design of your BCP, as you are likely to consider the BCP design based on your accepted financial constraints.
- A company uses AICOW to pay for soft tooling with shorter lead times than hard tooling, thus reducing the recovery times of the process.
- AICOW pays for components sent by air freight rather than sea freight to reduce delivery time.
- Process is outsourced at an additional cost (AICOW) whilst reinstated to ensure that the product continues to be delivered.
- Temporary warehouse space is hired at an additional cost to shorten the recovery of operations.
- A “premium” is paid for a replacement item of plant to jump the queue.
When we work with Partners&, this is a key part of the client conversation. “What is the “money no object” resilience solution” and using this to change the thinking about the design of the BCP and what BI insurance is purchased.
When you buy BI cover without integrating it with your BCP, you are effectively buying insurance that pays out for lost clients. When you combine the two, your BI and BCP are designed to help keep your hard-won clients.
If you would like to discuss how your BI insurance and BCP can work together, contact BCarm direct or ask your Partners& adviser for an introduction.
Written by Steve Williams, Managing Director of BCarm, part of the Partners& ecosystem
Steve Williams AMBCI, MIIRSM
Steve Williams AMBCI, MIIRSM
m: 07866 368144
t: 0800 8799981