In this interview by We Wealth Marco Accinelli, Account Executive of Strategica Group, examine the risk of Business Interruption (BI) and its underestimated implications, focusing on the role of the risk management consultant.
When we speak of Business Interruption we mean a total or even partial interruption of the activity of an organization, following an exceptional event that causes (in the classic formulation of BI) physical material damage. The stop can take place following an extreme natural event, such as an earthquake or flood, it can be determined by the consequences of a fire or an explosion, or by accidents affecting company assets, or at least the goods of suppliers. and critical customers, if provided for in the policy. The pandemic, which has caught most of the companies unprepared and forced them to deal with an almost total freeze of activities, has turned the spotlight on the subject of BI. Companies have begun to care about how to manage this risk, realizing that their survival is at stake.
Unfortunately still not enough. In Italy, according to a study carried out by Cerved in July 2020, only 3% of small and medium-sized enterprises are insured for the risk of BI. The level of coverage rises as the size of the company grows, but it still does not reach the levels of other European countries which have a greater sensitivity in terms of risk management. In fact, it often happens that companies consider not only the probability extremely low but also the impact of an event of this type low, believing that they have sufficient resources to be able to cope with it, without reducing operations but only with an increase in costs. Unfortunately - the real cases show it - it is an underestimation of the risk and a lack of understanding of it, and the consequences for a company can be very important, sometimes catastrophic.
The currently most popular BI insurance formula protects the company from the loss of the contribution margin, that is - simplifying the concept - the difference between revenues and variable costs ceasing in the event of a claim. One might think it is easily available data, but it is often the risk and insurance management consultant who supports the company in calculating it, in the first phase. The policy therefore provides for compensation for losses resulting from a total or partial stoppage of the business. We repeat: consequent to an event that causes material damage. The limit of the classic BI policies highlighted by the pandemic is precisely this: they do not intervene if the interruption is due to an event that does not cause physical damage, as happened with Covid19. There are actually very specific coverages that do this (Non Damage Business Interruption), but they are still not very widespread and very expensive. This is due to the fact that the scarcity of statistics and historical data (unlike those we have for example for natural events and fires) makes the risk assessment and related pricing process extremely difficult. Furthermore, the fact that the same event (see the pandemic one) could cause business interruptions to a large number of companies in a very large territory represents a "cumulation of risk" for insurance companies, a disincentive to insure.
Surely the pandemic has also led to reflection in the insurance sector, since it has increased, if not the demand, if only the interest of companies in BI policies and for extensions that include non-material damages. The pandemic was the most striking example but it is not the only one. What happens, for example, if the stop is due to a shortage of raw materials or services not attributable to material damage? Or a prolonged employee strike? There is no physical damage, so classic BI policies do not intervene. Another point of reflection are the other indirect damages: BI coverages compensate for the loss of contribution margin, but who, for example, reimburses any loss of market share? Or the reputational damage? We will see how the offer of the insurance sector will evolve in the near future, it is certainly a moment of great ferment.
Risk prevention and mitigation activities are fundamental, just as it is essential to be able to count on a good risk management consultant. The elements of vulnerability must first be identified: hydrogeological risk sites, dependence on critical suppliers, possible scarcity of essential raw materials, just to name a few. Based on the result, prevention plans are structured where possible aimed at limiting the probability of occurrence and the magnitude of critical events. These are analyzes and plans that every company should always implement before turning to the insurance market. Just as it is necessary to think in advance of mitigation activities that aim instead, precisely, to mitigate the effect of problems when they occur. They include actions such as the structuring of an incident response and business continuity plan, which allow immediate action to limit damage and safeguard part of the operations, the establishment of a crisis management team, which manages the crisis also in its communication aspects, the creation of a detailed business recovery program, to return to normal activities as soon as possible. These are activities that require investments but are fundamental.
Our role as risk and insurance management consultants is to support and guide companies so that by managing their risks they not only avoid potential losses, but above all they grow and strengthen. In Strategica Group we propose ourselves as 360° consultants in this field. Our activity starts from an in-depth analysis of the company and the context in which it operates, and then moves on to the mapping and analysis of the risks to which it is exposed, to the structuring of prevention actions, up to the choice of how to treat risks, with different forms of retention and / or transfer to the insurance market. We also take care of the mitigation and management of the claim, supporting the company in the phases of crisis management, recovery of any damage, resumption of activity.
