Bringing an end to guesswork and assumptions with business interruption insurance
30 july 2019
Some business risks are difficult to estimate, let alone adequately insure. This is extremely true for business interruption insurance. “I estimate that eighty per cent of companies with this type insurance do not have a clear enough picture of the actual risks for their organisation” said Russell Swart, who deploys an effective and practical tool with Riskonet’s clients.
A fire or another contingency is in itself already a drama for a business. However, it is the consequential loss of such an event that usually has major and far-reaching consequences. This is typically something that should be properly insured, though it is not a simple task. Considerable calculations are involved in the consequences of a fire estimating in advance. It involves numerous factors, including lost turnover, loss of profits, production and various known and unknown consequences. “Financial teams in companies struggle to get the relevant figures together, meaning that they make many estimates and assumptions”, according to Russell Swart, who recently joined Riskonet as a business interruption expert and will work closely with senior consultant Gerrit Vink.
Russell Swart specialises in this subject. Swart hails from South Africa and for the last forty years has worked in this field all over the world, including in the Netherlands, and he is pleased to deploy his expertise for Riskonet’s clients. “Many CFOs and CEOs in companies rack their brains over the more complicated, extensive business interruption issues. Brokers and insurers also find the subject complex, partly due to a lack of relevant expertise”, explained Swart.
What is so difficult about estimating business interruption? “There are many misunderstandings about this subject. You are insuring loss of profits. If your company or production facility is unable to operate due to a contingency, then you lose the profit margin that you would have had under normal circumstances.”
Estimates and assumptions
“Calculating the lost margin is so complex because it involves many factors. This is particularly the case for an international company with different products, varied margins and internal and external suppliers. This is why estimates and assumptions are used in many cases. It makes it difficult to get a clear picture of the real value and the actual damage, and the risks of business interruption.
Russell Swart has many years of experience in this field and this led him to build a comprehensive model for estimating business interruption. It has evolved over recent years into an instrument which incorporates all conceivable factors, dependencies and consequences. “It has grown into an unrivalled, all-round calculation tool which actually takes everything into account. It’s an instrument that any company can use. They can input their own data and get specific, logical and feasible results. The great thing is that we are making the tool available for future use. It can be updated with new data and new situations. For instance, if a new production facility has opened or there are new suppliers, these can be immediately translated into a new financial picture of business interruption risks.”
Russell Swart’s approach differs in a number of ways to current market practices. “I’m aware that companies invest a great deal in business interruption studies, with sizeable reports. Even when you read one of these reports, you still don’t always know what you should insure or for what amount. Many assumptions are made, which correspondingly lead to many open ends in the results. The exercise is repeated every two or three years, without any better understanding of the risks.”
"I estimate that eighty per cent of companies do not have a clear enough picture of the actual risks for their organisation."
‘business interruption’ expert Riskonet
Russell Swart has developed a tool that provides real answers to directors’ questions about the risks of business interruption and the need for adequate insurance. He decided to invest his time and energy into the tool that provides real answers to legitimate questions by directors into the risks of business interruption and the need for adequate insurance. “The tool is customised to the situation and needs of the organisation concerned. After the first exercise, and after recognising that the results are logical and provide a representative picture, the organisation can input new, updated data. The organisation can enter data about products, margins, locations, suppliers and clients, and will get almost new and reliable results almost immediately, and the precise amount to be insured.” Swart noted that insuring contingent business interruption, the effect on a business if a supplier or client fails, is also complex. “The tool is equally capable of quantifying the value of suppliers and clients for the company in terms of turnover and margin.”
Anticipating the effect of changes
Once the tool has been set up and configured, the CFO will possess an instrument for many years which also enables them to predict the effects of future changes in the organisation. “If the company is going to launch a new product, then every detail has an influence, from where and how it is produced to where it will be distributed. The effect of any change in the parameters can be calculated. It is even possible to work through different scenarios. What if there is a hitch, lasting from a few weeks to months or even a year or two? The instrument removes the guesswork and assumptions from the calculation. This produces better decisions, with greater certainty about the actual risk position and a lower chance of problems with the insurer when a contingency actually occurs.”
In practice, Russell Swart has seen that the extra certainty about the realism in the picture also convinces insurers, particularly now that they increasingly want to understand the basis for the insurance. “They see that the tool takes account of all conceivable parameters and processes these effectively into the total picture. They also have fewer reasons to call the results into question. So, working with this tool not only provides certainty for organisations, but also creates buy-in among insurers. The company is no longer a black box for insurers, and they trust the results.” This growing confidence has led Russell Swart to set up a training course at Riskonet for enhancing risk management engineers’ knowledge about business interruption insurance.
The tool’s operation has been proven in organisations in Europe, North and South America, South Africa and Australia. Russell Swart is enthusiastic about familiarising Riskonet’s clients with the approach. He also gives Dutch business owners the satisfaction of having real figures over assumptions when they determine business interruption risks. “I estimate that eighty per cent of companies with this type of insurance do not have a clear enough picture of the actual risks for their organisation.” According to Russell Swart, it is an important addition: “We promise that our clients will receive the fully open tool for their own use and that the results will be treated confidentially. We only disclose Information to insurers if the client wishes, and Riskonet can provide support in dialogues with insurers on behalf of the client.”
“The persuasive power of this approach is in the certainty of having the correct figures, reliable assumptions, or rather, absolutely no assumptions, and improving decisions, namely, what are you going to insure and for what amount. In this way, you ensure that you are never under or over insured. You also have a better story and a stronger discussion position with the insurer that will ultimately be pleased that your insurance application is thoroughly substantiated. Finally, as a CFO, you also have a better story for stakeholders, if they ask about the basis for expenditure on business interruption insurance that initially appears high.