In part 1 of this series, we unpacked the basics of business interruption insurance. Now, the next step is knowing your risks and identifying income streams.
In short: Business interruption (BI) refers to any event that stops a business from trading or generating an income, e.g. fire, flood, explosion and theft.
Business interruption insurance covers a business against the loss of revenue and helps it to get back on track in terms of paying overheads and expenses during downtime.
Identifying risks with scenario planning
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 of time.
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.
Whether you are a small or big business, you need to consider what your insurable and non-insurable 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. A good risk advisor should be able to help you identify these and guide you on what to cover and what to ‘transfer’.
There are four risk variables:
- Known knowns: Risk is known both theoretically (in correspondence to events which do or may happen) and as an actual risk exposure of which portents or impacts can be described using available evidence.
- Unknown knowns: Risk is less well known theoretically, but individual or organisational experience of it necessitates the management thereof.
- Known unknowns: It is understood that a particular type or category of risk deserves attention, yet there is a lack of convincing evidence for its presence as an actual risk exposure for the organisation at a particular time.
- Unknown unknowns: Possible risks which have not been predicted, and evidence for whose relevance within some specific organisational context might exist as scattered information, but not as clear-cut risk knowledge.
Identifying income streams
You need to consider all of 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 would be turned off, as well as identify your indemnity period.
Ask yourself questions such as the following:
- What could the possible causes of these income shutdowns be?
- Are the causes deferrable or insurable?
- How will a loss of market share affect your income streams?
- How reliant is your business on external parties/players?
- What are the impacts of variable incomes like investments and interest rates?
- Have you considered the effects of macro events like exchange rates and political sanctions as part of your overall risk exposure?
Take-outs
- Prioritise your risks: What are the big events that can cause your business to stop?
- Scenario planning: Determine the scenarios that have the potential of playing out.
- Identify income streams: Assess how your business generates income and the impact and duration on the businesses finances.
- Be informed: The better you understand your business and its risks, the better your business can be covered, not just in terms of getting back up and running, but also to regain loss of income.
By Peter Olyott, CEO of Indwe Risk Services. This article is the 2nd in a series to unpack business interruption insurance. Read part 3 here.
