ALL BUSINESSES when faced with a major interruption to their operations, such as we experienced in Bangkok last month, are exposed to possible loss of profits.
While most businesses have insurance coverage for such an eventuality, the quantification of such losses for insurance purposes can be a complex and time-consuming process. The preparation of a comprehensive business interruption claim requires familiarity with the contractual technicalities of insurance policies and a demonstrated expertise in financial and accounting skills. Such an appropriate team would typically have a full range of management disciplines including accounting, tax and insurance industry expertise to assist management to receiving full indemnity in a timely manner.
Periodically, companies should review the adequacy of their business interruption insurance coverage. This is best accomplished by considering the insurance coverage and quantum requirements for the operations of the company, recognising the unique nature of risk associated with each of the company's individual business units and their abilities to mitigate loss through expenditure programmes, and identifying minimum business interruption declared values, and limits of liability. Specific care should be given when assessing business interruption insurance needs and insurance policy structuring and wording. A summary of the review should be prepared in a manner that can be used directly by the company's insurance broker, and structured to allow future updates.
When insurance claims turn litigious, insurance claimants need to engage insurance specialists who can act as expert witnesses in a court of law. Such specialists should have detailed insurance policy knowledge and insurance claim experience in order to provide credible expert witness testimony. The loss quantification procedures and skills applied by expert witnesses are equally relevant.
Related to business interruptions is business continuity management, a significant component of operational risk management. Business continuity management is a whole-of-business approach that includes policies, standards and procedures for ensuring that specified operations can be maintained or recovered in a timely fashion in the event of a disruption.
Effective business continuity management plans minimise the operational, financial, legal, reputational and other material consequences arising from a business disruption.
Business continuity management concentrates on the impact, as opposed to the source, of the disruption, which provides companies greater flexibility to address a broad range of disruptions. Organisations with effective business continuity management plans can often negotiate reductions in insurance premiums.
David Kennedy is a partner at Deloitte Touche Tohmatsu Jaiyos Co. Ltd. He can be reached at 02676 5700. This article is jointly written by another partner, Russell Toy.