The catastrophes in Japan have caused many companies to take a hard look at the terms and conditions of the coverages they have in place.
Many policies exclude earthquake, flood and nuclear damage from coverage, says Shane Moran, vice president of ECBM Insurance Brokers and Consultants. However, there are other factors that make a company susceptible to contingent losses.
“It’s really a matter of evaluating your business model and identifying whether you are dependent upon a small number of vendors or suppliers to produce your product or service,” Moran says. “If so, you definitely have an exposure.”
Smart Business spoke with Moran about how to prepare your business for unexpected events.
How will the tsunami and earthquake in Japan change the way companies consider their coverage?
The tragedy will force companies to take a hard look at their business model, the key relationships they have and their risk management program in general.
Contingent business income is a property form, so you could expect to see earthquake, flood and nuclear exclusions on many forms. If you are a larger company with that type of exposure, you would want to negotiate with the carrier to write the coverage for your exposure. So you may be able to get an insurance carrier to provide some type of coverage for losses from an earthquake or flood, but probably not for a nuclear event.
The second area that companies are looking to reassess is the limits of coverage that they have chosen on their business income coverage. The magnitude of that destruction was so large that it will take a lot of those manufacturers a lot of time to get back up and running. That will force the buyers of those products to go elsewhere to find companies that can meet their needs, and that process is time consuming. Can a replacement meet quantity and quality expectations? You are not going to be able to pick up the phone, call a company down the street and immediately process an order for 10,000 widgets.
If you have a piece of equipment that takes nine months to build and you have one component you can’t get, the ripple effect can cause problems for your business for a long time.
How do unforeseen events affect losses for small and larger companies?
Whether you are a small or large company, you still need a well-thought-out contingency plan. It’s essential for any business to survive an unforeseen event.
If your business relies on a small number of key component suppliers, or depends on only a few customers, or if you only use one or two vendors for your product — then you have a very large business-contingent income exposure. That is going to apply whether you are a small, family-run company or large, international organization. For example, take the iPad 2 launch. Because so many of that product’s key components are made in Japan, shortages have created delays, which have cost that company because it can’t get its product into people’s hands.
Events like the disaster in Japan give us the opportunity to evaluate how our own contingency plans would respond and look at it from a fresh perspective. The key is to develop a plan that can be implemented whether you are a small or large company.
How do you begin to develop a well-thought-out contingency plan?
First, identify those key relationships with suppliers, vendors and manufacturers. Are you dependent upon just one or two of those to make your product?
Second, develop a plan that you would implement in the event that one of those companies shut down. How does that affect your business? What type of monetary loss would you suffer? Can you find a secondary vendor to replace that one? In that scenario, large companies do have an advantage because they are able to spread their risk over a larger spectrum than a smaller company can.
Then, the plan needs to be constantly monitored. As the business environment you are operating in changes, your contingency plan constantly needs to be evaluated and updated. You need to review annually, at a minimum.
If you are getting raw components from a country and the political climate there changes, you immediately need to evaluate how that will affect your business model. You need to be able to potentially outsource that stream of income to another, stable environment.
What else can businesses do to protect themselves from contingent losses?
You need to evaluate your company to see if you have that exposure. If you have identified that you have a problem, transfer that risk to an insurance carrier by purchasing coverage.
If a company’s spread of risk is small and it is not dependent on one particular supplier, and could easily move its business to another firm, it doesn’t have the same level of exposure as a company that gets a key component from only one company.
How can companies limit that exposure to contingent losses?
First, find another supplier. If you can’t, then you need to transfer that risk through purchasing insurance coverage.
Then, it becomes important to look at the terms and conditions of the policies. You may need to manuscript the coverage to fit your needs.
Finally, identify the limit of coverage you need. Make a business decision based on the cost of that coverage, whether you insure it or self-insure it.
Shane Moran is a vice president at ECBM Insurance Brokers and Consultants. Reach him at (610) 668-7100, ext. 1237, or email@example.com.