Broking focus - BCP: Business Continuity Plans for beginners

A recent report from the chartered Insurance Institute highlighted the fact that there are significant divergences of opinion between the broking community and claims practitioners on the impact of business continuity plans on the actual claims experience. The report, based on online interviews with 53 of the CII’s members from the general insurance faculties, highlighted that the primary causes of disruption within the previous 12 months period were: severe weather; failure of an IT or communication system; and the closure of European airspace due to volcanic ash, which affected 42% of respondents.

The report revealed that 90% of claims practitioners consider BCPs to have a positive effect compared to less than half (45%) of brokers. Of the respondents, 75% had “pre-arranged measures” in place to deal with the impact of such incidents, compared to 20% that did not, citing reasons such as a “lack of the awareness of the concept and importance of business continuity management” as a reason why.

An important area
Tony Gimple, chief executive of crisis Survivor, stresses, however, that having a BCP is “common sense”. “Why wouldn’t you have in place the means with which to continue operating your business should you suffer a denial of access to your business resources?” he adds.

Alex Royce, development manager at Aviva, considers that a BCP has become an important area of risk management for all organisations and, in recent years, major incidents such as Buncefield, floods, and terrorism attacks, have highlighted its importance to many. “Insurance does, of course, play its part in helping businesses to get back on their feet,” he says. “But many of the effects of a disaster, such as damage to businesses brand or reputation, may not be insurable. A BCP will help a business make sure that its business interruption insurance period of cover is set for long enough for profits to return to pre-incident levels, and also provides evidence of good risk management, which could improve the overall insurance deal.”

Chris Ball, associate director of client services at perkins Slade, who has seen firsthand how a BCP can be effective after the business experienced a fire at one its offices, says that often businesses might look at a BCP and question what pay back they will get from it.

“They want to know what discount they are going to get on their insurance premiums and at the moment the answer is not a lot,” he says. “The market is very competitive and the room for discount is not great. If a client asks me what they will earn from having a BCP, the honest and short answer is not much. However, the reality of the situation is that the statistics show those who have a BCP have a greater chance of surviving a severe loss.”

The CII’s report found a BCP does not make a significant difference to the price and terms of business interruption cover because it was such a minor factor.

Harry Roberts, director for technical, risks and compliance at Cunningham Lindsey, is not surprised that brokers were not “bowled over” by the concept of BCPs. “Brokers tend to look at it from the angle of, does having a BCP assist my client when they are seeking to take out insurance and is there any benefit for them in having a BCP? At that point they are split down the middle,” he says.

“A lot of them see that either their clients don’t get any reduction in terms of the premium that they would be charged, or it doesn’t open up doors to getting insurance that they couldn’t otherwise get. The other point is that the insurer doesn’t seem to be particularly interested in the content of the report, they submit a plan and it doesn’t matter what it says and so it becomes a tick box thing. If you are asked to submit a report and you get no reduction in your premium and no one comes back and tells you what they think of your plan, your response is going to be ‘what is the point?’”

The lack of interest to validate plans is highlighted as a major concern in the report, which says plans are not, and by definition should not be, the same but the lack of interest means those investing in plans that actually work are no better off, in insurance terms, than those who ‘tick-the-box’.

Roy Hebburn, divisional technical claims manager at Allianz, stresses, however, that BCPs are not a tick box activity. “For a BCP to be effective it has got to be tested in a dry environment before the event occurs,” he says. “Insurers do that as a matter of course and I would hope that any major firm that has a BCP does have a dry run on it just to make sure that it does work in the event that the unexpected or the unlooked for happens.”

He adds that if a policyholder’s BCP is not working 100%, it is not an indemnity matter nor would it be a matter that would cause the insurer to help them any less: “We would help them, but it is much better for all concerned if there is an effective plan in place because it will have the effect of shortening the indemnity period, getting the business up and running much more quickly and reducing costs all round.

Reflection in premium
“Premiums generally relate to cost and they are factored into the future cost of cover. So, if you have got a better insurance record then that will reflect in the premium at some stage.”

The respondents to the report did, however, concede you could achieve either, a reduced price on the premium, cover to be provided where it otherwise would not have been, or reduce the level of cover purchased, by having a BCP.

Mr Ball points out, however, that in reality it is on a lot of directors ‘must do’ pile, “but it is a bit like Galileo’s thermometer, it bubbles up to the top and then something happens and it bubbles down again”.

“No director is going to get criticised or fired for not having a BCP, until he needs one and he hasn’t got one,” he adds.

However, he believes major customers are increasingly seeing situations that highlight the importance of BCPs. “A business tendering and sending out tenders will want to know that they have got security of supply and part of that is understanding that you have a BCP. Frankly, that will drive it more than anything else, because if a business is either not getting on tender lists because they haven’t got a contingency plan, or they are losing business because they haven’t, that will drive it more than the need of their insurers saying that they would like them to have a BCP.”

Mr Hebburn adds that insurers do take note of BCP when underwriting business. “It is a ticket to the game,” he says. “It tells you something about the business if they haven’t got one. It would make handling the claim and the consequences of that claim much more difficult. We want to work with policyholders to get them back into business as fast as we can, and if they have thought in advance about how they might replace a supplier, or a particular product or how they might be able to source labour from somewhere else, that is of great advantage.”

What is advantageous to the broker is not necessarily advantageous to the insurer or the client, considers Mr Gimple, who suggests the CII report is symptomatic of a number of far more deep seated issues than simply brokers and underwriters differing opinions.

“Not least of which is how brokers do not themselves understand how little their customers really know about risk transfer or how insurance really works,” he says. “This fundamental fault, especially as it relates to BI insurance, leads to many problems for all concerned and does nothing for the industry’s reputation and standing.”

Mr Gimple also highlights the concern that most brokers do not themselves understand how a BCP works or their clients’ readiness and experience to complete a complex business process on their own.

He explains: “Over the past three years we have spoken to more than 500 brokers about their own BCPs and promoting them to clients. In almost every case, the brokers’ own BCPs were inconsistent with Financial Service’s Authority guidelines and, when asked about promoting BCP’s to their clients most felt that it is either not their place, that by putting a BCP in place it would cause the client to question why they are buying insurance in the first place or clients were not interested.

“Worse still, the majority of brokers to whom we have spoken didn’t know that better terms were available if a BCP was in place. If that wasn’t enough, then the CII’s own findings that a BCP could reduce premiums or provide cover where it might not have been otherwise available surely makes the case. The report also said that a BCP may reduce the need for cover, and perhaps this is why, with premium income still under pressure, brokers don’t want to promote BCP.”

However, Peter Shaw, executive director of global technical services at Crawford & Company, understands the brokers’ point of view. “Whatever eventuality you plan for, you literally cannot plan for every event and most businesses, particularly in the current climate, are facing ever changing dynamics with regard to their supply chain and their customer base, so it is very difficult once you have something in place to keep it up to date.”

And Frank Ramsay, global practice leader on claims at Towers Watsons, agrees that a BCP is only worthwhile if it is up-to-date, comprehensive and is tested from time to time.

“That could be as simple as periodic meetings with strategists to run through ‘what if’ scenarios and determine the most effective solutions,” he says.

From the report, loss or non-availability of IT or communication systems were considered by 93% of respondents in their BCPs, with loss of access to office or other facilities close behind on 88%.

Backing up data
Mr Roberts says one plus point is that companies today are much more careful about backing up data: “People who think about the risks that they face and put in place either preventative measures or measures by which they will be able to recover data, are going to better placed when it comes to claims. If you have a means by which you seek to first of all avoid loss of data and then have a means of trying to recover it, whether you have called it a BCP or not, it is going to help your business and, therefore, this is a good thing.”

However, weaker areas uncovered in the report were around suppliers, where only 61% had considered this in their plans and key customers where only 54% had taken it into account.

Mr Roberts says: “Between half and two-thirds have considered customers and suppliers, but lots of other people haven’t and that’s a real failing. In the modern supply chain that is a distinct problem, if you haven’t done that, your BCP, in my opinion, has a big hole in it.”

The report highlights some significant opportunities for the insurance sector to improve communication and understanding of the benefits of client BCPs, and sets out a challenge for the industry to more overtly recognise the investments made by clients and to encourage more clients to develop their own BCPs.

Mr Gimple concludes education is, therefore, essential: “More to the point, to say that if the client hasn’t got a BCP, insurers should say they won’t take the risk. But if they have got a BCP and it is to the British standard, they should say not only will they provide cover, but that cover will be wider, it will be at better rates and they may even look at longer terms.”

Source: Post – 3 February 2011