Recent flash flooding in North Yorkshire has seen claims bills exacerbated by the cost of business interruption, with small businesses hit by cancellations. Sam Barrett investigates the extent of the problem and asks what can be done to address this rise in future
When a month's rain fell in North Yorkshire during the course of a single June evening, many households and businesses were flooded. However, although the water damage was limited to just a few villages around Helmsley, businesses from a much broader area are now filing insurance claims. How significant is this knock-on effect going to be on insurer bills?
"Many people have been put off going to the area as a result of the media coverage," says Kevin Wood, partner and group chief technical officer at Ashworth Mairs Group. "It wasn't a particularly widespread incident but media coverage can be problematic."
Certainly in North Yorkshire, where the tourism sector is worth more than £1.5bn a year, there are reports of a serious reduction in business.
According to articles in local newspaper Malton Today, although all the tourist attractions in the area had reopened within a few weeks of the flash flooding, visitor numbers are still down, with bookings as far ahead as August being cancelled. For example, three weeks after the floods, a caravan site near Helmsley had lost more than £1000 of business as a result of cancellations. With many of the businesses affected being small, there is a risk that some will be forced to cease trading if they are unable to win back customers.
This has ramifications for the insurance industry. AMG estimates that, in addition to a cost of between £10m and £15m for those properties directly affected by the flash flooding, business interruption claims are now coming in from businesses in the surrounding areas that have lost income as a result of the reduction in tourism.
For those firms that have not suffered direct flood damage, BI claims will fall under either one or both of two areas - denial of access and loss of attraction.
Of the two, denial of access is more commonly included on policies. This covers a business if, as a result of a disaster, it is not possible to reach it. This eventuality can be rare, so most extensions will also cover hindrance of access; for instance, where you can reach the property on foot but not in a motor vehicle.
Loss of attraction cover is far less common and, by its nature, much more difficult to prove. This takes into account the amount of income the business has lost as a result of the disaster and tends to be used by businesses in the tourist sector.
Because it can be difficult to quantify what is a result of the disaster and what could be due to poor management or other uninsured factors, loss of attraction cover generally comes with plenty of conditions. "Loose wording could land an insurer in a lot of trouble so we will generally specify the contingencies that apply, such as the geographical area and the length of time it covers," says Graham Heale, underwriting director for property at Royal and Sun Alliance.
He says that where a policy covers a business for pollution on a beach, for example, the beach will need to be no more than a set distance, typically five miles, from the business. For flooding, the distance would usually be even smaller.
Indemnity periods also need to be quantified. After all, a hotel may lose some of its regular customers immediately after a flood but if those people visit another part of the country instead and find it so attractive that they never go back to their original holiday destination, the hotel has potentially lost income for all these future unbooked holidays. Subsequently, policies will typically include an indemnity period of 12 months, although it is possible to extend this up to 36 months.
Not all businesses will have paid for, and be protected by, these two types of cover, however. Loss of attraction is rarely included and, although denial of access is more common, this is generally only available as an optional extension of cover.
Kevin Pallett, managing director of Fusion Insurance, is concerned that this may be a result of cover becoming too commoditised in this market: "A one-size-fits-all approach doesn't work with this type of cover. Rather than buying a packaged product direct from the insurer, businesses need to spend time with brokers, talking about the issues that might affect them so cover can be tailored to their needs," he says.
Others feel it may just be time and cost pressures that are preventing businesses from taking out adequate cover. Damian Glynn, client director at Cunningham Lindsey, says the problem lies with insurance often being arranged quickly and on price. "The insurance industry has been very bad at explaining what business interruption is all about, so finance directors just take out cover for the losses they can imagine. Unfortunately, this means they'll just focus on the major losses such as fire, but in reality around 90% of losses will be partial."
Although businesses can often be blinkered about their insurance requirements, Mr Glynn adds that they can also be quick at passing the buck if their cover is not adequate. "A 12-month indemnity period is standard but I've seen writs against brokers because they haven't offered their clients a longer period of cover," he says.
Mr Glynn points at flood damage as a perfect example of the need for longer indemnity periods. He says most people underestimate how long it takes after a flood before a building is useable again. "Cabling is often placed under the floor and when water gets into this it can be very difficult to dry out. You also get a lot of cases where polystyrene ceilings soak up the moisture from below, which can result in the ceiling having to be written off," he explains.
Changes in the insurance industry have created additional challenges for businesses affected by flooding and other similar disasters. "There are fewer insurers today - and fewer loss adjusters - so a business that is affected may have to wait several weeks before they can have their claim assessed," says Malcolm Harvey, chief executive officer of Lorega.
"This was demonstrated after the Carlisle floods, when Prince Charles wrote to the insurers to ask them what was happening to help the people affected."
He believes this has driven sales in loss recovery insurance during the past few years. This can be included alongside other types of insurance and will cover the fees of an independent loss adjuster to help prepare and negotiate any claims on behalf of the policyholder. The cost is typically a small percentage of the underlying insurance premium. "More and more brokers are including this type of cover, as it speeds up the claims process and gives their client access to an independent adjuster within 24 hours," Mr Harvey adds.
Nobody believes, however, that insurance is the only solution to the problems faced by businesses affected by flooding and other disasters.
"Insurance is important but only in a fairly limited way," says Nick Chown, former chairman of the Association of Insurance and Risk Managers and founder chairman of Airmic's business continuity planning special interest group.
He believes a two-pronged approach must be taken. "Insurance will only provide a cheque after the event. Businesses need to plan to try to avoid the problem in the first place and, for those events that are unavoidable, put BC planning in place to make sure they can recover if they are affected."
There are plenty of steps that even small businesses can take to reduce the interruption - and thus the financial cost - to their business. For instance, Groupama's commercial insurances manager, Malcolm Smith, says contacting customers immediately after the event will help to reassure them it is business as usual. Indeed, in Helmsley, Ryedale District Council has made a £10,000 fighting fund available to help advertise the area and persuade tourists to return.
However, BC planning is far from widespread. Research from the Chartered Management Institute found that 49% of businesses do not have BC plans in place, with the rate even higher among small to medium-sized enterprises.
For businesses with a turnover of less than £11m, two-thirds have no plans in place at all.
"BC planning can substantially minimise the interruption to the business but it's not high up the agenda among SMEs," says Mr Heale. "The entrepreneurial spirit says the business will get back up again but this isn't always the case."
Going forward, businesses are likely to receive more support from their local authority. As part of the Civil Contingencies Act 2004, which came into effect on 1 April this year, local authorities must provide advice to local businesses to help them deal with possible disasters.
Mr Heale says he has already seen an increasing investment from local authorities: "This was evident when Carlisle was flooded earlier this year and the local authority was involved in helping households and businesses to get back to normal. It is a broad community issue - if a business goes under, then people are out of work. This affects the community as a whole."
The insurance industry is also in a perfect position to increase BC planning in the SME sector with some insurers now producing a number of guides to help their clients. For instance, RSA produces a number of guidance booklets to help SMEs with their BC planning, and Groupama issues a risk management guide that looks at this area. Additionally, when taking on new business, one of Groupama's surveyors will assess the risk, highlighting any areas they think are problematic, and make recommendations to improve them.
Brokers also stand to gain from the lack of awareness of BC planning among SMEs. Mr Wood explains: "There's a huge opportunity for brokers to add value to what they do for their clients. By helping them identify potential risks, and using a combination of BC planning and insurance to prepare for them, brokers can help to protect their own client bases as well."
SETTING STANDARDS FOR BUSINESS CONTINUITY PLANNING
Business continuity planning is an important part of damage limitation but, so far, only 51% of businesses have put any form of planning in place.
Keen to increase this figure, the British Standards Institute in conjunction with the Business Continuity Institute drew up a new standard - PAS 56 - to give businesses a framework to develop their own BC plans.
The standard, which as a 'publicly available specification' is one step short of a BSI standard, was launched in 2003 and has been well-received - especially by larger businesses. "It can help risk managers put in place the necessary plans to deal with any risks they might face," says Alan Staniforth, co-chair of the Association of Insurance and Risk Managers' BC planning special interest group.
Rather than being prescriptive, PAS 56 is designed to encourage businesses to think about how they might deal with different outcomes - for example, the loss of a building or of employees, rather than think about causes, such as fire or flood.
However, while it has helped more businesses put BC plans in place, Mr Staniforth believes it has limited appeal to the small to medium-sized enterprise market. "An SME could adapt it for their own purposes but, if it became a standard they would not be able to meet it," he explains.
For example, PAS 56 requires a business to specify particular roles to deal with a possible risk but, with limited resources, this may not be possible for an SME.
"PAS 56 is a 50 page document, which can be daunting for an SME with limitations on time and resources," says Mr Staniforth. "Ideally I'd like to see a two page check sheet developed for SMEs."
This may be about to happen. The BSI is now looking at moving PAS 56 forward to extend its appeal and bring the benefits of BC planning to a broader audience.
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