Business interruption losses come from all angles and insuring them isn't always possible. But mitigating and managing them is, and doing so will better position your business to cope when things go wrong
BUSINESS INTERRUPTION FROM ALL ANGLES
Food and agri companies face business interruption exposures in virtually every aspect of their operations. For example, disease affects crops, animals and harvest yields, and it can decimate supply chains in a very short space of time. In recent years outbreaks of avian flu and foot-and-mouth disease have wreaked havoc.
Distribution problems have brought many major companies to their knees and the recent problems experienced by fast food giant KFC demonstrate just how quickly issues can escalate. Product contamination and natural catastrophe events can also lead to business interruption losses, while traditional perils such as fire and flood make it very difficult for companies to operate normally. There are then emerging risks like cyber to consider. There is no shortage of business interruption exposures to manage and mitigate and they can arise from any point in a supply chain, at any location, globally.
LOSSES ARE NOT ALWAYS COVERED BY INSURANCE
It’s also the case that not all business interruption losses are covered by standard insurance wordings, and even planned events can throw up the most unexpected interruptions that lead to losses, commercial embarrassment and reputational damage.
This was certainly the case in the KFC distribution debacle earlier this year. The fast-food giant planned to streamline its distribution network and move to a company that would deliver all the chicken required by its 900 UK outlets from a single operational centre and different IT systems. The previous distributor had fulfilled the contract from six sites.
It appears that, once the plans had been put in place, a switch was made to move, in a single step, from the old to the new distribution model. In hindsight, questions remain as to whether a phased transfer would have been more appropriate and if KFC had challenged its new distributor thoroughly enough to ensure it could meet the demands of the contract.
Perhaps the most important lesson for the food and agri sector is that this was a planned move. Despite the preparation that must have gone into making the switch, the supply chain still collapsed. Imagine, therefore, the potential impact of an unexpected event.
As the disaster spiralled out of control, KFC had not only to close hundreds of retail stores for up to a week, but it also had to manage customer dissatisfaction and damaging headlines as it sorted out the mess.
Pre-loss analysis of exposures will highlight potential problem areas and enable detailed business continuity plans to be made.
In relation to a key ingredient, for example, there is a lot of work that can be done up front. Where does the ingredient come from, how many suppliers provide it, and how many individual producers do each of these suppliers work with? Where are they located? How easily can they ramp up production to cover failures from others in the network?
Creating a broad base of supply across a wide geographical area can mitigate a business interruption risk significantly. This is a mitigation tactic that the orange juice industry in Brazil is considering at the moment because a number of orchards have been affected by citrus greening, a bacterial infection carried by a fly that feeds on citrus leaves.
One of the issues is that, where greening affects an orchard, the whole orchard dies off within a couple of years. It is very hard to get rid of and, ultimately, there is an acknowledgement that it will wipe out the crop, forcing producers to start again – most likely in a different location.
Brazil is a big enough country to create a good geographical spread of risk, but there are other regions like Florida where the production area is much more compact. As a result, the industry in America’s Sunshine State has suffered dramatically at the hands of citrus greening in recent years.
However, there are additional considerations to factor in and companies may market their product on the basis of its local provenance, for example. In such situations, moving to national or international suppliers may undermine key brand messaging.
COMPLEX PROBLEMS REQUIRE TAILORED SOLUTIONS
There is no out-of-the-box solution for companies seeking to mitigate their business interruption exposures or insurance policies that will cover them all. But there is a lot that can be done to understand these exposures, to mitigate their impact and to minimise the time to restore business-as-usual operations when they strike.
We work with clients pre and post loss to provide the forensic financial expertise required to satisfy insurers from risk acceptance through to settlement in the event of a claim.
Pre-loss analysis will highlight:
- Core revenue and insurance gross profit/earnings streams
- Key vulnerabilities
- Operational dependencies and intergroup dependencies where knock-on effects of damage at one location can be felt at other group locations.
Internal supply chain assessment will identify:
- Single points of failure
- Critical plant, machinery and equipment.
In addition, examination of external supply chains will detail the contingent business interruption risk from key suppliers and/or customers. Employing this forensic approach enables companies to get a precise view of their business interruption exposures and to see the mitigation potential of resilience and business continuity measures.
It will also highlight gaps in an existing insurance programme and identify where risk measurement work could reshape the coverage required.
Following a loss, the upfront work means we are well placed to prepare the claim quickly, expedite settlement by providing complete and detailed information and to initiate immediate mitigation options.
Given the scale of the business interruption exposures that food and agri companies face, they have a vested interest in understanding them fully. The more forensic they are in their examination, the better prepared they will be to cope with business interruption events as they unfold.
For more information, please contact Tim Cracknell, Head of Risk Consulting on +44 (0)20 7558 3941