Operational Risks

Managing Business Interruption Risks

Protect Your Bottom Line from Business Interruptions

There are many troubling scenarios that can cause business interruptions natural disasters, fires, cyberattacks, or the loss of a critical supplier can sideline businesses for months. It takes time and money to repair a building, find a new location, or restock inventory. When a business can’t operate, revenue flatlines and bills continue to pile up. Sometimes, this cash-flow imbalance can even force a business to close its doors for good.

Business interruption is a type of operational risk because it interferes with a company’s ability to function, and organizations of all sizes need to find ways to mitigate its effects.

Planning for Business Interruptions

Many people assume that only spectacular scenarios, such as earthquakes or floods, put their companies at risk – the data tells a different story. According to a global study by Allianz Group, only 12% of business interruption insurance claims are the result of natural hazards. In fact, fires and explosions were responsible for 59% of global claims between 2010 and 2014. Effective risk mitigation requires businesses to understand which threats are most likely to impact them.

Here are several major risks that can result in business interruption and lost income:

  • Structure fires
  • Water damage
  • Loss of electricity or running water
  • Equipment failure
  • Third-party disruptions
  • Crime or vandalism
  • Natural disasters

Almost every business faces some exposure to these risks. Risk managers must decide which events pose the greatest threat to their companies, and then take preventative measures to guard against them.

Once risk managers identify the greatest threats, they can prioritize the best strategy. The following actions can reduce the likelihood of suffering a long-term business interruption from some of the most common threats:

  1. Installing sprinkler systems to minimize fire damage.
  2. Maintaining machinery to prevent unexpected downtime.
  3. Building a redundant supplier base so the business isn’t dependent on any single vendor.
  4. Purchasing security cameras and alarms to deter burglars and vandals.
  5. Monitoring supplier credit scores and ratings for signs of financial distress.

Insuring Against Business Interruption

Despite risk managers’ best efforts and ground work, many businesses experience challenges that threaten their ability to operate. One way to prepare for this is by purchasing a business interruption insurance policy designed to reimburse the company for income lost due to a prolonged closure. Without this protection, companies that find themselves unable to operate for weeks or months may default on debts, lose customers, and fail.

Business interruption policies are the only insurance instruments that take potential earnings into consideration when evaluating damages. Property insurance may cover the cost of rebuilding a warehouse, but it won’t provide a cash infusion while operations are stalled.

One thing to note - business interruption coverage can’t be purchased a la carte. Instead, it’s sold as a component or rider to another commercial policy. It’s critical that businesses are suitably insured and understand the limits of their policies. Consulting with an insurance professional before purchasing a BI policy is highly recommended.

Adopting Contingencies

Events that impact a vendor’s ability to operate can propagate down the supply chain. Risk managers must be diligent in identifying liabilities and weak points at all stages of the manufacturing process.

The unexpected failure of a key vendor can be devastating to a company’s bottom line. There are tools available to help procurement professionals and risk managers better understand suppliers’ financial health, and such insights can be invaluable when gauging risk.

Larger geopolitical concerns may also affect supplier reliability. The economic climate in another country feels like a distant concern until assembly lines shut down or ships are stuck in port. Contingent business interruption insurance is designed to protect against disruptions caused by events affecting a vendor.

Mitigating business interruption risks requires companies to anticipate challenges and adopt protective measures. Failure to do so can put unnecessary stress on a business and might even lead to its premature demise.

Dun & Bradstreet publishes a suite of enterprise risk management tools to help mitigate third-party threats.

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