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Article | Managing Risk

Food and drink: Are you getting business continuity planning and business interruption cover right?

Risk & Analytics|Risk Management Consulting
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By Rod Ratsma | July 28, 2022

Rod Ratsma raises the urgent questions food and drink businesses should be asking themselves ahead of the unimaginable becoming reality.

You might imagine the COVID-19 crisis has led to swathes of food and drink businesses taking a long, hard look at their business continuity plans and business interruption cover. While it’s true many in the sector are doing just that, a worryingly high proportion still appear to be living under the mantra: It’ll never happen to us, or simply finding the thought of the catastrophic loss of their assets too mind-boggling to contemplate.

Some food and drink leaders continue to interpret the fact they’ve weathered the storms, including the global pandemic which has proved extremely challenging for many food and drink businesses, as evidence of their resilience. But the longer the time without a destructive incident goes on, the closer you are to the moment when you wished you’d spent more time planning for the darkest days a business can face.

For those perhaps overwhelmed with continuity planning, those who perhaps think effective business continuity plans (BCPs) are about producing huge manuals, why not think about it another way?

BCPs and resilience itself are simply about the things you need to do now, during and after an incident to make sure your customers don’t defect to your competitors.

You can start small, start simple, but if you haven’t already done so, you must simply start.

The one thing you won’t have when crises occur is time, so begin by thinking about what you need to put in place now that means your business can manage incidents as rapidly as possible.

For example, what happens if your factory can’t access mains electricity? For minimum disruption, you might need to get a back-up generator hook-up point installed today so you can get temporary power supply easily connected should you ever need it. If you don’t act now, it might take two weeks to get something that could have been dealt with in less than a day with the correct preparation.

Turning to business interruption (BI) cover, which is designed to cover loss of income during periods when you cannot carry out business as usual, we meet so many food and drink clients who don’t understand either what they have or what they need from their BI policies.

BI insurance aims to put your business back in the same trading position it would have been in had the crisis incident not occurred. Let’s sit with this for a moment; pause to consider all the elements that need to be in place for ‘back to normal’ to happen.

Let’s say a fire wipes out your main factory. You’ll first need your insurer to complete its investigation and there might potentially also be a crime scene investigation. You’ll then need to factor in time for demolition, engineering and architectural planning, council approval, not to mention time to build the machines you’ll need to replace the ones you lost – some of which can take up to two years to remake – in addition to constructing the building itself. All this before you work to get the staff in back in place and trained to manufacture the stockpile needed to recover the market share you would have lost.

Given all of this, it’s perhaps astounding some food and drink manufacturers are still setting their BI indemnity periods – the maximum length of time your business is paid by your insurer – for as little as twelve months.

Setting the indemnity period at such a narrow window of time is often a move designed to save money on premiums, but it may prove to be a devastatingly false economy. What businesses don’t realise when setting their indemnity and their limits, is that it won’t matter say, for example, that you’ve only managed used half of your limit after 12 months. The way indemnity periods work means that on day 366, all further losses become uninsured. In this event, you will have paid premium for cover you are unable to use.

Needless to say, we feel it’s vital food and drink organisations think carefully and realistically about indemnity periods when setting their cover. They’re also well-advised to avoid some other common mistakes, such miscalculating their gross profit sum insured and not recognising the important difference between this calculation and accounting gross profit. They also need to avoid confusion on the difference between fixed and variable costs as insurers define them.

Know what costs to cover. If you have a business interruption, you won’t want to lose your workforce, particularly in the current labour market, so insure employee costs. This is not only about avoiding the reputational damage of making employees redundant in times of crisis but also about preventing your staff being forced to work for others, perhaps your competitors, and never coming back again.

If you want to know how far you’re getting business continuity and business interruption right for your food and drink business, you could start by thinking about the following questions:

  • How confident am I that our current BCP will enable us to continue or return to production within an efficient timeframe?
  • How confident am I that our current BCP sets out the things we need to do now, during and after an incident to make sure our customers don’t defect to our competitors?
  • Do I know what the indemnity period is on our current BI cover?
  • If I know this indemnity period, what confidence do I have that it matches the realistic timeframe it would take to put the business back to its state had the crisis incident not occurred?
  • Do I understand what’s covered by our policy and what’s not?
  • Am I clear on which costs are fixed, which are variable and which of these we ought to be looking to cover?

If you need support on business continuity planning or are interested in a business interruption review for your food and drink business, please get in touch.

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Practice Leader- Risk Consulting

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Food and Drink Practice Leader

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