The Role of Business Interruption Insurance in Risk Management

If there's one thing you can confidently say as a business owner, it's that there are no two days alike when you're a South African entrepreneur. The business landscape is dynamic. While not every change impacting your business will be negative, it’s difficult to make concrete predictions or prepare for every eventuality. If you want to safeguard your business's future, forewarned is forearmed.

A risk management plan, along with Business Interruption Insurance, is the best way to plan for business risks that could severely impact your day-to-day operations. Discover how Business Interruption Insurance in South Africa should play an important role in your risk management strategy, as Budget Insurance discusses the role of insurance in this process.

The purpose of Business Interruption Insurance

Business Interruption Insurance is a type of business insurance that is designed to compensate a business owner or company for loss of income and various expenses in the event of a covered event or incident that impedes business operations. Events that could impact operations inculde natural disasters, raw material shortages, or the financial liquidation of a key supplier. According to the Allianz Risk Barometer[1], it’s one of South Africa’s major business concerns. Business Interruption cover will help you to honour your financial commitments and, by extension, continue to partially or fully function while you recover from an unforeseen inactive period. Discover more about What is Business Interruption Insurance & Who Needs it? 

An example of a business interruption

To paint a picture of how one might need to file a serious business interruption claim, consider the following situation:

Selwan has owned a successful and lucrative neighbourhood carwash business for five years. He currently employs a ten-person team and has four bays in operation seven days a week. While he’s making decent profits, he still owes the bank on the loan he took out to build and brand his carwash facility. One morning — his busiest business day — Selwan discovers the road leading to his premises is flooded due to a burst water pipe and that the authorities have closed the road for maintenance that is estimated to take at least one week to repair. While Selwan’s carwash is non-operational, he still has bills to pay, including his staff wages, rent, the bank loan, and the costs of various industrial cleaning supplies he’s bought from wholesale dealers. 

Business Interruption Insurance will ensure that Selwan can honour his financial commitments without comprising his financial situation. Ultimately, it will save his business from possible disaster by providing the relief needed to recover after this unforeseen setback. 

Key principles of risk management strategy

In addition to having the right kind of business insurance cover, business owners are encouraged to have a good risk management strategy for addressing a business interruption episode that could seriously impact their business. Risk management is an approach used to identify, assess and mitigate potential risks, and in doing so, minimise the impacts of these risks. The approach works in the following ways:

• The process starts with risk identification, which analyses industry trends and the business' history to determine future risks and their likelihood of occurring. It can also determine a risk's source and prioritise it accordingly.

• Risk analysis is the next step and involves determining the likelihood of the risk impacting the business as well as analysing the severity of the impact.

• Thereafter, it’s important to hold discussions with the relevant stakeholders of the business who can provide input on suggested resolutions or contingency plans. 

• The next step is risk control. This involves assigning responsibilities and roles so that should an identified risk become reality, the action plan can be executed swiftly and efficiently.

• The final step will be cyclically reviewing risks for changes and making improvements as the landscape evolves. This could involve eliminating certain risks and adding new ones.

How do you manage business interruption risk?

Now that you know how a risk management strategy can help your business better deal with risk, you'll want to know how it works alongside Business Interruption Insurance. Here are the steps someone like Selwan could for his business:

1. For Selwan, analysing the potential risk could result in him identifying reasons why his business may have to temporarily close, like road access issues, extreme weather conditions or a major supplier shutting down. 

2. Next, he could estimate the overall cost or lost earnings related to the risk that he would incur based on the financial impact of this risk. 

3. As part of his risk management plan, Selwan elects to invest in Business Interruption cover after consultation with a trained insurance broker. 

4. Finally, Selwan develops a prevention plan as per his risk management strategy. He could decide to hire a portable waterless car cleaning system. He could identify alternative suppliers or new premises from which he could operate. 

Get Business Interruption cover from Budget Insurance 

In today's unpredictable business climate, a robust risk management strategy, along with the right kind of business insurance, like Business Interruption cover, is critical. If you aren't sure what kind of coverage your business would benefit from or have questions relating to Business Interruption. Apply for a quick and hassle-free Business Interruption Insurance quote online.