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Funding methods for business continuity.

Business Continuity Expo And Conference : 31 March, 2008  (Technical Article)
Patrick Roberts of Needhams 1834 explains alternatives to insurance for funding recovery from exposure to unplanned risks.
One of the most neglected areas of Business Continuity planning is identifying the source of funds for business recovery. Most disruptions will generate extraordinary short-term demands for cash including:

* Replacing damaged plant and equipment.
* Securing temporary premises.
* Continuing to pay ongoing expenses (eg wages) in the absence of customer revenues.

It is a practical impossibility for most companies to maintain adequate cash reserves and, even if this were possible, it makes no sense to have large sums of money tied up unproductively. Many people therefore fall back on an assumption that insurance will see them through. In the first half of this article I look at some of the limitations of traditional insurance before turning, in the second half, to look at some alternative sources of funding that could complement insurance cover.

Insurance is an excellent mitigation against the financial impacts of a fire or burglary but is less well suited to low frequency/high impact risks that are difficult to quantify. Unfortunately these are the very risks that can devastate a business. For instance, Pool Re emerged with government backing in 1992 because of fears that the terrorism insurance market would collapse after the Baltic Exchange bombing. However, even with the UK Government acting as insurer of last resort, the graph below illustrates the difficulties that the insurance industry experienced in pricing terrorist risk.

Similar problems of unavailability or lack of affordability were seen for terrorist cover in the US after 9/11 and may emerge, in due course, as the risk of flooding and other climate-related disruptions increases in certain parts of the UK.

Even if suitable insurance cover is available (and affordable), there is always the issue of the claims process. Judging by the following quote from a 14th Century Italian merchant, this has long caused friction between insurer and insured.

"It is sweet to them to take the monies; but when disaster comes, it is otherwise, and each man draws his rump back and strives not to pay."

A more recent quote, from 9 months after the June 1996 IRA bombing of Manchester City Centre, suggests that little changed in the intervening 600 years.

"Only 50 percent of bomb insurance claims have been settled so far and it could take another two years before all are finally settled."

To be fair, it would appear from the lack of reports of similar problems after the summer 2007 floods that things have speeded up in the last few years: the new disaster management protocol between the Emergency Services and the Association of British Insurers should improve the situation further. Nevertheless, any thorough claims handling process will necessarily create delays and uncertainty in payment which is the very antithesis of good Business Continuity planning. Furthermore, even when money is forthcoming, the insurance company may constrain what the money can be spent on - focusing on restoring what was there before rather than what the business may need most going forward.

Banks have obviously been a major source of business recovery funds in the past and the flexibility of local banks was clearly a contributing factor to the survival of many businesses after the Manchester bombing in 1996. Two specific types of loan that are particularly relevant to Business Continuity planning are discussed below.

A Committed Line of Credit gives a customer the right to borrow up to a certain amount on agreed terms (interest rate, repayment term etc). Whilst a commitment fee is payable for this service it is generally going to be less expensive than a whole raft of insurance policies. More importantly, because this is a loan:

* It does not depend on a specific trigger (eg fire, flood).
* Funds can be released much more quickly.
* The money can be spent on whatever the borrower wishes.

For instance a retail outlet that has just lost its premises might choose to use the Line of Credit to quickly set up a website so as it can continue to service its customers whilst its premises are restored.

The emergence of specialised loans geared to business recovery is a reasonably recent innovation. Whilst these loans are not yet universally available, the examples given below point to what can be achieved.

The US Small Business Administration (SBA) launched a loans programme in November 2005 to assist small businesses impacted by Hurricane Katrina. The loans programme is delivered by commercial banks but underwritten by the SBA and offers loans of up to $150 000 repayable over 5 to 25 years. The ambitious aim is that the loan approval process can be completed in just 24 hours. Crucially though this programme was only initiated some months after the disaster, by which stage many businesses may have already failed.

In the wake of the 2001 Foot and Mouth outbreak and the Summer 2007 floods, the Federation of Small Businesses offered interest-free loans to member firms affected by the disruptions. However, the loans are limited to only £5000 per company so are only a partial solution for all but the smallest enterprises; in addition, there is no guarantee that a similar loans programme will be made available after any future incident. Clearly the value of this sort of scheme for Business Continuity planning purposes would be greatly enhanced if there was certainty that such loans would be forthcoming in the future.

The long history of the insurance industry testifies to its usefulness as a risk transfer tool and it would be foolish to ignore the importance of insurance in the Business Continuity process. However, the existing limitations in the ability of the insurance markets to properly price unusual, extreme and evolving risks are likely to become more of a problem for businesses as the corporate risk landscape expands to encompass the threats of global terrorism and global warming. Going forward, Business Continuity managers are therefore encouraged to talk to their bank as well as their insurance company when planning how to fund business recovery.

Needhams 1834 Ltd will be exhibiting at the Business Continuity Expo and Conference held at EXCEL Docklands from 2- 3rd April 2008 - the UK's definitive event for managing risk, resilience and recovery. This event will explore the solutions and best practice to ensure operational continuity and protect a company's interests before during and after an incident.
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