Insurance market update: business continuity and your Plan B
Published 19 May 2020
Business continuity remains firmly in the spotlight amid trading downturns, lockdown restrictions and empty retail spaces, following on from the recent battering by a summer of bushfires, droughts and storms.
Research surveys indicate that more one quarter of Australian businesses have been affected by natural catastrophes and extreme weather events, with those in the accommodation and food services sectors hardest hit.
With bushfire events affecting large swathes of Australia, the broader climate change forecast suggests an increased frequency and severity of extreme weather-related events in years to come. In support of this prediction, the 2020 Allianz Global Risk Barometer cites business interruption relating to natural catastrophes as one of the top 5 five risks facing businesses globally.
From a COVID-19 perspective, government assistance in the form of concessional loans and financial relief packages present eligible businesses with an interim solution. However, while these measures will go some way towards addressing immediate concerns, they by no means offer a longer term strategy to adjust to whatever the new (ab)normal will be once the COVID-19 lockdowns gradually lift. State and territory governments have injected in the region of A$11.5 billion (0.6% of GDP), including payroll tax relief for businesses and relief for households, such as discount utility bills, cash payments to vulnerable households and support for health spending.
Formulating a Plan B
In light of this, and with Plan A now out of the picture and unlikely to return, establishing a Plan B is the way forward for many Australian businesses of all shapes and sizes.
In reshaping business strategy and adjusting business continuity plans, among other things, business owners should consider the following:
Short-term liquidity and cash-flow — including the appropriate insurances to manage default and deferral situations, as well as trade credit insurance provisions.
A robust position on operational and financial risks — including directors and officers' liabilities, return to workplace and risk considerations, and adjusting debtor and creditor provisions.
Trading environment — following the mass migration to remote working arrangements, businesses may elect to move to a more permanent home working solution. Consideration of key risks such as cyber security, regulatory compliance and IP and key person risk will become more critical in this new norm environment.
Commercial lease obligations and connected insurances
Review your insurance to identify potential gaps and exposures — this includes changes to the scope of business activity being undertaken, including where enhanced online trading involves adjustments to standard operating processes and governance.
Ultimately, diversification and having comprehensive risk management processes in place will be the key to business continuity and survival.
Implications for insurance cover
At renewal insurers will increasingly ask to review your business continuity plan, even for those will a positive claims history and robust risk management processes. Underwriting appetite will be selective, in line to the continued hardening market cycle, and capacity will vary between insurers. For some a business continuity plan will mean the difference between a more challenging renewal discussion and the availability of options for consideration.
With COVID-19 affecting the majority of  Australian industries and sectors, the broader ramifications of the pandemic are still to be seen. A clear expectation is that the economy will experience a downturn, potentially recession, and there will be tougher times ahead.
Business interruption insurance, with the exception of a few rare cases, excludes pandemic, epidemic and contagious disease control. While that may present immediate concerns for some, it is important to understand what this product covers in the post pandemic scenario once lockdown restrictions start to transition. Policy wordings may be subject to change.
Among the hardest hit by the flow-on supply chain impacts and consequent productivity delays are manufacturers and wholesalers that rely on imports and exports. With key international markets such as China, Europe and the United States locked down, many businesses have reduced their plans to a short term view and are fluid in their expectations of the future.
Hospitality and tourism operators, as well as educational institutions, are suffering as international students and tourists are prevented from entering Australia and premises remain closed or revert to online trading. With the travel restrictions decimating the airline industry and the inbound flow of consumers, we are seeing examples of pre-purchase options and airlines increasing their air freight capacity to partially offset some of immediate challenges. There will likely be wholesale structural changes to this sector once the flow of travellers and students returns.
Health care, disability and aged care service sectors are also likely to face deeper structural changes to manage ongoing COVID-19 exposure risks and industry-wide changes to care provision and risk management frameworks longer term.
With change being the new stability for many industries and sectors, we will continue to work closely with clients operating in these spaces to develop the appropriate risk mitigation response.
Forward thinking — plan for continuity
Insurance remains a contractual obligation for businesses with a mortgage, bank loans and commercial lease agreements. As such it’s important to understand both the legal requirements and the impact of changing the scope and breadth of your insurance program at this time.
Despite the generally negative outlook presented by current media reporting, there are examples of businesses finding a way through the current challenges and opening up new trading channels to cater for consumers isolated at home who are looking for improved access to goods and services. Please do not hesitate to contact your Gallagher broker to discuss your business continuity plans and review your insurance program to ensure it remains fit for purpose.
In this report you will find additional insights on current market conditions and the impact of unprecedented impacts from extreme weather catastrophes, political and economic turbulence and the significant blow dealt to the recovery process dealt by the COVID-19 pandemic, including
professional and financial risks —board governance and directors' liability
cyber — risks evolving as fast technology itself
food production — challenging times remain from farm to table
claims — preparing for a new normal.
We strongly encourage any business owner with prevailing concerns around the adequacy of their insurance cover to speak with Gallagher subject matter experts at the earliest opportunity. We are here to help and, through our strategic partnerships and access to exclusive markets, we may be able to present an improved course of action for your business.
Gallagher provides insurance, risk management and benefits consulting services for clients in response to both known and unknown risk exposures. When providing analysis and recommendations regarding potential insurance coverage, potential claims and/or operational strategy in response to national emergencies (including health crises), we do so from an insurance and/or risk management perspective, and offer broad information about risk mitigation, loss control strategy and potential claim exposures. We have prepared this commentary and other news alerts for general information purposes only and the material is not intended to be, nor should it be interpreted as, legal or client-specific risk management advice. General insurance descriptions contained herein do not include complete insurance policy definitions, terms and/or conditions, and should not be relied on for coverage interpretation. The information may not include current governmental or insurance developments, is provided without knowledge of the individual recipient’s industry or specific business or coverage circumstances, and in no way reflects or promises to provide insurance coverage outcomes that only insurance carriers’ control.
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