Business, Interrupted

2005 saw the worst hurricane season on record, with widespread devastation across the American Gulf region. While this may not have impacted small businesses in Europe, it brought back memories of the windstorms in 2004 and pushed the argument about climate change further up the agenda. Furthermore, the terrorist attacks in London and riots in Paris highlighted that terror and civil unrest are a real issue for small businesses across Europe.

With this in mind, Royal & SunAlliance (R&SA) undertook an extensive study to define exactly how UK business handles external risks, including terrorism, fire and flood. The study also sought to establish whether they were prepared for these risks.

We are not exaggerating the threat. The Metropolitan Police in London have said they believe that the threat of terrorism in the UK and mainland Europe will be with us for over a decade. Leading climate experts believe that the next two decades may well determine the weather patterns of the future, with the expectation that sub-Saharan temperatures could start to creep into Northern Europe with the shift towards long hot summers and reductions in rainfall.

Experts also say that the movement of the Gulf Stream by just a few degrees either way may well mean that the British Isles and parts of Western Europe will have similar climate patterns to Canada, with long, freezing winters and hot, dry summers.

Despite these challenging issues, few UK businesses are prepared for the worst.

WHAT KEEPS YOU AWAKE AT NIGHT?

When asked which external event could have the biggest impact on their ability to operate, fires, telecommunications failures, power failures and storms were cited as the risks that businesses feared most.

Terrorism was seen as the biggest threat by just 5% of those who responded, despite the events of last year. There were, however, some regional variations, with 16% of firms operating in London putting terrorism at the top of their threat list.

The average cost to businesses in our survey who were forced to close for over a day was £27,000. For 58% of those firms who were involved in the study and suffered an external event, those costs were not covered by their existing insurance programmes and therefore had to be funded by the businesses themselves.

The consequences included reductions in takings, a drop in the level of business, failure and loss of machinery and damaged stock. 33% said they also lost existing customers.

In the 'just-in-time' supply chains which are becoming increasingly popular, loss of the ability to deliver is increasingly resulting in a threat to future business. Damaged stock can be replaced, but lost clients can have a long-term and more serious impact on the business.

The Royal & SunAlliance survey found that:

• 18% of businesses interrupted by external factors are still closed 12 months later
• The average cost of one day's closure is £27,000
• Only 41% of UK businesses have disaster recovery plans in place

IT'LL NEVER HAPPEN

Generally businesses in the UK believed that they would not be facing an incident which would cause their firm to close for over 24 hours in the year ahead. Surprisingly, 14% believe that such an event will never happen and the majority (64%) believe that it is unlikely to happen.

Bigger businesses, not surprisingly, were more realistic in their view of the threat of external events. 53% of those firms with a turnover in excess of £50m felt an event could happen, compared to just 20% of businesses with a turnover below £50m. Worryingly, given the fact that almost half of surveyed companies said a closure of one month would see the business fail, only 41% of the companies surveyed said that they had a formal business continuity plan for when disaster strikes.

REGIONAL VARIATIONS

In all, 94% said they had informal contingency plans, with 21% of businesses in Scotland admitting they have no plans whatsoever in place. Following the 7 July attacks in London, only 14% of firms said they had reviewed their business continuity plans in case a major event occurred.

Clearly, firms in London have become more aware of the threat of terrorism, in part due to the sporadic bombings of the 1970s and 1980s. But the events of 7 July 2005 saw over a third of London businesses undertake a review of their continuity plans in the event of a terrorist attack. While almost all said there was an informal structure for continuity, the majority lacked the framework which would allow their staff to carry on working if their premises were placed out of bounds.

WHAT THE INSURANCE MARKET OFFERS

The insurance market does provide business interruption cover. It will provide compensation to a set amount for a period while the company cannot operate and can work hand in glove with the disaster recovery plan to ensure the business does not lose income when an event occurs.

However, the study found that over a third of UK businesses simply choose not to take out the cover. Britain's businesses are, on the whole unprepared for the worst. They are either taking the view that it will never happen to them or believe that they will be able to weather the storm.

Unsurprisingly perhaps, the research found that it was the bigger companies which had the disaster recovery and business continuity plans in place, alongside additional business interruption insurance. It may well be that they have risk managers who have a better understanding of the risks that business faces today. But smaller businesses are also in the position where they are least able to cope financially with an extended period where they cannot carry out their business.

EUROPEAN AWARENESS?

A similar Europe-wide study has not been commissioned, so hard-and-fast percentages are not available, but the Federation of European Risk Management Associations (FERMA) says the businesses of Europe are no better than those in the UK.

FERMA believes that business interruption and the threat of extreme external events is not high on the average company's radar across Europe.

Terrorism is not seen as such an issue and while the standard commercial policy contains a limited amount of cover for terrorist attack, there is no real demand for the specific terrorism products available in other markets. Many European businesses will say that it is not the lack of will that is affecting their ability to buy business interruption cover; it is finding the cover itself.

There is a clear need for businesses across Europe to take some time to think the unthinkable and examine how they would react if they fell victim to terrorism or any other cataclysmic event. The danger of adopting the 'it will never happen to me' attitude is self-evident. The products and services from the insurance and risk management community are available. What is needed now is for leaders in the business community to realise that it could indeed happen to them.