Regardless of what industry you operate in, you are undoubtedly reliant on Australia’s supply chain network, and acutely aware of the business disruption you face when the supply chain itself is disrupted. It would be almost impossible for any business to ignore how turbulent the last couple of years have been for supply chains in Australia, which has prompted many organisations to question whether their business interruption insurance covers supply chain disruption.
If you are one such organisation, then read on as we unpack business interruption insurance and how it relates to the impacts of disrupted supply chain operations.
What is business interruption insurance?
The variety of insurance policies available to businesses is expansive, so let us provide a quick recap on what business interruption insurance is. Of the many policies available to your business, business interruption cover is designed to help indemnify your business for the financial loss caused by agreed events that disrupt your business operations.
The name can be somewhat misleading, with business owners often presuming that they are covered for any and all disruption to their business. Unfortunately, this isn’t the case, and, as is with most insurance, you are only covered for major loss as a direct result of suffering an agreed event, as outlined in the policy.
Business interruption insurance ideally would cover any shortfall in profit that you incur after experiencing an insured event, which can include events caused by supply chain disruptions. Any business owner would understandably wish to maintain their profit level and be able to cover their ongoing costs while they recover, which is why many seek out business interruption policies.
A business interruption insurance policy can provide compensation for:
- Employee payroll.
- Lost revenue (based on your past gross profit).
- Lease, mortgage or rent payments on your business premises.
- Other expenses such as loan payments that are due during the covered period.
- Relocation costs in the event you need to move premises (such as after experiencing a fire).
The supply chain risks that impact businesses
Supply chain risk is one of the biggest business risks you can face. The good news is that you can help mitigate risks to your business by practising sound supply chain risk management. When looking at the potential risks to your supply chain, the first step is to assess what your internal and external risks are.
Internal supply chain risks
Businesses of all sizes are inherently exposed to internal supply chain risks. The upside to internal risks is that they can offer a better opportunity for risk mitigation because they are mostly within your control. Supply chain risk management is important even if you run a small business.
Internal supply risks include:
Contingency risks
Not having a backup plan or an alternative solution mapped out means you’re not putting contingencies in place for if something happens, which can leave you open to contingency risks.
General business risks
Changes in key personnel, a shake-up to your business processes or other processes that impact your internal operations can all leave your internal supply at risk.
Manufacturing risks
Your internal processes or internal operations can also impact manufacturing risks. In addition, manufacturing risk can also be influenced by external factors such as a shortage of raw materials.
External supply chain risks
The impact of external risks on your supply chain are largely out of your control, which is why having solid risk management practices in place is so important. The risks that you can’t control are often what cause disruption to your business and is why a business interruption insurance policy can be beneficial.
For example, your business may face external risks, including:
Demand risks
If you experience unpredictable customer demand, or even misunderstand your demand levels, this can seriously impact your supply chain. With an interrupted supply chain, being caught unable to meet your customers’ demands can cause many issues for businesses, including things like damage to the business reputation, strained relationships with customers, as well as the more obvious issue of lost revenue.
Physical plant risks
Regulatory compliance is ever evolving, if a supplier’s physical facility is put out of action for a period of time due to compliance or quality issues, or if it suffers damage itself, this will cause a major disruption to the supply chain.
Business risk for suppliers
Speaking of suppliers, they are an integral part of both domestic and global supply chains. If a supplier within your supplier network faces issues within its own financial or management stability, this too can cause issues down the supply chain.
Supply risks
Any risk to the supply of the products or parts you need to keep your business operating is one of the external risks you face.
Environmental risks
Operating in Australia means that you are no stranger to the unpredictability of the environment, and how our weather, in particular, can disrupt your business. Climate is just one of the environmental risks, though; social, governmental and economic risks are all encapsulated in the term ‘environmental risks’.
Business interruption insurance should form part of your supply chain risk management
While it’s not always possible to control risks, it is possible to mitigate them as best you can. Risk management is vital to your business continuity, and putting contingencies in place is vital to lessening the effects of supply chain disruption within your business. One such contingency that most businesses benefit from is business interruption insurance.
At Barrack broking, we help to measure and manage your risk, so that you can focus on what’s important. We can help your business survive serious interruption caused by supply chain disruption by developing an Insurance Program Strategy, and use our extensive experience in business interruption insurance claims to get you back on track in the event of a claim.
To understand more about how to cover your business using business interruption insurance, or to gain a greater understanding of the business risks you face, reach out to the team at Barrack Broking.
