Safe and sound by design.

• Author: Roof, Bradley M.
• Position: Operating asset insurance - Includes related articles - Risk Management

As floods, hurricanes, even bombings fill the news, some businesses are suffering because they misjudged their vulnerabilities. Does your company's insurance coverage fit its attitude about risk?

Not long ago, operating asset insurance was a simple matter. Coverage was easy to understand, insurance prices were affordable and settling claims was straightforward. Some firms established relationships with their insurance companies that lasted generations of top management.

No longer. Today, every firm has to build an operating asset insurance program that guarantees protection against potential losses at the best possible price. But that's not as easy as it sounds. You have to understand your potential losses, develop a concrete set of risk and insurance objectives and broker these objectives.

Often, an accounting or finance employee gets the job of dealing with insurance, but he or she doesn't always know as much about operating assets as the people responsible for them. So, if you're trying to assess your asset values and their associated risks, for starters rely on the operating manager in charge of those assets.

WHAT ELSE COULD GO WRONG?

When you're developing your list of risk and insurance objectives, you'll need to look at three loss areas: the operating asset, the associated loss from operating interruptions and the losses to third parties who suffer as a result of the operating asset loss.

Operating Assets -- To understand what you might lose, find out what you have. Good accounting and physical plant records won't tell you all you need to know. Taking physical inventories and inspecting assets will fill in the blanks. First, imagine how different calamities will affect you. For example, even modest water damage may destroy your brand new mainframe but will leave relatively undamaged the $200,000 of facility modifications you capitalize as mainframe costs, too. Then again, a serious fire would destroy both.

Second, determine the asset value you'll lose as a result of these mishaps. Accounting book values are just about worthless here because they reflect historic cost. Focus instead on replacement cost or some measure of "value in use," like appraised values.

Operating Interruptions -- Be explicit here. With the help of operating managers, quantify your potential unit output losses and then convert them into financial estimates. Don't settle for "ball park" financial estimates. And test the reliability of the estimates by questioning your managers' assumptions.

Look at operating recovery schedules, too. Will you restore operations at once, or will you return to service in segments? Beware of such items as time estimates you can't reliably assign to recovery activities, exact recovery time estimates for activities that contractors must provide, and complex recoveries that have exact time estimates rather than minimum and maximum time ranges.

Also, decide what you'll do with employees during the recovery period. You can save the payroll through layoffs, but your employees may go elsewhere, leaving you with a smaller labor pool of untrained workers when you resume operations. On the other hand, you can retain all your workers during a reconstruction period, but that may be just too expensive. One alternative is to insure payroll through business interruption coverage; others are to shorten work schedules, rotate short layoff periods between employees, or implement long-term layoffs of only unskilled workers or those with skills in plentiful supply.

Third-Party Losses -- Decide how each potential calamity will affect employees...