Matteo Vazzoler is an expert in the insurance sector, where he works as a Risk Engineer. Matteo supported PANTA RAY in promoting a new digital training platform for business continuity managers, which is part of a project funded by the European Erasmus Plus programme. He now kindly agreed to answer some questions on the importance of business continuity and resilience initiatives for the insurance industry. This is part of an ongoing effort to raise awareness on this issue.
How important is training on business continuity and resilience from the point of view of both those in the insurance industry and those running a business?
Personally, I can give an interpretation and an answer for what concerns my professional figure. I work for an insurance company and I deal with Risk Engineering, conducting inspections for exposure and risk management regarding fire, theft, machine failure, product and pollution liability, depending on the type of policy. In this specific case, the policies also cover the aspect of so-called consequential damages, so the policy covers in a certain way what concerns lost profit or lost turnover. In my role, I try to identify what may be the points of vulnerability and critical elements that, should they arise, would disrupt production and the normal operations of the company. This is because an interruption would have an impact on the extent of the damage.
This is an economic evaluation that also impacts on the contribution margin. So this training is important to me because it connects the realities I visit on an almost daily basis with what can actually be the critical issues in a company. These can include bottlenecks, raw material supply problems or other factors; essentially any issue that can jam the company machine.
Conversely, on the company side, the focus is on damages that may or may not be compensated. The company has different needs, to survive disruptions that may undermine the stability of its business. Consequently, it is equally important to have risk management and business continuity systems in place. Sometimes in an event, the extent of the direct damage related to the company’s assets (buildings, plant and goods) is far less than that caused by the inability to continue production, resulting in extensive damage. A disruption is sometimes greater than physical damage (although the two may coincide), because balances and positions within a complex market may also be lost. And this has an impact that many times in the space of five or six years may affect companies that then go bankrupt.
Can business continuity and resilience awareness initiatives, such as the CONTINUITY platform, help companies in this regard?
The impact is undoubtedly strong, but one needs to be far-sighted, in the sense of being aware that the company is still, I would say, almost a living being, right? It modifies, it changes, and it has its own balances and peculiarities, so entrepreneurs from my point of view must necessarily look beyond, with a time horizon of several years. Above all, they must look at the functioning and effectiveness of their processes not only from an economic point of view, but also of their operational continuity.
So, I have to say that I often notice that this kind of mentality is missing. Caught up in so many things, such as deadlines or tax declarations, entrepreneurs, especially in small and medium-sized enterprises, often overlook and do not consider aspects of continuity and resilience. It is often a problem of mentality: there is a tendency to hope that certain incidents simply do not happen. Usually as part of the indirect damage assessment, I ask when and how a business continuity plan is made, even in ‘peacetime’. Sometimes they look at me or look at each other and say ‘we have never done such a thing’; sometimes, as I am about to leave the client, I then have the perception that something has shifted and that therefore this awareness has matured. So I go back to the initial issue, on the importance of broadening the culture on business continuity issues and the positive impact that this would have. This is fundamental on several levels, both from an insurance point of view, since a reduction in claims and their magnitude would also entail a lower indemnity, and from a production point of view. Even on a national scale there would be a lower impact, making the industrial fabric more robust to the benefit of greater awareness, greater maturity and less vulnerability of the Italian economy.
What is striking is that despite the fact that Covid caused not only casualties due to the disease, but also major losses for large and small firms, this awareness has not matured. Yes, something has changed, but the industrial fabric is still not as responsive to such a systemic risk event, which could be caused by conflicts, supply chain disruptions or natural catastrophes (NatCat in insurance jargon).
So this unpreparedness could, in my opinion, certainly be modified, corrected and improved. Training, therefore, also via the CONTINUITY platform that you have set up is certainly very useful and interesting. I am also sharing it with other colleagues, and we can actually see the usefulness and quality also for dissemination at a high level.
How do you assess the risks to the production or supply chain? How important is it to have business continuity and resilience solutions within it?
Considering also the fact that a company itself does not live in an isolated world, but has to interface with an external system, it is crucial to have business continuity systems that also include the supply chain. It is true that unfortunately there are inherent limitations to the system, in the sense that I can be the most resilient company on this planet, but if I hire a transport service that is unable to get employees to work, I have to compensate somehow. Similarly, a flood or an earthquake could completely isolate me.
There are certain scenarios that are controllable only to a certain extent. In the case of a flood, I can somehow identify the most exposed areas by means of ad hoc software that assesses exposure to lightning, floods or landslides, but the repercussions can still be uncertain. In this regard, I would like to mention that the poor state of our national territory, which was found by the study and mapping carried out by ISPRA (Superior Institute for Environmental Research and Protection) to be strongly exposed to a high hydrogeological risk. In addition to this, it must be considered that our country is often exposed to intense atmospheric phenomena, which combined with insufficient land management and increasing concreting contribute to making the entire current and future damage scenario rather serious and worrying. In fact, we have flooding situations that, due to a lack of land drainage, become truly dramatic to manage.
Even at the supply chain level, it becomes difficult to intervene on every variable at play in the operational context, especially on an international scale. Globalisation is welcome when useful and necessary, but this often entails more complex and varied difficulties and operational risks. At present, the supply chain crisis is exacerbated by global phenomena of various kinds, such as geopolitics, which are beyond the control of a single company.
Therefore it becomes necessary to mitigate the uncertainty caused by such global trends by putting in place business continuity and resilience management systems. There are documents and studies by insurance companies, where one can easily see that business continuity is one of the most urgent issues to address, in addition to climate change and cyber risk, of course.
The latter, in particular, also presents risks at the production level, especially when it comes to Industry 4.0, where there are highly automated, computer-controlled processes. A computer breach can also cause physical damage, as well as loss of data, which also presents a problem from an insurance perspective. An intrusion into the system can cause a fire caused through the manipulation of industrial equipment through altered data. This can cause machinery to work at unacceptable speeds and thus develop a fire or affect the quality of a certain product that is then placed on the market and must subsequently be recalled. In this case, there is a problem of classification and quantification of damage, which over the years has led to the development of policies tailored to take into account cascading damage resulting from cyber-attacks.
What do you think will be the most relevant topics in the next 12 months?
The catastrophic events part will have a major focus, because of what happened in 2023 in Italy and beyond, with big amounts of values at stake. Environmental trends do not change overnight; there is no switch that suddenly fixes the climate. Therefore, we may expect something similar or worse in the future. In this regard, the government has proposed a solution that provides insurance cover for catastrophic events with compensation for damage to machinery and buildings. It remains to be seen how it will develop, but in my opinion the policy should be shared as a cost between the company and the state. It is a bit like the introduction of car insurance when it was not compulsory in the past; the idea of the current government is to somehow make this compulsory or advised. This initiative in my opinion is very important because it would have a positive impact on the business continuity of the various companies, and the entire production system. If there are funds that intervene in the event of a claim, things are much more sustainable and tolerable if the burden is shared among several entities.
In addition, cyber threats, which expose companies to such risks on a daily basis, will certainly increase. Then of course there is the supply chain, with the various challenges we have talked about. These aspects should be combined with business continuity. A trend we are witnessing is that the demand for such measures is becoming a business requirement. There is a common tendency across suppliers that affects contractual conditions, since you must ensure continuity to win contracts.
OK, one last question, do you think the pandemic has changed the perception of risk? Because sometimes it seems that for the individual company a localised event has a stronger impact in terms of perception than a global event that happens every hundred years and is systemic in nature.
I agree that it is paradoxical, but on the one hand it mirrors what was said earlier. Every company has its own objective, which is to produce and maintain certain levels of productivity also in relation to its competitors. During the pandemic, there was a general stop, which levelled the playing field a bit for everyone in this respect. A stop that in some cases, through government subsidies, albeit sometimes insufficient, made it possible to reduce the impact. In contrast, a damaging event such as a fire stops a manufacturer but not its direct rivals. The same is true for suppliers, the lack of a certain product on a large scale slows down the production of an entire industry, with repercussions in the long run, but in the short term for the individual company the stop of a critical local supplier has much more impact. Therefore, it is increasingly important to raise awareness and dialogue among firms through initiatives dedicated to these issues, such as the CONTINUITY platform.
Author: Gianluca Riglietti
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