While taking out business interruption insurance is common among companies in the Nordic countries, the practice remains in its infancy in the Baltic States. In Estonia, for example, just 10% of businesses have such cover.

“Companies here insure their assets, but the rate of cover is low when it comes to business interruption,” remarked Seesam’s Company Asset Insurance Product Manager Sander Lill. “The need for such insurance is mostly recognised by medium-sized and larger companies that more consciously weigh up the risks facing them.”

Lill says that business interruption cover can be likened to a company’s life insurance, helping to keep it financially afloat should anything unexpected occur. For example, the insurance covers loss of income in the event of a fire, flood or major breakdown in equipment, as well as unavoidable fixed costs like rent, salaries and loan repayments, which must all be met even if the business itself grinds to a halt.

Smaller companies lack the financial reserves to deal with unexpected events

According to Lill, Estonia’s biggest business interruption insurance payouts to date have resulted from fires. For instance, a recent incident in an energy company that was caused by malfunctioning equipment was so extensive that the damages amounted to several million euros.

Lill explains that business interruptions can last for anywhere between a few weeks and a few years depending on the nature and extent of the damage, adding that the annual insurance premium for an average-sized company is just a few hundred euros.

“Two types of company are leading the way in Estonia,” he said: “bigger manufacturing companies whose turnover is highly dependent on the operation of their equipment and production lines; and spas and hospitality companies, where any disruption can lead to a significant loss of revenue. Smaller businesses often view interruption cover as an unnecessary additional cost, especially if they have never experienced any such losses themselves. Companies generally also tend to underestimate the losses incurred in downtime, particularly the longer it goes on for.”

Moreover, smaller manufacturing companies often lack the financial reserves they need in order to cope with setbacks of this nature: their operations are heavily reliant on keeping their equipment running, and a failure in one piece of equipment can lead to a chain reaction which brings production in its entirety to a standstill.

“A recent incident involved a metalworking company whose CNC milling machine – its main tool – broke down due to a sudden drop in voltage, bringing work throughout the factory to a halt,” Lill said. “Ordering and installing replacement parts led to a five-week shutdown. The damage to their assets was minimal, just 4000 euros, but the work stoppage cost them 100,000 euros.

If they had only had asset insurance, it would solely have covered the cost of repairing the machinery.”

Entrepreneurs can get too cocky

Lill notes, however, that businesses in the catering, accommodation, logistics and retail sectors are vulnerable to even small-scale fires. He describes an incident in a small fast-food restaurant caused by the thermostat in a deep-fat fryer malfunctioning: despite the conflagration being brought under control even before the firefighters arrived, the damage from the water used to extinguish it and the smoke resulting from it were so extensive that it was impossible to continue working in the kitchen. In terms of assets, the losses to the business were 6200 euros – but with the restaurant closed for nearly three weeks, labour and turnover losses amounted to 40,000 euros.

“We come across quite a bit of cockiness on the part of entrepreneurs, too,” Lill added. “A prevailing attitude of “it won’t happen to me”, or if it does, that their reserves will be enough to cover the costs and carry on working. But if they overestimate their financial capabilities, or underestimate the costs, what starts out as quite a black scenario can turn much blacker, and a single unexpected event can bring the business they have been building up for years undone. Apart from monetary losses, they can lose their employees, suppliers and customers as well. A company’s financial resilience and its ability to recover from a crisis frequently depend on how consciously and prudently it manages its risks.”