It is well documented that extreme weather events and other natural disasters across the Asia-Pacific region have caused massive disruption to countless businesses in recent years. And fires, floods and storms are just some of the events that have the capacity to severely interrupt an organisation’s ability to trade, putting it at risk of significant financial loss and potential failure. There are also man-made events, such as terrorist and cyber attacks, which can bring businesses to their knees incredibly quickly. This is why business interruption (BI) insurance is more important than ever to ensure the success of an organisation.
“In the wake of a number of recent large losses following major fires and explosions, floods, storms and earthquakes where BI has been a major cause of loss, it is clear to see why concerns surrounding BI policies are paramount,” explains Peter Newall, senior claims manager Swiss Re Corporate Solutions. “Typically the BI proportion of a property claim will account for the majority of the loss, well over 50% of the incurred loss in our experience, and it is now not uncommon to see single risk claims exceed USD 100 million – in some cases even approaching the USD 1 billion mark. This trend we see, of increasing BI losses, is due to factors such as more complex global supply chains and highly specialized production equipment, interdependency risks and just in time inventory. This is further exemplified with emerging risks such as disruptive technology and the Internet of Things (IoT).”
Properly structured BI coverage can provide the critical working capital needed for a business to survive a major disruption. It can be the difference between a business being able to rebuild and recover and maintain relationships with its suppliers and customers, or being severely impacted and maybe even shutting down completely. The regional director of JLT Risk Consulting Asia Craig Paterson says that his firm’s definition of BI insurance is based upon the needs of the client.
“Our intention is to work with clients to understand what the risks are that drive an incident and determine the variables that are affected,” he says.
“This allows us to then calculate the size and time period of an interruption.” Singapore-based Paterson explains that most clients want to know what they financially lose from an incident (both as physical assets and revenue).
“Only once a client fully understands the magnitude of loss do we start to look at appropriate insurance solutions,” he says.
Taking this a step further, BI can be explained as an insurance concept as an extension of a property policy to indemnify for gross profit lost, says Willis Towers Watson’s head of forensic accounting and complex claims, Asia, Henry Dumas.
“Essentially, the property policy provides coverage for the asset and the BI section of the policy covers the gross profit (defined as revenue less variable costs) said asset was used to generate,” he explains. “The key point here being that BI is triggered by damage to insured property, not general disruption of a business.
However, coverage has evolved to include gross profit losses from damage to non-owned property (contingent business interruption [CBI] and other extensions). Furthermore, coverage for losses triggered by product recall and disruption of a data network (cyber insurance) is available too. There are also many other extensions to tailor the coverage to one’s business.”
However, the fact remains that many insurance specialists assume that BI insurance is provided by property damage insurance, but this blinkered view is no longer appropriate for today’s businesses, which want to protect intangible assets (as well as the tangible) and which face risks throughout their supply chains (not just at their own premises).
As UK-based managing director of Marsh’s risk finance practice Caroline Woolley puts it, business interruption risk is simply “anything that interrupts business”. “It doesn’t necessarily fit into the existing insurance categories,” she adds, “therefore, we need to build an enhanced level of comfort and security with regard to BI risk.”
Indeed, BI remains one of the most misunderstood areas of insurance, and many risk professionals are poorly prepared for the complexities that accompany a BI loss.
Consider the 2017 RIMS Business interruption survey, which found that approximately 60% of risk managers have not experienced a BI loss in the last five years. It follows that many companies and risk management professionals will not have experienced a complex BI loss during their careers and, subsequently, BI may not be a major area of concern the typical risk manager.
“Many risk managers may find themselves unprepared for the complexities that accompany a business interruption loss and the overall claim process,” the survey analysis team states.
“Understanding the documentation requirements and necessary resources needed to successfully recover from a business interruption loss are critical for any organisation.”
Furthermore, as Craig Paterson points out: most risk managers are “concerned about being able to explain to senior management / board of directors the potential magnitude of an incident and how it could affect operations. Many of these incidents are rare events and, as such, it can be difficult to convince [them of] their importance.”
To fully document, negotiate and settle a large, complex BI loss can take 12 to 18 months or longer depending on the size and circumstances surrounding the event leading to the loss. This makes it critical for risk professionals to manage internal expectations around timing. The RIMS survey team again:
“A coordination of efforts is necessary in order to manage the departments most directly involved in the recovery. These departments might include operations, real estate, finance and accounting, budgeting and sales.
Additionally, communication to company executives and stakeholders is critical to manage expectations about recovery timing, human capital resources required–and documentation needed to resolve the loss. Furthermore, frequent and open communication between risk management professionals and their insurance partners is important and may assist in the time to resolution.
Business interruption claims are rarely simple and typically result in a series of negotiations between the insured and insurers, even with those risk professionals who have experienced losses in the past.”
Of course, one of the main concerns for purchasers of BI insurance is whether the coverage will respond as they expect it to, particularly in relation to highly complex risks. Henry Dumas says that, to create certainty in this area, policy wording needs to be “placed with care and with a good understanding of the business”.
“Unless the risks are fully understood by the policy holder’s broker or insurer, the coverage may not respond as intended or more importantly, expected by the policy holder,” he says.
“The Thai floods in 2011 highlighted this issue in particular, where businesses were dependent on each other in a small local area but the coverage for CBI was heavily sub limited or not present at all.”
Another concern is the indemnification process adequately supporting and proving losses, Dumas continues.
“It is different from other forms of insurance coverages as indemnification is based on the ‘but for’ principle, that is, but for the damage, what would my revenue have been? This is opposed to a property loss where indemnification can simply be based on replacement cost of an asset using an invoice. One of the main questions from policy holders is ‘I know I’ve lost between x and y of revenue but how much am I due from my claim and how can I support it?’. Policy holders need expert advice from a reputable firm to ensure they get the right product and also correct indemnification in the event of an incident. The expert needs to understand the process, what insurers require in terms of support and be a trusted advisor. These traits can only be gained by experience and interaction with the insurance market.”
The following report has been created with the help and support of a great many professionals well versed in the insurance market who have dealt with large and complex BI events. We trust that it will provide valuable information and case studies to assist you to make informed decisions when considering your BI insurance needs.