The Business Interruption proportion of a property claim accounts for the majority of a loss. In fact, usually over 50% of the incurred loss.
RISKY BUSINESS
Hi <<First Name>>,
Did you know that everything from risk barometers, risk reports and risk management surveys continue to tell us that Business Interruption remains one of the biggest risks that companies around the world continue to face.
Yet Business Interruption Insurance continues to be a challenge and source of frustration for us Insurance Brokers as only about 40% have added the cover to their material damage insurance. Worse than that, we fear many have under-estimated the size of this risk and are under insured.
So, why is business interruption risk become the most important in an insurance program?
This month's article presents 5 reasons that Business Interruption Insurance has become so vital.
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INSURANCE NEWS
5 reasons Business Interruption Insurance has become so vital
1. The cost of the loss
The Business Interruption proportion of a property claim accounts for the majority of a loss. In fact, usually over 50% of the incurred loss.
This trend of increasing Business Interruption losses, are due to other factors such as more complex global supply chains and highly specialized production equipment, interdependency risks and just in time inventory. This is further illustrated with emerging risks such as disruptive technology and the Internet of Things (IoT).
2. Interdependencies on the rise
Many individual companies and industries are now dependent on globalisation, technology and social change along with a more competitive business environment. Business structures and supply chains are more complex today than ever before.
This is because companies are more reliant on their suppliers for key components or ingredients, services and utilities. This is seen as one of the main drivers for increased Business Interruption losses and why it is the top risk for many organisations globally.
It has a knock on effect
Most sectors have interdependencies; either from a company within their own group, a third party supplier or from public utilities. If there is a disruption, which impacts supply, it has a knock on effect. An example is the automotive industry. A single car has about 30,000 parts and a major car manufacturer may have to manage thousands of different suppliers. A missed delivery of a single component might result in a significant business interruption loss amounting to many millions of dollars.
Further, many organisations have relocated manufacturing and production facilities abroad. Some of these regions are more prone to natural disasters.
3. Increasing losses from natural catastrophe events
Storm and flood losses dominate causes of losses in Asia. Man-made events that frequently cause Business Interruption losses are fire and explosion, machinery breakdown, power outage and rolling blackouts as well as terrorism and human error. However, natural catastrophe events usually lead to wide spread damage.
In Australia significant losses came from Cyclone Debbie in March and April 2017 which brought strong winds, wind-driven rainwater and storm surge damage to southeast Queensland and northeast New South Wales.
It is relatively easy to calculate and settle property claims, but during these events infrastructure was damaged, roads, airports and ports as well as power and utilities, which prevented not only supplies from reaching their destination, but also the movement of people. The result was that business recovery were substantially delayed.
Also, as is seen after most natural catastrophe events, there was a major demand surge for construction services and materials as whole industries looked to reinstate their properties, which again resulted in drawn-out business interruption and increased financial consequences for businesses. Often, well beyond the chosen indemnity period.
4. Increasing costs and complexity of production equipment
All businesses rely on some form of equipment and machinery, which may need to be replaced or repaired following a major event. Most production facilities have some form of critical equipment.
If machines are damaged, The original equipment manufacturer’s lead times become crucial as failed production losses mount. These lead times for repair or replacement tend to be particularly long in sectors that use specialist or heavy equipment, such as the mining and power sectors.
The resulting business interruption losses may be much higher
For example, large power transformers are often custom-made and not fully compatible. Spare transformers are not commonly available. The property damage loss potential of transformers is relatively small at up to USD 7 million, the resulting business interruption losses may be much higher, as repair or replacement periods may take up to 18 months, due to the limited number of manufacturers worldwide.
And the risk of lengthy business interruption periods is not just restricted to the power industry.
5. Supply bottlenecks
Many of the reasons that Business Interruption Insurance has become a key consideration today, is due to the interrelated nature of risks. This is certainly true when it comes to the supply of critical components or ingredients following a serious loss.
Having a Business Continuity Plan is essential
With many production facilities now located in the same industrial park or geographic area, when an event occurs, there is then a sharp rise in demand for materials, spares and machinery, as similar businesses, with similar needs look to reinstate their production facilities and operations as quickly as possible. Having a Business Continuity Plan, involving suppliers of key equipment is therefore essential.
Critical components can often be in the hands of a small number of manufacturers worldwide. With demand surge from impacted corporations, the shortage of raw materials and availability of services can become acutely apparent and waiting periods can easily reach 24 months. A shortage of raw materials from just a handful of suppliers can inevitably lead to longer lead times and result in increased business interruption exposures.
We also see other reasons Business Interruption has become a key risk for many organisations such as:
Political instability
Cyber risks and the Internet of Things, including automation practices in supply chains
Strikes and industrial riots
Public or civil authority actions such as denial of access to premises that might be imposed
In Summary
Risk and insurance professionals consistently identify Business Interruption as the major concern facing any business today.
We see this trend increasing further in the face of new technology, tighter independencies and participation in global supply chains. It is so important that any business, evaluate their Business Continuity Plans and Business Interruption coverages in much more detail. Particularly factoring in Suppliers and Customers losses as extensions to the cover.
You can see easily why the cover is vital but also how easy it is to be under-insured for such events if supply chain factors are not considered.
It has a knock on effect
