Business interruption remains the top concern for risk managers, according to a new study. Sam Barrett finds out why-¦
Whether it is a fire, flood or a denial-of-access attack, getting a business back up and running after a loss can be a long and expensive process. But, while this means business interruption (BI) is a key concern for risk managers, there are still issues the insurance industry must address.
Statistics from the Allianz Risk Barometer 2017 give a good insight into the market. For the fifth year running, BI tops the perils chart, with 37% of respondents placing it in their top three risks. It is not surprising either, given that the average large BI property insurance claim is €2.2m, more than a third higher than the average direct property damage loss of €1.6m.
Operational changes are pushing up losses, especially as a result of supply chains becoming longer and much more global. Brian Kirwan, chief executive officer of Allianz Global Corporate and Specialty, explains: "The complexity of and reliance on the supply chain means that if there is a loss the impact on revenues can be greater. Just-in-time ordering delivers speed and efficiency but it can also leave a business very exposed if there is an issue with a supplier."
In addition, problems can be exacerbated by the concentration of suppliers. The Japanese earthquake and tsunami of 2011, along with the Thai floods in the same year, is a good example of this, with companies all around the world and in a variety of sectors affected when production was hit.
The emergence of new risks such as cyber incidents and terrorism help to keep BI top of the agenda too. These present particular challenges as, unlike a more traditional risk such as fire or flood, there won't necessarily be any property damage to trigger a BI policy.
Although policies are available that explicitly cover non-damage and cyber-related incidents, standard BI cover leaves businesses exposed. Anne Griffiths, director of commercial propositions at Zurich Insurance, says she is currently exploring ways to extend cover to these types of risk. "Elements of cover are already available on other policies, for example data loss is covered on computer insurance policies, so we're looking at where the gaps are for businesses," she explains. "It will also be interesting to see what the Prudential Regulation Authority recommends, following its consultation into cyber insurance underwriting risk."
While the BI insurers are grappling with new risks, it's important to note that the more traditional ones still dominate claims. "Cyber offers an opportunity to discuss exposures but it would be wrong to ignore the other risks. We still see the majority of claims resulting from fire, flood and supply chain issues," explains Bianca McKenzie,
head of claims preparation and valuations UK at Aon. "We work with our clients to ensure they are in the best position pre-loss. This involves improving the insurance programme and ensuring risk management recommendations are in place."
Traditional issues also haunt the BI market, with underinsurance still a major issue especially in the SME market. "Often, businesses will only realise the inadequacies of the sum insured after they've suffered a loss," says Ms Griffiths. "BI underinsurance was highlighted in the FCA's review of SME claims and it's an area where more education is needed."
Indemnity periods can be a particular issue, with Richard Keegan, executive accountant at McLarens, saying that many SMEs underestimate the length of time it takes to be up and running again. "If there's a fire in a business premises or in a neighbouring building, it can take more than a year to reinstate it," says Mr Keegan. "How long it takes to get back up and running will depend on the business but a 24-month indemnity period should be the absolute minimum."
Many of the insurers have moved to this longer indemnity period and are taking additional steps to educate this sector of the market. For example, Axa and Zurich have both launched
BI calculators to help brokers and their clients calculate the amount of cover required. In addition, and to encourage greater use of the new tool, Zurich offers a 10% premium discount to clients who use the calculator.
"We want to encourage brokers to use it at quotation stage," adds Ms Griffiths. "It can open up the BI conversation and protect customers and brokers from underinsurance." And while getting BI into the conversation is important, it is also essential that the product remains relevant to the risks that businesses are seeing. "Customers are changing the way they operate, with new risks emerging," says Mr Kirwan. "Insurance products and structures must change too."
BI CLAIMS COSTS
Energy platform incident €4.2m
Fire and explosion €1.7m
Faulty design/manufacture €1.6m
Power interruption €1.2m
Source: Global Claims Review: Business Interruption in Focus, AGCS. Average value of claims.