As the world becomes more interconnected and natural disasters increase in frequency, more firms are dealing with costlier and costlier business interruption losses.
Business interruptions were the top risk to organizations cited by risk managers surveyed in the report, “Global Claims Review 2015: Business Interruption In Focus,” from Allianz Global Corporate & Specialty. The study looked at more than 1,800 business interruption claims and found that they resulted in average losses that were greater than the actual property damage.
The report, which looked at claims trends between 2010 and 2014, found that the average cost for a business interruption insurance claim had grown during that period to $2.38 million. That’s 36% higher than the $1.75 million average for the corresponding direct property damage loss.
Incidents such as the port strike in Los Angeles in 2015, the 2011 floods in Thailand (which was the biggest global supply chain disruption in history) and the recent explosions at the Chinese port of Tianjin, had significant impacts on a variety of business sectors, including manufacturers, retailers and wholesalers.
The report should be a wake-up call to businesses of all sorts that it’s not only localized or internal issues (such as machinery breakdowns and fires) that can cause a business to seize up, but also far-afield events.
It’s imperative for businesses to have contingency plans in place for a variety of probable interruptions.
“This growth in BI claims is fueled by increasing interdependencies between companies, the global supply chain and lean production processes,” said Chris Fischer Hirs, CEO of Allianz Global Corporate & Specialty.
“Whereas in the past a large fire or explosion may have only affected one or two companies, today losses increasingly impact a number of companies and can even threaten whole sectors globally,” he added.
Top causes of business interruption loss by value (2010-2014)
1. Fire and explosion
3. Machinery breakdown
4. Faulty design/material/manufacturing
6. Cast loss (entertainment)
9. Human error/operating error
10. Power interruption
The Tianjin port explosion destroyed warehouses and production facilities, affected a nearby railway station and residential structures, and destroyed vehicles and shipping containers in the port.
Confirmed insurance industry property losses to date are more than $2 billion, but when business interruption and contingent business interruption losses are finally calculated, Allianz Global estimates another $1 billion will be added to the total. There is usually a delay of up to 18 months for business interruption claims to settle.
The newest threat: cyber
While cyber risk has not entered the top 10 causes of loss, cyber insurance claims have produced business interruption claims, including instances where hackers took a French television station off the air and, in another event, hackers grounded 10 planes after launching a denial-of-service attack against a Polish airline.
Cyber events don’t have to be caused by hackers. Often human error is to blame, such as when the New York Stock Exchange shut down for 3.5 hours in early 2015.
“Awareness of the potential for cyber- and technology-related BI claims, in particular, has been increasing and is likely to become a feature of insurance claims in the not-too-distant feature,” the report states.
Cyber attacks are one form of peril that can disrupt business operations without associated physical damage.
“Perils such as a cyber-attack, strikes and industrial action, infectious disease outbreaks, power outages, and even solar storms, could potentially cause large losses for companies without damage to property,” Joachim Hufenreuter, Allianz Global’s property claims specialist, said.
What can you do?
While many Fortune 500 companies have business continuity plans and supply chain risk management programs in place, few small and mid-sized businesses have them.
Fortunately, with some effort and time, you can put such contingency plans in place for your organization even if you don’t have a risk manager on the payroll.
The best way to start is to analyze your business processes, examining what’s required during each step of your operations. Start by conducting a detailed risk assessment of your supply chain risks, in order to identify and plan an effective response integrated into the overall business continuity plan.
Consider how you would handle all conceivable perils, including:
• Machinery breakdowns,
• Fire in your facility,
• Natural disasters that keep you from receiving products or materials, or keep you from delivering your products,
• A supplier goes bankrupt or has their own fire,
• Your computer system crashes or you lose essential data.
To identify all of your risks, you need collaboration among different parts of your organization, including purchasing, logistics, product development and finance. The key is to identify all of your key suppliers, as well as alternative suppliers should one not be able to deliver.
Also, how would you continue operations if your own facilities were affected by an outage from a fire, machinery breakdown or other event?
Finally, you should secure business interruption insurance, which can pay for lost revenues that result from an event at your facility. Also, contingent business interruption insurance would cover an event outside of your facility, such as at a supplier or some other supply chain disruption.
Call us today for an analysis of how you can manage your supply chain risks and how business interruption coverage can help your organization.