Business interruption (incl. supply chain disruption) continues to be the top risk for the fifth successive year according to the Allianz Risk Barometer, with 37% of responses choosing it among their top three business risks. Business interruption (BI) entails a loss of income that could impair a company’s revenue stream and thus a shortfall in covering the ongoing costs of doing business. Its impact is one of the hardest risks to measure.
Insurance claims analysis shows that the average large BI property insurance claim is €2.2m ($2.38m), 36% higher than the average direct property damage loss of €1.6m ($1.75m) , emphasizing the significant impact BI can have on companies’ revenues. Accordingly, physical perils like fire and explosion (44%) and natural catastrophes (43%) are the top causes of BI that businesses fear most.
However, alongside these perils, so-called non-physical or non-damage causes of BI are becoming a much bigger issue. Impact of supplier failure (33%), cyber incidents (29%) and the wider disruption caused by a terrorist event (10%) are just some of the many incidents that can cause large losses for companies without causing property damage. Businesses will need to think about how to mitigate these risks as more of these events occur in future. Meanwhile, BI risk continues to further evolve. For example, insufficient management of societal and environmental risk topics (ESG) could lead to a BI event ordered by authorities moving forward.
“BI again tops the Allianz Risk Barometer survey,” notes Volker Muench, Global Practice Group Leader, Property Underwriting, AGCS. “That’s because new triggers for BI emerge constantly. These can range from cyber incidents to market developments to the changing political landscape. Going forward we expect there to be more non-damage triggers of BI. It is important that our insured customers understand the evolving threats they are facing.”
The impact of cyber and other intangibles: Non-Damage BI
A main driver behind non-physical damage BI losses is the continued impact of digitalization as companies technologically upgrade. “There is a need for real data or information on risk exposures, both tangible and intangible, in an environment that is continuously changing with new suppliers and new geographic locations,” says Thomas Varney, Regional Manager, Americas, Allianz Risk Consulting.
Many factors can be said to trigger BI, including system interconnectivities, reliance on outsourcing suppliers and the ever-broadening aspect of cyber risks.
“With the current incidence of data-driven events,” says Muench, “most can be linked back to business interruption. Businesses need to think about data as an asset and then what prevents data from being used. Hacking isn’t the only threat, cyber incidents can also stem from human error or technical failure and these risks need to be identified and managed too.”
Then there are other threats beyond cyber incidents that may also impact production. Supplier failure, for example, ranks third on the list of top BI risks businesses fear most, especially related to using single-source, low-cost suppliers or plants in countries where labor is cheapest. “Cost-cutting measures such as these can be recipes for disaster, because as supply chain costs fall, risks soar,” says Mark Mitchell, CEO AGCS Asia.
Supply chain disruption, and hence a contingent business interruption (CBI) scenario, can result from overreliance on a sole or key supplier, no matter if it is due to physical exposures – human or natural hazards – or intangible exposures like bankruptcy, civil unrest, competition or other perils.
“To ensure business resiliency and continuity,” says Mitchell, “companies need to maintain the right level of supplier diversification at cost-competitive prices.”
Planning is crucial, too. Constantly updated business continuity plans that involve all facets of an organization are effective in understanding supply chain exposures
and critical internal and external suppliers. Business continuity management remains a gap in many supply chain risk management programs.
Non-damage BI (NDBI) exposures exist independently of the normal flow of business. For example, after the explosions in Tianjin, China, in 2015, a number of losses associated with the supply flow interruption occurred because the port was closed by local authorities or because companies were unable to power-up facilities due to impacted workforce. Such damages may not be covered by insurance, unless special NDBI insurance coverage has been purchased.
“Insurers such as AGCS can help insureds with BI, CBI and NDBI threats by providing new insurance solutions, such as political violence and data-driven (cyber) risk products, but even more so by providing risk management services, such as supply chain risk management workshops, where the insured’s supply chain organization is stress tested, to identify and reduce those threats,” says Muench.
The potential BI impact of terrorism/political violence
Terrorism risk is rising. Fear of political unrest and terrorism moves up one position in the overall Risk Barometer rankings year-on-year to 8th position, while Act of terrorism and sabotage is the number one concern for businesses in this risk category. Terrorism resulted in 29,376 deaths and cost the global economy $89.6bn in 2015 .
From an insurance perspective, according to Adam Posner, Senior Underwriter, AGCS Crisis Management (Terrorism) North America, a business does not have to be the direct victim of a terrorist act to feel the effects of BI. If an attack occurs in the close vicinity, for example, the surrounding area will likely be cordoned off by local authorities for an indeterminate amount of time, meaning nearby businesses will be unable to operate. Policy extensions like denial of access following an act of terrorism are important coverages to consider.
Businesses should also consider supply chains and the possible impact an act of terrorism can have on suppliers which could produce a CBI scenario. If the insured is a manufacturer relying on a small number of suppliers or customers, terrorism contingency plans should be in place, as it can take months for an affected company to get back to regular trading levels due to the substantial interruption.
Growing risk of political violence
While conventional terrorism is a real concern, the growing risk of political violence events, such as war, civil war, insurrection and other politically motivated incidents which focus on countries – particularly in the Middle East and Africa – rather than certain locations should not be underestimated, according to Christof Bentele, Head of Global Crisis Management, AGCS. “The impact for globally operating businesses and our customers can be much greater and longer-lasting,” he says.
While there is often little companies can do to prevent an incident, they can prepare by monitoring the political landscape and seeking help from professional crisis management companies. AGCS has formed a partnership with one of the global leaders in this area, red24, which enables businesses to access services including threat analysis and bespoke crisis management planning.
 Global Claims Review: Business Interruption In Focus, Allianz Global Corporate & Specialty
 2016 Global Terrorism Index: Measuring and understanding the impact of terrorism, Institute for Economics & Peace