According to risk managers and corporate risk experts surveyed by the Allianz Risk Barometer, the impact of business interruption (BI) is the top risk companies face in today’s increasingly interconnected and globalized business environment.
This report examines global BI claim developments over the years 2010-2014 and highlights top causes of BI losses during that period, as well as current and future trends. It also focuses on BI losses in three sectors: energy, entertainment and property & engineering.
Top 10 losses analysis
Fire & Explosion accounted for 59% of 1,807 BI claims globally according to data analyzed over a five-year period. According to AGCS insurance claims analysis, the vast majority of BI losses are not caused by natural catastrophes. Non-natural hazard events account for 88% of BI losses, according to value.
Top causes of business interruption (BI) loss by total 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
Top causes of BI losses by value. All losses > €20,000
Global Loss Atlas - Largest Non-Nat Cat Losses 2015
Recent loss activity/trends
Over the past five years, there have been a number of large losses following major fires, storms, floods and earthquakes where BI has been a key loss driver. Almost all large property insurance claims now include a major element of BI, which typically accounts for the majority of the loss.
According to AGCS, the average large BI property insurance claim is now in excess of €2m (€2.21m: $2.38m). This is around 36% higher than the corresponding average direct property damage loss (€1.63m).
Although fire and explosion is the top cause of BI loss around the globe, costing €1.7m in losses on average, there are some major differences regionally.
Storm and flood-related losses are notable in Asia, reflecting the region's continuing economic development and increasing exposure to natural hazards. Storm is the top cause of BI loss in the Caribbean and Central America region, accounting for a third of claims by value.
The top 10 causes of BI loss for global businesses account for over 90% of BI losses, with this list dominated by nonnatural catastrophe events (8).
Losses by business sector
Fire and Explosion is the top cause of BI loss by number of claims and value in the energy sector, followed by machinery breakdown and power interruption. Wear and tear on aging equipment and water damage are also major loss drivers. The average energy BI claim costs almost €4m (€3.96m).
BI exposures are growing within the energy sector and claims severity is increasing as a proportion of the overall claim. Additionally, interdependencies between companies is an increasing loss factor, resulting in regional contingent business interruption (CBI) claims if one plant is disrupted.
Cyber exposures are another potential cause of property damage and BI claims. There are fears that a malicious cyber-attack against a refinery or petrochemical facility could result in a fire or explosion. Offshore oil and gas BI losses have been relatively benign due to a recent lack of natural catastrophe events and increased safety awareness in the industry, but property damage losses have increased in number and amount.
Losses due to cast member inability to perform due to accident or illness account for 60% of entertainment insurance claims received and almost three quarters of
claims according to value. The average entertainment BI claim costs €264,000. However, performance interruption among top talent can easily push claims into
the millions of dollars.
In addition, extra expenses related to other production delays, such as property damage and inclement weather can also be costly. Even minor delays can result in major loss amounts.
Digital technology, visual effects, extravagant live events and other trends are changing the typical face of entertainment BI claims. Interruptions can bring
expensive claims. Also the increasing complexity of live music and sporting events is a fast growing area of the industry, bringing new and potentially expensive interruption risks.
Property & Engineering
The shift of manufacturing to China and Southeast Asia, increased interdependencies, just-in-time production and diminishing stock are resulting in larger BI and CBI claims. The top five causes of BI loss in the property
sector account for 88% of all claims by value. Strike/riot/vandalism is the third top cause of BI loss by value, despite generating relatively few claims by number.
Increased interdependencies can significantly affect the cost of a major loss event. Property BI claims are likely to increase further in future with the growing relevance of non-damage events. Increasing automation is influencing and impacting supply chains. Technical and human issues are responsible for the top
five causes of BI loss in the engineering sector.
Current and future trends
Reported loss estimates from the largest events across the insurance industry during 2015, excluding those caused by natural catastrophes, total more than $7bn at time of writing with the Tianjin loss potentially accounting for almost half of this total. The Tianjin incident is the latest to highlight the growing complexity of large insurance claims and the increasing relevance of BI.
BI and CBI are significant drivers behind the increasing severity of very large property losses. In future, non-physical damage causes of business interruption will become more relevant too.
Business continuity management remains a gap in the supply chain risk management programs of many multinational companies. There is an increasing need for businesses to analyze their production processes
Detailed risk assessment of their supply chain risks can help businesses identify and plan an effective response integrated into their overall business continuity plan.
Pre-loss claims meetings between insurers and businesses are increasingly important. They enable both parties to establish a claims protocol – a clear procedure of what to expect, what to do and how to communicate
in the event of an incident.
It has been shown that companies that are able to actively manage a BI event significantly reduce the time it takes to restore operations.
Click here to read the press release about Global Claims Review 2015.