The shift of manufacturing to China and South East Asia, increased interdependencies, just-in-time production and diminishing stock are resulting in larger business interruption and contingent business interruption claims.
- Increased interdependencies can significantly affect the cost of a major natural catastrophe or loss event
- Hailstorms can have significant BI impact, particularly in industrial parks
- BI claims are likely to increase further in future with the growing relevance of non-damage events
- The “Internet of Things” and increasing automation is influencing and impacting supply chains
The primary drivers for increasing BI losses have been the growth in complex global supply chains and increasing concentrations of risk, as companies, products and processes become more specialized.
“Over the past five to 10 years, BI claims have been becoming ever-larger with growing interdependencies,” says Joachim Hufenreuter, Property Claims Specialist, AGCS.
The global drive for efficiency has seen supply chains become highly-integrated, throughout their length, as well as locally and internationally.
Adding to the problem has been the shift of manufacturing to China and South East Asia, where assets are exposed to natural catastrophes, and where risk management and asset protection are still maturing.
In addition, the growth in political instability - or in some countries, political violence - creates increasing potential for BI and CBI losses, often from unexpected directions, highlighting the need for effective risk management where suppliers are exposed to such risks.
Bottlenecks are a particular issue, while just-in-time production and a lack of stock buffering increases vulnerability, with many companies holding only enough stock to maintain production for a few weeks or even days.
“The noticeable increase in interdependency can be evidenced in the growing complexity and size of property insurance claims,” says Raymond Hogendoorn, Property and Engineering Claims Specialist.
“This, together with, increased purchasing of BI and contingent business interruption (CBI) cover have resulted in a significant rise in BI losses,” he says.
CBI demand rises
The past five years in particular have seen a rise in CBI losses, where a company suffers a financial loss that is “contingent” on that of another.
Many automotive and electronics companies in Europe and the US suffered losses when suppliers in Japan were unable to produce vital components following the 2011 Tohoku earthquake and subsequent tsunami. Similar losses were experienced by global companies later in the same year when widespread flooding affected clusters of manufacturers located in Thailand.
“Five years ago CBI cover was seen as an add-on. Now many clients view it as a necessity,” says Hogendoorn.
Impact on loss totals
With increased interdependencies, BI and CBI losses can significantly affect the total cost of a major natural catastrophe.
For example, the Tohoku earthquake and tsunami alone led to some 150 claims notifications for AGCS. Reflecting the growth of interdependencies, the vast majority of notifications were from companies located outside Japan that were not directly impacted by the disaster.
Less well documented is the impact hailstorms can have with regards to BI losses. A recent hailstorm in 2015 in Australia caused many warehouse roofs to collapse due to the weight of hail and rainwater – there was no windstorm influence. Due to the concentration of many businesses in the impacted industrial park, insurance industry losses in what represented a relatively small district totaled in excess of $100m.
While natural catastrophes can cause massive disruption to supply chains, smaller events can also generate large BI and CBI losses. For example, an explosion at a chemical products manufacturing plant in the Netherlands in 2014 had a ripple effect, generating losses for suppliers and customers up and down the supply chain. Many companies relied on the plant for certain plastics products and were suddenly faced with the higher costs of sourcing the products in the open market.
Supply chain disruption also played a part in the fire at the SK Hynix semiconductor factory in Wuxi, China, in September 2013, which was reported to have cost insurers around $1bn, not including potentially higher CBI losses. The cost of the claim reflected the time and expense of restoring specialist ‘clean rooms’ used in the production of semi-conductors, as well as CBI losses suffered by the plant’s US customers.
Causes of non-damage BI
BI claims are also likely to increase further in future with the growing relevance of non-damage BI.
The risk of widespread non-damage BI was clearly demonstrated by the Eyjafjallajökull volcanic eruption and ash cloud in 2010, which closed airspace across swathes of Northern Europe. However, there are many such scenarios that could give rise to large business interruption.
“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,” Hufenreuter
Non-damage BI is an emerging risk and there is growing demand for insurance cover from AGCS clients, according to both Hufenreuter and Hogendoorn.
“I expect to see an increase in non-damage BI claims in the future as insurers look to meet the increasing demands of businesses,” says Hogendoorn.
Awareness of the potential for cyber- and technologyrelated BI claims, in particular, has been increasing and is likely to become a feature of insurance claims in the not-too-distant feature.
Despite a limited claims experience, insurers are now beginning to offer such coverage, according to Hogendoorn and Hufenreuter.
“We are already seeing the increasing influence and impact of the “Internet of Things” and increasing levels of automation in supply chains,” says Hogendoorn.
“Technology can bring many benefits but it also brings security concerns and the risk of yet greater interdependency and a reliance on technology.”