Contingent BI remains in spotlight post Covid

Adrian Ladbury interviewed Sarah Baker, head of Crawford Forensic Accounting Services, about the critical matter of contingent business interruption that has been thrust centre stage by the pandemic. Adrian Ladbury (AL): Covid brought contingent business interruption (CBI) into the spotlight. How has the pandemic affected the supply and demand of this type of cover? Sarah Baker (SB): The pandemic has focused and, in some instances, redirected the thought process amongst insurance buyers. Historically, companies were concerned with protecting themselves against traditional physical perils that could disrupt operations at their own premises. Many companies now recognise they face a range of non-damage risks in the broader economy, many of which are out of their control. This includes, for example, denial of access when restrictions have been put in place by an authority; damage at a supplier or customer location; political risks impacting a supplier’s operation; disruption of public utilities; and notifiable or specified diseases. As economies shut down during the pandemic and then re-emerged, this also highlighted the huge exposure to supply chain disruption in a global economy where businesses are reliant on geographically remote suppliers. If a business is aligned to a key supplier thousands of miles away potentially in a less stable economy, that creates an exposure for consideration and management. Companies appear to be focusing more so than previously on identifying where their exposures lie. These are beyond the traditional physical perils. Risk managers and brokers are focusing now on the different types of CBI coverage that are available and their associated cost. Rather than ‘what happens if we have a flood or a fire?’, the ‘what ifs’ are directed at ‘what happens if one of our suppliers can’t operate’. The demand, therefore, for CBI cover is increasing. AL: The pandemic led to many disputes and legal cases to determine if and how coverage was triggered. How did Crawford cope through this complex period? SB: There have been numerous legal cases in the UK considering non-damage covers and how they may respond – principally notifiable disease and non-damage denial of access. Aggregation has featured too, as has the treatment of government assistance, principally furlough. There are more cases, decisions and appeals awaited this year. Given the subtle differences in the policy wordings issued by the insurance market, Crawford created dedicated working parties with many of the insurers to ensure a consistency of approach to claims. This was essential given the profile, importance and sensitivity of these claims. We also leveraged Crawford Forensic Accounting Services resources from multiple territories to build a bank of insurer-specific knowledge, which helped us manage more than 5,000 of these claims in the UK. To cope with the claims surge, we also built an automated system for claims data to be received directly from policyholders, and to provide either preliminary calculations for accountant adjusters to review, or to automatically settle. AL: Now the dust has settled, what were the key learnings and future implications for CBI coverage? SB: The pandemic has highlighted the need to stress test policy wordings and consider extensions that may provide assistance given the threats that businesses now face through being part of the global economy. Historically, CBI extensions were additional covers to the main policy, typically with small financial limits and generally with less profile. Typically, they would mirror the perils covered by the main wording but apply to damage at customers’ and suppliers’ premises. The focus remained on physical damage. Now CBI cover is all about managing exposures in an ever-changing commercial world, and the focus is increasingly on non-damage issues such as political unrest, transportation, strikes and civil disruption – aspects of the economy that can affect a business’s ability to operate. Supplier and customer extensions can be extended to provide coverage for tier two entities, such as suppliers of suppliers or customers of customers and beyond. Again, however, this is typically damage-related cover. The cost and availability of cover are key considerations. A business may be able to get the cover it needs but there might be a significant premium or extreme conditions attached such that the insurance buyer needs to make a call on whether the risk transfer requirement justifies the cost of cover. AL: Where do the biggest protection gaps exist in relation to growing supply chain risk, and why? SB: Many recent business interruption problems have arisen from non-damage matters such as labour shortages or capacity problems at key points along the supply chain. As supplier or customer extensions are normally triggered by physical loss or damage, this can leave gaps in coverage. Specialised supply chain insurance designed to cover losses from events ranging from cyberattacks and political instability to transportation failures can address these gaps. However, the interconnectivity and complexity of global supply chains means there are always going to be protection gaps and unpredictable events that force people to examine their covers to see if they are broad enough to respond. Cyber risk is another huge issue as the rising frequency, severity and complexity of cyberattacks could have huge implications for business interruption. At Crawford, we have multi-disciplinary teams with specialist industry knowledge, and that expertise comes to the fore when tackling these complex claim issues. AL: How can corporates best protect themselves against non-physical damage CBI risks within their supply chains? SB: Many will map their supply chain to identify where the risk lies. Data mining and modelling supply chain risks will assist. With the highlighted risk hotspots and dependencies, identified coverages can be reviewed to see whether they match up with the exposures. When undertaking this analysis, companies will have to ask themselves whether tier one coverage is sufficient. Due to the specificity of non-damage covers, other questions are which risks does the business need to transfer and can the required level of cover be found in the market at a reasonable cost.

Contingent BI remains in spotlight post Covid

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