Large complex BI claims on the rise: AGCS

In its 2015 Global Claims Review, AGCS has revealed that increased risk interconnectivity is driving up the cost of BI losses. It found that business interruption is becoming more meaningful for large property losses-in most cases it now accounts for the majority of the loss. The average large BI property insurance claim is now in excess of €2m, 36% higher than the corresponding average property damage claim of just over €1.6m. "The growth in BI claims is fuelled by increasing interdependencies between companies, the global supply chain and lean production processes," explained Chris Fischer Hirs, CEO of AGCS. "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 said.hideAnalysis of some 1,800 AGCS claims globally-with a total value of €3bn over a five year period-found that fire and explosion was the single largest cause of loss, accounting for 56% of BI claims. According to AGCS, there have been a number of large losses in the past five years where BI has been a key driver. Just 12 large loss events-including Superstorm Sandy, the 2011 Japan earthquake, floods in Thailand and a number of unusually large fires and explosions at manufacturing plants-generated over 149 individual claims that accounted for 40% of the claims under review by AGCS. Surprisingly, natural hazards were not as prominent a cause of BI loss as might be expected. Storms (6%) were the second biggest cause globally while floods (3%) were seventh. Eight of the top ten causes of BI losses were non-catastrophe related, while 88% of all BI claims by value were not related to natural disasters. The top ten causes-which account for 90% of large BI claims globally-also featured machinery breakdown, faulty design or material and strikes and riots, each representing around 5% of claims during the period under review. The majority of BI claims by value come from property business (65%), followed by energy (16%) and engineering (8%). By number of claims, midmarket business is most prominent (33%), then property (30%) and entertainment (18%). Causes of BI loss, however, differ by region and sector. In Europe, fire explosion remains the biggest single cause, accounting for 78% of claims by value, followed by faulty design/materials. In France, fire and explosions accounted for 90% of BI claims, compared with 56% in Spain, 76% in Germany, 77% in the UK and 88% in the Netherlands. Fire and explosion is also the biggest cause of BI loss in the US, but accounting for a lower 52%. Storms are the second biggest cause at 14%. Storm and flood-related losses are also a feature in Asia and the Caribbean and Central America-accounting for a third of insurance claims by value. While the causes of large claims are not new, the financial impact for multinational companies has risen dramatically, said Raymond Hogendoorn, Head of Property and Engineering Claims at AGCS. Interconnectivity and globalisation of trade and manufacturing means that a property loss, such as a fire or a flood, can now cause massive disruption and potentially much larger losses for corporates than was the case in the past, he told CRE. While companies are typically good at managing short periods of disruption, they often fail to consider extended disruption of many months or more. "This is where risk managers can start thinking and can look to find insurance cover that is better suited to their needs," said Mr Hogendoorn. Historically business interruption has been an add-on to property damage insurance. But that way of thinking is likely to flip around in the future, Mr Hogendoorn predicts. Although not included in the report's statistics, losses this year have been dominated by two massive explosions at the Chinese port of Tianjin, as well as a number of aviation incidents and large offshore energy losses. The explosions in Tianjin look set to become the largest man-made loss of 2015, and potentially the largest single loss in Asia on record. Confirmed insurance industry losses total almost $2bn, although Guy Carpenter estimates the total insured loss could be as high as $3.3bn. This figure excludes damage outside the blast zone, as well as business interruption, contingent business interruption (CBI) and potential pollution claims. AGCS says the blasts are the latest incidents to highlight the growing complexity of large property insurance claims and increasing relevance of business interruption, as well as the growth of accumulation risk, particularly in highly industrialised areas. It is also the third year in a row in which the largest man-made loss has had a significant BI component, and been attributed to a fire or explosion. The largest loss tracked by AGCS in 2013 was the explosion at the SK Hynix semi-conductor plant in China, which cost $1bn. While in 2014 it was the $800m plus major fire and explosion at an oil refinery in Siberia. "The Tianjin loss is a much more complex non-natural catastrophe loss than anything to have occurred before in Asia. Such a loss event was unexpected, with the explosion's footprint larger than anticipated," said AGCS. The Tianjin loss is particularly complex because it involves many parties and includes many policies from different legal environments. Adding to the complexity are issues such as who owns the damaged or destroyed goods at the point they were damaged-ie goods in transit may belong to the supplier or customer, depending on the contract. Indirect losses-those not resulting from property damage, but from the closure of a port or disruption to production-were also a feature of Tianjin. So called contingent business interruption losses have risen significantly over the past five years and are likely to help drive up BI claims in the future, says AGCS. Insurers are increasingly concerned by the effects of interconnectivity and interdependencies, said AGCS. "There needs to be more awareness and understanding of the risks linked to increased levels of interconnectivity and interdependency, and more consideration given as to how we manage them," said Michael Bruch, Emerging Risks Specialist at AGCS.

Large complex BI claims on the rise: AGCS

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