Weather-related BI risk should be centre of attention

While macro issues—such as growing populations and wealth—are driving corporates’ exposure to natural hazards, the move to low cost outsourcing and lean supply chains is heightening the threat, according to Nick Wildgoose, Global Supply Chain Product Manager at Zurich Global Corporate. The increase in outsourced supply chains means that business interruption and contingent business interruption claims are becoming a significant proportion of large commercial property claims for some insurers, he said. Research from Zurich and the Business Continuity Institute suggest that some 70% of companies have experienced supply chain disruption, with adverse weather being the second largest cause of disruption behind IT failure.hide“If the Mapelcroft statistics are correct that the share of the global economic output in countries categorised as ‘extreme risk’ could rise from 44.3% today to 49.9% by 2025, then supply chains will be even more exposed to natural catastrophes,” said Mr Wildgoose. Business interruption losses from natural perils are typically higher than the cost of replacing the damaged property, according to Maarten van der Zwaag, Head of Property Account Engineering at Allianz Risk Consulting. AGCS loss data shows that BI losses are between 50% and 70% of all paid losses resulting from natural catastrophes. “What’s more, a large amount of those losses occur outside the country where the natural catastrophe has happened. This is the result of supply chain interruption, which is why the Contingent Business Interruption (CBI) element of a business interruption policy is increasingly in focus,” he said. Property damage is not the only cause of supply chain disruption from natural hazards, according to Mr Wildgoose. Natural catastrophes can take out key infrastructure, like ports, roads, power and communications, which in turn disrupt business. “As an industry we need to think beyond physical damage to property,” he said. Another factor adding to business interruption exposures is the trend towards specialisation and the geographical clustering of similar industries, said Mr Van Der Zwaag. A local natural catastrophe event could therefore impact multiple suppliers of specific components at the same time, he said. “This could not only knock out a company’s main supplier but also impact the potential alternative suppliers. A good example is the high concentration of electronic producers in the Pearl Delta in China,” said Mr Van Der Zwaag. The often large gap between economic and insured losses following a catastrophe reflects the degree to which business interruption and supply chain disruption risks are either under insured, or not insured at all, said Caroline Woolley, Head of the EMEA Property Risk Team at Marsh. Developing the market for supply chain insurance and extending BI limits for property damage and non-property damage caused by natural perils will help close the gap, she said. Identification and quantification of the extent of exposures is essential for risk transfer as well as best practice risk management, said Ms Woolley. “Insurers are already requiring more information on natural catastrophes and supply chain exposures. Providing this information is important if clients want to get the best value from their insurance—insurers will price for a worst case scenario if information is missing in a high natural catastrophe zone,” she said. The business interruption and supply chain losses from the 2001 floods in Thailand and the earthquake and tsunami in Japan were a wakeup call for businesses and their insurers. “There’s definitely a greater awareness of the risks of geographical clustering since the Thailand floods of 2011,” explained Volker Muench, Global Practice Group Leader for AGCS’ Global Property unit. “Risk managers are responding to this challenge and we’re seeing a more integrated approach on the client side to managing this risk. As insurers, we’re looking for more information from our insureds to calculate accumulation exposures and to manage supply chain risks beyond first tier suppliers,” he said. A large number of companies do not know the locations of their tier one suppliers, explained Mr Wildgoose. “Some corporates are analysing and investing more in understanding their supply chain exposures, while others are sleepwalking into future problems,” he said. “Some companies do now map all their tier one suppliers. Not only is this good practice, such information is crucial for insurance. If insurers are to provide supply chain insurance we need a certain level of information on strategic suppliers,” he said. Data quality is increasingly important for industrial risks, explained Tina Baacke, AGCS’ Global Head of Catastrophe Risk Management. “Without good quality data, the models have to make assumptions which are sometimes far off the reality—with misleading results,” she said. With the shift of economic activity to emerging markets, unexpected large losses, like the 2011 floods in Thailand, could become more common in the future, according to Andreas Schraft, Head of the Cat Perils and Treaty Centre at Swiss Re. “There are many more such powder kegs waiting to explode,” said Mr Schraft. If left unchecked, the increasing natural catastrophe exposures could become uninsurable, or at least much more expensive, he added. “If the risk is not transparent, or if large events become too frequent, insurers will shy away,” he said.

Weather-related BI risk should be centre of attention

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