Contingent Business Interruption - AccueilGlobal Risk Consulting I Claims Preparation, Advocacy &...

1

Contingent Business Interruption Andrew King B.Com ACA FCILA FUEDI-ELAE Head of Claims Consulting, MEA Aon Global Risk Consulting

Risk. Reinsurance. Human Resources.

Aon Risk Solutions

Global Risk Consulting I Claims Preparation, Advocacy & Valuations Aon Risk Solutions

Agenda

What is contingent business interruption

How does it differ from “normal business interruption”

What are the different types of CBI now being offered by markets

Consideration of issues and problems that can arise


The Allianz Risk Barometer – Top Business Risks 2016

Business Interruption (BI) remains the top peril for the fourth year in succession per Allianz’ annually issued Risk Barometer 38% of responses rating this as one of the three

most important risks companies face A key concern in business and insurance

markets across the globe In today’s increasingly complex and

interconnected corporate environment many of the top 10 global business perils in the 2016 Risk Barometer rankings, such as cyber-incidents and political risks, for example can also have severe BI implications


What is contingent business interruption

Contingent Business Interruption has become a term to describe any business interruption coverage that is not business interruption resulting directly from damage to insured property.

The “standard” property damage and business interruption policy covers :- − Damage to insured assets caused by insured perils − Business Interruption in consequence of the damage to the assets

However modern business activity can be interrupted by many other disrupting factors, such as:- − Fire at a suppliers premises − Flood at a customers premises − Loss of utilities – gas, water and electricity − Murder, suicide, infectious disease outbreak at a hotel or food factory − Denial /prevention of access to a shopping mall by a competent authority − Delay in start up of a new plant − Business interruption caused by loss of computer/IT systems (“Cyber risk”)

So the term “Contingent Business Interruption” has become a catch all term to describe a variety of

factors and events which operate to cause a business interruption, other than interruption caused by direct damage to the associated insured physical assets.


Magazine publisher


Policy Fundamentals

The majority of covers of this type are effected by extending the locations at which damage can occur and which will then trigger the business interruption section of the policy. This is done by using a wording such as the following:- “Loss destruction or damage at the undernoted situations or to property as undernoted shall be deemed to be an Incident as defined and this policy shall respond subject to all other terms and conditions of the policy. The liability of the (insurance) Company shall not exceed:- a. The total sum insured of the policy,or b. The amount shown against such situations or property or group as the limit. Limits need to be carefully considered – there needs to be some business impact analysis carried out and consideration of the possible length of the interruption. Maximum indemnity periods will vary depending on the potential length of interruption and what the market may offer.


Policy Fundamentals Any loss arising under a CBI extension is calculated in the same way as for an incident that may arise at the insured’s own premises. An insured will have to prove the following:- That an Interruption has occurred, or would have occurred but was avoided by incurring

extra costs, That the cause of the Interruption was an insured peril, That the consequences of the operation of the insured peril led directly to the interruption. The insured will then have to demonstrate a loss of sales against which is applied a supported rate of gross profit, and provide evidence supporting any increased costs incurred in the usual way. So the normal methods of calculating a claim still apply. However as we shall see it is likely that different limits, indemnity periods and other considerations will apply. However, setting sums insured and policy limits are quite different and require a thorough understanding of an insureds business model and anticipated cash flow model. If these are not understood and not kept under review it is very likely that recovery of a full indemnity will not occur.


Suppliers extensions and supply chain disruption

We live in the era of the global value supply chain with companies working on an ever tighter set of interconnections incorporating JIT and lean manufacturing practices. For a value chain to operate successfully there needs to be at least four key elements in place:-

– The physical flow of the goods and services – Information flow that supports and sustains this physical flow – An appropriate level of critical infrastructure – People with the relevant skills and relationships

A failure in any of these areas can lead to supply disruption. Failure can be caused by physical damage, or a number of other non damage events.



BCI – CIPS – Zurich Supply Chain Resilience survey 70% of businesses reported at least one significant supply chain incident.

The majority involved Tier 1 suppliers but Tier 2 or below represented over one third of incidents

Unplanned IT and telecom outages and cyber attacks plus adverse weather were the main source of

supply chain disruption in 2015. Insolvency of a supplier remains a leading concern particularly in the engineering and construction

sectors There is increasing concern over potential reputation issues



The most notable features of the supply chain risk from an insurance perspective are: Disruption is often not a result of any physical damage sustained by the supplier, The initial disruption often occurs at a Tier 2 or lower level

Potential substantial financial losses can be suffered.


Supply chain coverage

Essentially insured’s can take out supply chain coverage:-

– Under a traditional BI policy where there has generally to be some physical damage, and – Under a stand alone cover where cover is provided for “any reduction in supply that leads to a loss of

output and/or gross profit. These can be issued under an all risks basis or on a named perils basis. What is absolutely crucial is that a supply chain risk assessment is carried out.

It is essential that the main risks are identified and that estimated probable and maximum loss figures are

calculated for each supply. These will provide the basis for the decision on the length of the IP to be purchased. The supply chin risk assessment will contain :-

– Supply chain maps – Key supplier details – Risk factors for key suppliers – Loss scenarios


Practical Examples

Japanese tsunami and earthquake 2011 Insured – mobile phone company. All manufacturing outsourced Key suppliers listed into 3 tiers and either individual supplier limits or tier limits had been calculated Problems:- None of the key suppliers listed in the policy had remained as suppliers apart from one at the time of

the incident Dual supply arrangements had been replaced with single supplier agreements Tiers 2 and 3 included a number of suppliers who has been affected, The losses far exceeded the cover available, We ended up “stacking” the limits for tiers 2 and 3 and adding some additional amounts for the Tier 1

supplier still current on the policy

Details of new suppliers must always bee communicated to the insurance dept. or brokers.


Practical Example

Japanese Earthquake and tsunami 2011 International car manufacturer with Japanese head office All key suppliers meticulously listed in policy wording with loss limit calculated per supplier. Problems Not at all clear which components were causing losses of production. Clearly some suppliers were

wiped out. However losses at EU factories supplied with Japanese components were in some cases caused by supply failure from parent factories where no insured peril has operated. Reductions in production of certain models at EU and other factories were reported from Japan but

the EU factories reported losses of production of different models, Lack of understanding about how the policy worked and what needed to be established and proven

led to a very long claim process that lasted many years


Delay in Start Up (DSU)/ Advanced Loss of Profits (ALOP)

Delay in Start-up (“DSU”) insurance is essential for the preservation of cash flows by ensuring that profits and additional expenditure are adequately protected. Despite intricate planning, an unexpected or unavoidable event can severely interrupt project timelines whereby significant financial losses could result.

DSU insurance aims to ensure coverage is in place should the client sustain an insured delay at the

project site by covering the following lines:

− Loss of Gross Profit

− Increased Costs of Working

− Fixed Operation and Maintenance Costs

− Debt Servicing Costs

− Take or Pay Commitments


Delay in Start Up (DSU)/ Advanced Loss of Profits (ALOP)

Delay in Start-Up or Advance Loss of Profit indemnifies the actual loss of gross profit sustained as a result of delayed commencement of business operations caused by an insured peril covered under the following:

− Construction All Risks (CAR); or

− Erection All Risks (EAR). The Insured peril must operate before the commencement of the indemnity period The period of indemnity commences from the intended date of practical completion. Any delays unrelated to the Insured Peril should be deducted from the loss claimed.


Practical example

HYDRO ELECTRIC DAM PROJECT – TURKEY Disastrous failure of diversion tunnel gates led to total destruction of turbine hall and considerable loss

of life DSU cover take out but with shortcomings:-

– Max Indemnity Period only 8 months

– Sum insured did not take into account repayments of principal amounts of loans

– Repairs took 18 months.

Once again a Business Interruption Review would have considered the maximum interruption period and made sure that the sum insured was adequate.


Cyber Risk

All businesses are heavily reliant on the use of IT networks and the internet. This use transcends production processes, sales platforms, and record keeping Responsibilities placed on companies in respect of their IT systems have expanded and it is no longer

adequate or sensible to try to shoe horn certain elements into a BI policy. Much better to have a stand alone policy covering the following risks and losses:-

– Data breach liability – Data breach costs including notification and IT forensic costs – IT theft loss – Network security liability for hacked or compromised systems – Media liability for digital publications – Business Interruption caused by a cyber event – Restoration costs for data and programs resulting from a cyber event – Crisis management costs – Cyber extortion – Regulatory defences and fines – Contractual penalties


Cyber risk – business interruption element

The policies offered are often in the form of US wordings, probably because the first cyber policies came from the USA. Cover is thus provided for the “period of restoration”, i.e. when the business has returned to normal

operations, not when sales have returned to normal levels Most noteworthy contrast to traditional BI covers is in respect of:-

– Trigger. The commencement of the period may start when the insureds systems first become

impaired, or when the interruption , degradation, or failure of the insured’s network begins. The terms used are significant as they serve to overcome the difficulty in defining damage in relation to IT.

– Length of Indemnity Period. IP’s are measured by the length of time the impairment continues and may be limited to a maximum of 120 days.

– In some cases there may be a short “recovery” period of 30 days.


Summary and conclusions

CBI , particularly through supply chain and cyber is becoming a very significant part of an insureds business risk transfer protection In order to properly protect the business the risks, loss scenarios and calculation of the impact

analysis must be complete and accurate. Supply chain risk assessments and business interruption reviews are essential to ensure that:-

– Sums insured are accurate,

– All suppliers are included

– All risks are considered and factored in

– Indemnity periods are correctly set

– The duty of fair presentation of the risk (Insurance Act 2015) is complied with.

Contingent Business Interruption - AccueilGlobal Risk Consulting I Claims Preparation, Advocacy &...

Documents

Transcript of Contingent Business Interruption - AccueilGlobal Risk Consulting I Claims Preparation, Advocacy &...