There exists a mismatch in how corporate buyers perceive business interruption (BI) risk and the way insurers traditionally define them in their policies, Marsh’s Business Interruption Centre of Excellence Global Leader, Caroline Woolley, told Asia Insurance Review recently in Singapore.
“When risk managers think about business interruption, it is not just damage to physical property but also many other factors that can cause their business operations to be disrupted, such as cyber for instance,” she said.
Traditional BI policies are typically bundled as a rider to property & casualty coverages, or as part of a comprehensive business insurance policy.
Ms Woolley said there is an obvious gap between what insurers cover in BI policies and the needs of modern businesses today.
“The current BI policies have been around since the 1930s to mainly cater to traditional manufacturing firms. However, we need to expand the range and scope of BI policies to better align the expectations of risk manages and insurers, and all parties need to work together in this.”
Broadening the scope of coverage
Marsh is working to broaden the policy wordings for BI policies to better address the changing global risk landscape. This includes looking at BI through a different lens, incorporating things such as cyber risk, supply chain, product recall and terrorism amongst others.
While these risks may be covered in part by various other insurance products, Marsh intends to bring the various silos together to create a convenient and comprehensive solution.
It would assist corporate risk managers in getting a wider scope of potential risk covered under an improved BI policy, than to seek a mandate to purchase individual policies for each risk, she said.
Beyond physical risk
Taking supply chain for instance, the top perceived risks for businesses have evolved considerably from physical risks to non-damage exposures such as cyber-attacks, infectious diseases, and interstate conflict. An Allianz risk survey, involving 400 corporate insurance experts across 33 countries, showed supply chain risk accounting for 50-70% of all insured property losses – or as much as US$26 billion a year.
However, traditional coverage at present is generally limited to that arising from physical damage at a direct or primary supplier. The Global Risks report from the World Economic Forum identifies key risks on the radar of risk managers around the world. It is the non-damage risks such as cyber that are becoming higher impact and more frequent.
What the insurance industry offers right now in traditonal PD/BI policies falls short of the needs of businesses, said Ms Woolley. She hence urged the industry to take small steps to narrow this gap and expand the scope of BI policies. There are standalone supply chain policies which can cover damage and non-damage events.
“In this process, the gathering of data is key in order to better understand the various types of risk and thus develop the right approach to managing them,” she said.
Moving forward, Ms Woolley believes that as insurers update their approach to BI risk, there is a possibility for business interruption to exist as a standalone product in the future.
Marsh recently produced a report titled: Business Interruption Insurance Efficacy – Five key issues, which aims to modernise BI approaches. It focuses on five core improvement areas: insured values; indemnity periods; wide area damage scenarios; supply chain; and claims.