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Disaster Recovery

Irma’s Business Interruption Claims

Contingent business interruption claims from Hurricane Irma could take years to resolve.
By: | September 20, 2017 • 4 min read
energy industry

Hurricane Irma tore through Florida and the Caribbean destroying tens of thousands of homes and businesses, forcing people to be evacuated, and causing an estimated $25-35 billion in damage. On a commercial scale, however, the industries hardest hit were hospitality, retail and construction, as well as health care and manufacturing, say experts.

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But worse than the initial physical damage caused to their properties are the mounting business interruption (BI) and contingent business interruption (CBI) claims from companies forced to shut down because of the storm. At one point it was estimated that 62 percent of residents had lost power, exacerbating the problem and leading to issues such as mold.

And with further storms approaching, notably Hurricane Maria, there’s the added challenge for claims adjustors of scrambling to try and differentiate the damage caused by each event, particularly in the more inaccessible areas. That’s on top of trying to reallocate resources from other storm affected parts of the country including Texas.

“Hospitality clients and real estate clients including commercial condominiums and apartments have had some significant claims,” said Marsh’s U.S. property practice leader Duncan Ellis. “Then there are the school boards and retailers, from strip malls to individual big box stalls, a lot of whom have suffered significant damage.”

Estimating overall insured losses in the “tens of billions,” Lockton’s national property claims director Sheri Wilson expects tourism and hospitals, nursing homes and assisted care facilities to be the worst affected in terms of commercial losses.

Duncan Ellis, U.S. Property Practice Leader, Marsh

“Florida’s tourism industry is going to take a battering, not just because of the short-term damage, but with the high season just around the corner they are not going to be able to recover in time because of the lack of materials and manpower,” said Wilson.

“The hospitals are a bit unique in terms of business interruption because they have so many different sources of revenue, so it takes time for that to work itself through the claims process and we won’t know the true financial impact until later this year.”

Willis Towers Watson’s head of property broking Gary Marchitello also expects Irma to result in “significant business interruption losses” arising from extensive power outages, taking months to resolve.

“These business interruption claims could take months to calculate,” he said. “Even if a specific property is not damaged, the insured’s property may face other obstacles to its operations, for example it could be impaired by civil authority and/or it may not have a means of ingress/egress due to nearby road closures.”

Beazley’s head of property Mark Bernacki added: “A key part of the loss escalation will be what’s covered under the extended period of indemnity. This allows the insured, post the normal period of indemnity, to pick up additional business interruption loss until the business can resume full operations.”

Hospitality clients and real estate clients including commercial condominiums and apartments have had some significant claims. —Duncan Ellis, Marsh’s U.S. property practice leader.

While Irma has forced many businesses to shut, Kevin Kavanagh, a partner at Wilson Elser LLP, believes that the longer-term implications are much worse, including lost jobs.

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“How long can you be shut down and not be bringing in any money or paying your employees?” he said. “It’s just devastating for smaller businesses, a lot of whom don’t have contingent business interruption and barely enough business interruption to cover their losses.”

Given the scale of the storm, it could also have a knock-on effect on the supply chain for months or even years down the line, said EY’s Americas Insurance & Federal Claims Services Leader Allen Melton.

“Take for example a manufacturing facility that had to close before the hurricane, came back and discovered they have little physical damage to their facility, but they have suppliers that produce key components or raw materials that were either severely impacted or completely destroyed,” he said.

“If they have coverage for contingent business interruption in their policy, they could have a fairly complex claim that could continue well into next year.”

Another issue is mold. With its humid environment, Florida is susceptible to mold and other diseases like Legionella, exacerbated by the power outages resulting from Irma.

Sheri Wilson, national proprerty claims director, Lockton

Veronica Benzinger, chief broking officer at Aon Risk Solutions Environmental Services Group, said that mold has the potential to grow within 36 hours of water intrusion of a building. While many policies cover water intrusion, she said that they often don’t extend to mold.

“The chances are that you are also dealing with potentially contaminated water full of chemicals, petrochemicals or biologics including sewage and so the process may become more extensive that just simply drying out, replacing wall board or pumping water out of your property,” she said.

“The protracted period of no power will also add to the severity, potentially, of the loss, which combined with the humid environment and organic material to feed on, will only encourage mold to grow.”

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Insurtech

Kiss Your Annual Renewal Goodbye; On-Demand Insurance Challenges the Traditional Policy

Gig workers' unique insurance needs drive delivery of on-demand coverage.
By: | September 14, 2018 • 6 min read

The gig economy is growing. Nearly six million Americans, or 3.8 percent of the U.S. workforce, now have “contingent” work arrangements, with a further 10.6 million in categories such as independent contractors, on-call workers or temporary help agency staff and for-contract firms, often with well-known names such as Uber, Lyft and Airbnb.

Scott Walchek, founding chairman and CEO, Trōv

The number of Americans owning a drone is also increasing — one recent survey suggested as much as one in 12 of the population — sparking vigorous debate on how regulation should apply to where and when the devices operate.

Add to this other 21st century societal changes, such as consumers’ appetite for other electronic gadgets and the advent of autonomous vehicles. It’s clear that the cover offered by the annually renewable traditional insurance policy is often not fit for purpose. Helped by the sophistication of insurance technology, the response has been an expanding range of ‘on-demand’ covers.

The term ‘on-demand’ is open to various interpretations. For Scott Walchek, founding chairman and CEO of pioneering on-demand insurance platform Trōv, it’s about “giving people agency over the items they own and enabling them to turn on insurance cover whenever they want for whatever they want — often for just a single item.”

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“On-demand represents a whole new behavior and attitude towards insurance, which for years has very much been a case of ‘get it and forget it,’ ” said Walchek.

Trōv’s mobile app enables users to insure just a single item, such as a laptop, whenever they wish and to also select the period of cover required. When ready to buy insurance, they then snap a picture of the sales receipt or product code of the item they want covered.

Welcoming Trōv: A New On-Demand Arrival

While Walchek, who set up Trōv in 2012, stressed it’s a technology company and not an insurance company, it has attracted industry giants such as AXA and Munich Re as partners. Trōv began the U.S. roll-out of its on-demand personal property products this summer by launching in Arizona, having already established itself in Australia and the United Kingdom.

“Australia and the UK were great testing grounds, thanks to their single regulatory authorities,” said Walchek. “Trōv is already approved in 45 states, and we expect to complete the process in all by November.

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group.” – Scott Walchek, founding chairman and CEO, Trōv

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group,” he added.

“But a mass of tectonic societal shifts is also impacting older generations — on-demand cover fits the new ways in which they work, particularly the ‘untethered’ who aren’t always in the same workplace or using the same device. So we see on-demand going into societal lifestyle changes.”

Wooing Baby Boomers

In addition to its backing for Trōv, across the Atlantic, AXA has partnered with Insurtech start-up By Miles, launching a pay-as-you-go car insurance policy in the UK. The product is promoted as low-cost car insurance for drivers who travel no more than 140 miles per week, or 7,000 miles annually.

“Due to the growing need for these products, companies such as Marmalade — cover for learner drivers — and Cuvva — cover for part-time drivers — have also increased in popularity, and we expect to see more enter the market in the near future,” said AXA UK’s head of telematics, Katy Simpson.

Simpson confirmed that the new products’ initial appeal is to younger motorists, who are more regular users of new technology, while older drivers are warier about sharing too much personal information. However, she expects this to change as on-demand products become more prevalent.

“Looking at mileage-based insurance, such as By Miles specifically, it’s actually older generations who are most likely to save money, as the use of their vehicles tends to decline. Our job is therefore to not only create more customer-centric products but also highlight their benefits to everyone.”

Another Insurtech ready to partner with long-established names is New York-based Slice Labs, which in the UK is working with Legal & General to enter the homeshare insurance market, recently announcing that XL Catlin will use its insurance cloud services platform to create the world’s first on-demand cyber insurance solution.

“For our cyber product, we were looking for a partner on the fintech side, which dovetailed perfectly with what Slice was trying to do,” said John Coletti, head of XL Catlin’s cyber insurance team.

“The premise of selling cyber insurance to small businesses needs a platform such as that provided by Slice — we can get to customers in a discrete, seamless manner, and the partnership offers potential to open up other products.”

Slice Labs’ CEO Tim Attia added: “You can roll up on-demand cover in many different areas, ranging from contract workers to vacation rentals.

“The next leap forward will be provided by the new economy, which will create a range of new risks for on-demand insurance to respond to. McKinsey forecasts that by 2025, ecosystems will account for 30 percent of global premium revenue.

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“When you’re a start-up, you can innovate and question long-held assumptions, but you don’t have the scale that an insurer can provide,” said Attia. “Our platform works well in getting new products out to the market and is scalable.”

Slice Labs is now reviewing the emerging markets, which aren’t hampered by “old, outdated infrastructures,” and plans to test the water via a hackathon in southeast Asia.

Collaboration Vs Competition

Insurtech-insurer collaborations suggest that the industry noted the banking sector’s experience, which names the tech disruptors before deciding partnerships, made greater sense commercially.

“It’s an interesting correlation,” said Slice’s managing director for marketing, Emily Kosick.

“I believe the trend worth calling out is that the window for insurers to innovate is much shorter, thanks to the banking sector’s efforts to offer omni-channel banking, incorporating mobile devices and, more recently, intelligent assistants like Alexa for personal banking.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.”

As with fintechs in banking, Insurtechs initially focused on the retail segment, with 75 percent of business in personal lines and the remainder in the commercial segment.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.” — Emily Kosick, managing director, marketing, Slice

Those proportions may be set to change, with innovations such as digital commercial insurance brokerage Embroker’s recent launch of the first digital D&O liability insurance policy, designed for venture capital-backed tech start-ups and reinsured by Munich Re.

Embroker said coverage that formerly took weeks to obtain is now available instantly.

“We focus on three main issues in developing new digital business — what is the customer’s pain point, what is the expense ratio and does it lend itself to algorithmic underwriting?” said CEO Matt Miller. “Workers’ compensation is another obvious class of insurance that can benefit from this approach.”

Jason Griswold, co-founder and chief operating officer of Insurtech REIN, highlighted further opportunities: “I’d add a third category to personal and business lines and that’s business-to-business-to-consumer. It’s there we see the biggest opportunities for partnering with major ecosystems generating large numbers of insureds and also big volumes of data.”

For now, insurers are accommodating Insurtech disruption. Will that change?

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“Insurtechs have focused on products that regulators can understand easily and for which there is clear existing legislation, with consumer protection and insurer solvency the two issues of paramount importance,” noted Shawn Hanson, litigation partner at law firm Akin Gump.

“In time, we could see the disruptors partner with reinsurers rather than primary carriers. Another possibility is the likes of Amazon, Alphabet, Facebook and Apple, with their massive balance sheets, deciding to link up with a reinsurer,” he said.

“You can imagine one of them finding a good Insurtech and buying it, much as Amazon’s purchase of Whole Foods gave it entry into the retail sector.” &

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at riskletters.com.