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Digital EditionHow Climate Change and Supply Chain Chaos Are Driving the Need for Better Business Interruption Coverage
The market for business interruption (BI) insurance had been hardening since the heavy hurricane season of 2017 — Harvey, Irma and Maria — but may have peaked, with rates starting to moderate. Underwriters and brokers agree that the coverage has become standardized and is mostly bought rather than sold. The notable exception is the small-business segment, which ironically is a class that needs the coverage. Artificial intelligence is starting to play a role, with a few tools in service and more being developed.
According to the 2024 Munich Re Risk Scan report, “cyber, changes in climate, and business interruption comprised the top risk concerns of the overall marketplace. Climate [concern] is primarily driven by consumers, while business and insurance professionals identify business interruption as a top-of-mind issue.”
Contingent BI coverage is a different animal. “CBI has always been a very emotional discussion point,” said David Reasons, a managing director within the property practice at Marsh. “Identifying and quantifying a comprehensive view of a company’s supply chain through tier-one, -two, even –three suppliers means the matrix gets elaborate. It is a balance between operational issues [that a company a company may best address internally] and where insurance can provide risk transfer.”
Even as a fixture, BI has seen some evolution. For example, the worksheet that many companies use to estimate their BI exposure has not changed much in 30 years, noted Steve Penwright, technical director for large property at Zurich. “For this and other reasons, some discipline was lost over the years in updating the data regularly. That led to under-reported BI values, which grew into a significant insurance-to-value gap, especially during a period of high inflation.”
The industry has closed the gap for both property damage and BI, Penwright said. Not surprisingly, that correction often resulted in increases in exposures and thus premium, “but those increases could be net neutral if sales numbers were also rising for insureds with inflation. There was still some disruption as that all took place in a hardening-rate environment. But at the same time people were adjusting their limits and retentions, and focusing on enhancing their supply-chain resilience by figuring out alternative suppliers in case of a disruption.”
Nick Garside, chief underwriting officer for property at GRS North America, a subsidiary of Liberty Mutual explained that “the risk landscape changed from a Nat CAT perspective in 2017. That was followed by the pandemic, which caused global supply-chain issues, and with high inflation impacting replacement costs and business interruptions. Finally, the re-insurance market responded to the challenging environment in 2023, by significantly increasing cat excess-of-loss attachments. The outlook of moderating inflation and price adequacy is [now] leading to downward pressure on rates.”
Alternative risk transfer, including parametrics-based BI, “has been a reasonable growth engine for us in the last 12 months,” said Garside. “At a large broker event recently, it was noted that alternative risk structures across the industry increased tenfold 2023 to 2024.”
Contingent BI is “a much more nuanced conversation,” said Jeff Duncan, executive vice president and head of commercial lines at AmTrust Financial Services. “The real need is with smaller firms that don’t have their own risk managers or the balance sheet to absorb a heavy loss.
“Owners of small businesses usually get some coverage in their standard packages,” Duncan elaborated, “but confusion and frustration can arise from how loss is calculated. Too often that understanding comes at the time of a claim, which is a bad time. That is where the independent broker or agent is essential, explaining actual coverage and options well before there is a claim.”
Duncan strikes a middle note in the range of opinions on CBI. “CBI is definitely a part of risk management, especially for small businesses. Coverage is available. It may be expensive, and limits are not likely to cover the complete exposure.”
Penwright at Zurich, adds that “large corporations increasingly understand that the first line of defense in business resilience is their own contingency planning and risk mitigation. Insurance is the second line of defense.”
For carriers, in addition to the complexity of understanding upstream supply-chain exposures for their customers, Penwright also noted the potential for aggregation of exposure. “If we insure a given company, as well as some of that firm’s suppliers, we face a stacking of limits that we have to understand across multiple accounts.”
That is not necessarily a hindrance for carriers to provide coverage. “But having accurate addresses and geo-coordinates of insured locations becomes critical in terms of mapping out that aggregate stacking of exposures,” Penwright said.
“Underwriters need to go in and see how much capacity we have at these locations. That will drive how much we can deploy,” he added. “There may become a need at some point for facultative re-insurance, as long as underwriters can go to the fac market and gross up. But sometimes facultative also is at their limit and the reality is there isn’t more capacity to offer.”
Ed Leibrock, head of U.S. corporate property at Munich Re is an advocate for fully engaged CBI. “If an owner has a risk they have not been able to mitigate on their own, that is what insurance is for,” he stated emphatically. “The purpose of insurance is to help business do business, it is a business enabler.”
Munich Re tends to work with larger clients in the shared-and-layered segment of the market, in contrast to some other carriers that tend to write 100% of a client’s risk. Those are also the ones that tend to have large risk engineering groups.
Regardless of the size of the insured, there are basic elements across BI and CBI coverage, explained Reasons at Marsh. “It starts with risk management. Some companies
can buy coverage at limits that would cover their exposures. Certain sizes of companies don’t have that capability. [But] everyone can identify contingency plans.” &
