Fires and natural catastrophes are the major causes of business interruption losses – which can cost as much as 45% more than the corresponding property damage from such incidents. However, more exotic triggers like digital platforms and supply chains, political risks and environmental factors are also becoming more relevant for businesses.
For seven years in a row the impact of business interruption (incl. supply chain disruption) has ranked as the most important risk for companies in the Allianz Risk Barometer. In 2020 it is finally replaced in top position by cyber incidents, a peril with which it is closely interlinked. It may no longer be the standalone number one peril in the eyes of risk management experts but the business interruption (BI) threat is undiminished. The trend for larger more complex BI losses – from both traditional causes, such as fires and natural catastrophes, and newer ones, such as digital supply chains or civil unrest – continues unabated.
Allianz Risk Barometer 2020 risk in focus:
Business interruption
Global ranking history
(position, % of responses)
- 2020: 2 (37%)
- 2019: 1 (37%)
- 2018: 1 (42%)
- 2017: 1 (37%)
- 2016: 1 (38%)
- 2015: 1 (46%)
Top risk in the following countries
- Austria
- Brazil
- Canada
- China
- Colombia
- Germany
- Indonesia
- Italy
- Malaysia
- Netherlands
- Philippines
- Poland
- Singapore
- Tanzania
Top risk in the following sectors
- Chemicals,
- Pharmaceuticals,
- Biopharma
- Food & Beverages
- Heavy Industry
- Manufacturing
- (incl. Automotive)
- Oil & Gas
- Power & Utilities
- Renewable Energy
- Retailing,
- Wholesale
- Transportation
Contingent business interruption (CBI) events (whereby a company suffers a loss due to an event at a customer or supplier) are now far larger and more widespread than 10 or even five years ago. In recent years, natural catastrophes, fires and cyber-attacks have all caused large CBI loss events that have impacted multiple companies in multiple countries. Industries such as automotive manufacturing and pharmaceuticals may have developed highly efficient global supply chains, but this also makes them vulnerable to very large BI and CBI events. For example, a fire at an auto-parts manufacturing plant in the US in 2018 caused supply shortages for a number of car manufacturers and was the catalyst for hundreds of millions of losses throughout the industry. A year earlier, another fire at an auto-part manufacturer in the Czech Republic had a similar impact. Furthermore, a growing number of other industries are now emulating such supply chains.
What are the most frequent causes of BI insurance claims?
According to AGCS, fire and explosion incidents are the most frequent cause of business interruption loss, accounting for almost a third (30%) of claims by number. BI costs following a fire can significantly add to the final loss total. For example, the average BI loss from a fire or explosion incident is €5.8mn ($6.7mn) compared to €4mn ($4.5mn) for the average direct property loss [1] or 45% higher.
Source: Allianz Global Corporate & Specialty. Based on the analysis of 1,175 corporate insurance claims between July 2013 and July 2018 with a total value of €6.3bn ($7.1bn) that have both a property damage (€2.6bn) and business interruption (€3.7bn) component.
What causes of business interruption do you fear most?
“Today, many companies’ supply chains are much more integrated, so the financial impact of a BI is becoming larger and larger,” explains Raymond Hogendoorn, Global Head of Property and Engineering Claims at AGCS. “An incident like a fire or a cyber- attack at one company can affect the entire supply chain impacting multiple manufacturers.”
Source: Allianz Global Corporate & Specialty. Figures represent the percentage of answers of all participants who responded (1,018).
Figures don’t add up to 100% as up to three risks could be selected.
Figures don’t add up to 100% as up to three risks could be selected.
Trend: Data vulnerabilies and digital supply chain reactions
Digital platforms can potentially create a chain reaction ensuring a BI cascades through a whole sector. Picture: Adobe Stock
The growing reliance on technology and data from business is beginning to manifest in BI and CBI claims. Companies can suffer major BI losses due to the unavailability of critical data or technology, either through a technical glitch, cyber-attack or a physical event, such as fire or flood. Loss of data, or “business intelligence”, is emerging as a significant cause of loss. The inability to access data for an extended period of time can have a significant impact on revenues – for example, if a company is unable to take orders. One notable large BI claim in 2019 involved a fire at a European media company. A significant proportion of the claim was related to the unavailability of data and the cost of restoration.
Dependency on digital supply chains – both for the delivery of services and the supply of goods – brings numerous benefits. Shared technologybased platforms enables data to be exchanged between parties, automates administrative tasks and orders and transports products on demand.
Digital supply chains are more transparent and goods can be tracked back to their source. For example, the food and pharmaceutical industries are just two sectors that are already using blockchain solutions to trace ingredients and products as they move through the supply chain.
However, such platforms can potentially create a chain reaction ensuring a BI cascades through a whole sector. If a platform is unavailable due to a technical glitch or cyber event, it could bring large BI losses for multiple companies that all rely and share the same system. In June 2019, an outage caused a catastrophic failure at some Google cloud services, causing several hours of disruption to a number of large online service providers, including You Tube, Uber and Snapchat. In 2017, a four-hour outage at Amazon Web Services in North America was estimated to have cost S&P 500 companies $150mn.
- Raymond Hogendoorn, Global Head of Property and Engineering Claims at AGCS
“Digital supply chains can be more efficient and traceable, but a fire at a data center or a hack could cause a significant BI and it may no longer be possible to switch back to manual processes if the system is down,” says Raymond Hogendoorn, Global Head of Property and Engineering Claims at AGCS. “By making supply chains digital, organizations also make themselves more vulnerable to BI.”
Trend: Political violence BI is underestimated
In today’s volatile world, businesses are increasingly exposed to political risk exposures in their many guises – riots and civil unrest, strikes and, of course, terrorism attacks, can cause huge disruption to companies. The past year alone has seen civil unrest in Hong Kong, Chile, France, Bolivia and Colombia to name just a few examples, resulting in property damage, BI and a general loss of income for many businesses.
“Political BI risk is often underestimated,” says Hogendoorn. “Ten years ago, protests in somewhere like Chile may have gone largely unnoticed by global businesses, but today the impact of such events is all too apparent.”
The protests against the Chilean government began in October 2019 and have resulted in a number of deaths, thousands of injuries and significant damage to property. Hundreds of supermarkets have been looted or set on fire with the property and transport damage bill currently estimated to be in the region of $3bn. Retail giant Walmart is among those who have suffered significant losses .
Political risks can also result in BI losses even if there is no physical damage. Picture: Adobe Stock
“Even if it was ‘just’ looting it will still take several months until the supermarkets can open again, so there are enormous BI losses,” says Bjoern Reusswig, Head of Global Political Violence and Hostile Environmental Solutions at AGCS. “This event is predicted to be one of the biggest losses in the history of political violence insurance.”
Political risks can also result in BI losses even if there is no physical damage. In Hong Kong, the ongoing social unrest has resulted in a 40% year-on- year drop in tourism with serious ramifications for the industry. “It’s not only that customers or hotel guests stay away,” says Reusswig. “Another consequence of these types of events is that employees might not be able to access their workplace because of security reasons. This can reduce productivity or bring production to a standstill in other industries.”
In Hong Kong, purchasing of political violence or riot insurance is relatively uncommon so many companies will be left to foot any damage or disruption bill themselves. However, globally, insurers are seeing an increase in BI losses from political risks, in part because customers are buying more insurance – particularly so-called denial of access and loss of attraction coverage – but also because companies and supply chains are increasingly international.
Trend: Environmental drivers on the horizon
In 2018, low water levels on the Rhine made parts of the river unnavigable, causing a number of manufacturers to cease production. Picture: Adobe Stock
Businesses are likely to face an increased risk of disruption from extreme weather activity and environmental factors in future. Globalization and supply chain dependencies have helped make BI a much larger proportion of natural catastrophe losses today than was the case even 10 or 20 years ago. A storm in Japan or an earthquake in Chile can affect production at a manufacturing plant in Europe.
Extreme weather can also affect the availability of resources, such as water or power – with unexpected consequences. In 2018, low water levels on the Rhine made parts of the river unnavigable, causing a number of manufacturers to cease production. Even measures to mitigate weather events and climate change can also cause BI – drought conditions in 2019 led utility suppliers in California to carry out planned power outages to reduce the risk of wildfires.
Businesses may even need to relocate or find alternative suppliers, for example, if a manufacturing or industrial facility is no longer accepted in a residential area or due to an increased risk of flooding. Certain industries are also becoming more concerned about continuity of supply of key ingredients, in particular in the context of modern food supply chains.
Businesses may even need to relocate or find alternative suppliers, for example, if a manufacturing or industrial facility is no longer accepted in a residential area or due to an increased risk of flooding. Certain industries are also becoming more concerned about continuity of supply of key ingredients, in particular in the context of modern food supply chains. In 2018, a shortage of carbon dioxide created disruption in the food and beverage sector at a time of peak summer demand. Extreme weather can lead to volatility in the supply of certain foods. Droughts, heatwaves and floods in recent years have affected yields, including vegetables, wheat and milk, affecting supplies for food manufacturers and retailers.
“Companies are increasingly thinking about how extreme weather events affect supply chain risk and how this can be managed,” says Georgi Pachov, Global Property Practice Leader, Cyber at AGCS. “There are companies in the food and beverage industry enquiring about BI linked to key ingredients in their products and how this might be captured in insurance. The challenge for the insurance industry is to ensure the BI solutions of the future are fit for purpose.”
- Raymond Hogendoorn, Global Head of Property and Engineering Claims at AGCS
Mitigation: A shift to bespoke BI coverage
At a time when many industries and supply chains are becoming more sensitive to BI, shareholders and customers are also becoming more risk averse and less forgiving of nasty surprises. As a result, large companies are increasingly looking to protect their balance sheets with more tailored BI solutions. “We see a growing demand for BI solutions that protect a company’s balance sheet,” says Pachov. “These may not be traditional BI triggers, such as fire and nat cats, but protection against risks which complement the business model and strategy for two, three or four years ahead. The BI insurance solution of five years’ time will be much more bespoke than it is currently, incorporating data-driven insights into the solution development and placement. We are increasingly entering into partnerships with clients to protect the balance sheet from a wider range of BI risk.”
[1] Based on the analysis of 354 fire claims between July 2013 and July 2018 with a total value of €3.5bn ($4bn) that have both a property damage (€1.4bn) and business interruption (€2.1bn) component.
The Allianz Risk Barometer is our annual report identifying the top corporate risks for the next 12 months and beyond, based on the insight of more than 2,700 risk management experts from over 102 countries and territories.
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