Xuber Xposure director Justin Davies outlines the top five types of insurable non-physical damage
In this modern world with an uncertain economic climate, political uncertainty and continued massive technological change, businesses and insurers are facing a wider range of disruptive forces in 2016 and beyond. Risk priorities are forever changing, as are shifts in risk perception.
No longer are traditional industrial risks such as natural catastrophes leading the fore, but a rise in ‘non-physical’ risks are pre-occupying the minds of business leaders worldwide. A recent report from Allianz revealed that business interruption remains the top peril for the fourth year in succession with 38% of responses rating this as one of the three most important risks companies face.
The fifth annual Allianz Risk Barometer, which surveys over 800 risk managers and corporate insurance experts from more than 40 countries, also saw cyber incidents nudging into the top three business risks for the first time – ranking third position, and making it a greater concern for businesses than natural catastrophes.
Xchanging has pulled together a list of what we regard as the top five insurable business risks which can result from non-physical damage.
Business Interruption (including supply chain disruption)
Business Interruption (BI) insurance replaces business income lost as a result of an event that interrupts the operations of the business leading to a reduction in revenues. Contingent Business Interruption (CBI) is similar but is usually as a result of a supplier or partner being affected by an event rather than the insured being directly affected.
BI & CBI – can be caused by physical damage, for example, the Tohoku quake of 2011 and subsequent reduction in reduction and export capability from Japan General Motors to reduce production at their Louisiana factory, and Apple had to reduce production of the then current iPad due to a shortage of key components. However, it is not always physical damage which causes concern. One of BMWs smaller suppliers ran into financial difficulties leading to the auto producer bailing them out and taking a share in the organisation - as bankruptcy could have cost the German car giant millions in lost revenue as the loss of supply would have affected the production of a number of models. Potential losses can be mitigated through BI insurance and/or a corporate strategy to ensure that there are one or more suppliers of a component or enough reserves to ensure that another supply can be sourced if the primary supply is cut.
Cyber (cyber-crime, data breaches, IT failures)
Cyber risk is the hot topic at present. It essentially encompasses any risk arising out of the use of technology and data and, in this digital age, affects virtually every organisation around the world. It is estimated that 80% of large companies suffered a cyber security breach in 2014 – double the number from 2013 – at an estimated cost to industry as a whole in the order of $400 billion every year.
There are many recent examples of organisations who have suffered a cyber loss leading to adverse publicity (the mobile phone operator TalkTalk in the UK), direct costs related to ensuring that clients are informed of a breach or both (US Health insurer Anthem). However, there are only two reported instances of physical damage occurring as a result of a cyber-attack – one of them was damage to a blast furnace at a German steel mill. It should be noted that many cyber events still go unreported.
Risk can be mitigated by ensuring a strict IT security policy is put into place and recommendations followed. However, there is always the risk of non-conformance, a rogue employee stealing data or causing damage to core systems or new methods of attack being employed by external actors which cannot (yet) be protected against. The insurance industry is aware of the risks posed and is working towards finding new ways to cover their clients – though there is still some way to go before consensus is reached within the industry, and a set of “standard” policy terms and conditions are defined.
Loss of reputation or brand value
Reputational risk can have many and varied causes – from rogue employees undertaking acts detrimental to the business, to suppliers or partners being exposed as corrupt or incompetent, the list of potential causes is long. In addition, the value of reputation and the impact of specific events can be exceptionally difficult to measure and almost always subjective. Moreover, it is not a core area of expertise for risk managers.
Risk can be mitigated through undertaking thorough due diligence on suppliers and partners and ensuring that employees understand the organisations brand values and undergo regular training to reinforce the correct behaviours. Insurance cover will, for example, provide for emergency PR assistance at a time of crisis or compensate a company for the costs of contacting their clients should it be necessary. Damage is often subjective, and the insured must often trust their insurer to act fairly – though some policies can be sought which measure sales before and after an event with the insurer providing compensation for the difference in profit.
Political risks (war, terrorism, upheaval)
Corporations can suffer loss of revenue from political issues such as civil unrest, war or terrorist acts (2014 was the worst year ever, with the costs of terrorism calculated at USD 52.9 billion and with the trend for the last four years being upwards), or issues such as inconvertibility of foreign currency, the inability to repatriate funds, governmental repudiation of contracts. There is little that an organisation can do to mitigate risk other than have a clear understanding of the political situation in the countries that they operate in. Establishing a strategy to continue or withdraw operations accordingly, or to hire security specialists to advise on the protection of assets should be part of the plan.
It is, however, possible to insure against loss of revenue via a political risk policy - a type of insurance that can be taken out by businesses against the risk that revolution or other political conditions will result in a loss. Cover insuring against loss of income due to war, riot or terrorism is known as a Political Violence policy.
D&O (Directors & Officers Risks)
Directors and officers of a corporation may be liable if they damage the corporation in breach of their legal duty, mix personal and business assets, or fail to disclose conflicts of interest. Even innocent errors in judgment by executives may precipitate claims. Action may be brought by shareholder-derivative actions, creditors (particularly after entering the zone of insolvency), customers, regulators (including those that would bring civil and criminal charges), and competitors (for anti-trust or unfair trade practice allegations).
A D&O policy pays out for losses or advancement of defense costs in the event of such claims. A 2011 Towers Watson survey found that 69% of publicly traded companies had claimed for a shareholder lawsuit in the past ten years as opposed to 21% of private companies. The average cost of a related lawsuit was over $300,000.