Collapsed buildings damaged factories or destroyed shipping containers: Whenever natural catastrophes or man-made disasters strike the physical damage is often devastating for companies.
However, the less obvious economic impact from business interruption (BI) is often much higher than the cost of the actual physical damage, and presents a growing risk to businesses operating in an increasingly interconnected world.
According to the latest Global Claims Review report from Allianz Global Corporate & Specialty (AGCS), the average large BI insurance claim is now in excess of €2 million, which is 36 percent higher than the corresponding average property damage claim of just over €1.6 million.
The average BI claim in Africa between 2010 and 2014 is €2.05 million. According to AGCS statistics, structural collapse is the most expensive cause of BI loss in Africa, accounting for over 50 percent of claims by value. However this was a single large loss, which raised the relative importance of collapse by virtue of the fact that it had the highest value.
“In terms of frequency, the majority of BI claims in Africa are still fire and explosion,” says Julius Kluever, Head of Claims for AGCS Africa. “We do expect an increase in BI claims in future as South African and global companies converge on the rest of the African continent. The region’s increasing trade with Asia, which is seeing a significant rise in large claims may result in more CBI claims.”
In its new report, AGCS, Allianz’s specialist insurer for business and industrial risks, has analysed more than 1,800 large BI claims from 68 countries from 2010 to 2014, totalling over €3 billion. BI now typically accounts for a much higher proportion of the overall loss than was the case 10 years ago.
Both the severity and frequency of BI claims is increasing, which are mostly caused by human error or technical failure.
“This growth in BI claims is fuelled by increasing interdependencies between companies, the global supply chain and lean production processes,” explains Delphine Maïdou, CEO of AGCS Africa, which is based in Johannesburg.
“Whereas in the past a large fire or explosion may have only affected one or two companies, today losses increasingly impact a number of companies and can even threaten whole sectors globally. With our experts researching this topic we are well positioned to respond to this evolving risk.”
As production continues to be shifted to Asia, so have large claims. There is an increasing concentration of production sites and logistics hubs in some geographic areas. If such clusters are hit by natural catastrophes, or by fire or explosions – as recently happened at Tianjin port in China – disruptive effects can quickly multiply resulting in contingent business interruption (CBI) losses around the globe: In such cases a business is unable to operate because of an event that has damaged one of its suppliers.
“BI exposures are greatest for sectors with high levels of interconnectivity and technological values as well as concentrations of risks in single locations such as automotive, semi-conductors, power and petrochemical plants”, says Alexander Mack, Chief Claims Officer of AGCS. “While modern supply chains may be flexible and cost-efficient, they are also more vulnerable to disruption. CBI coverage is increasingly being seen as an essential part of today’s insurance policy for many businesses.”
According to the AGCS analysis the majority of BI claims originate from technical or human factors (88 percent of BI losses) and not from natural catastrophes.
The top ten causes of BI loss account for over 90 percent of such claims by value, with fire and explosion being the top cause of BI accounting for 59 percent of all BI insurance claims globally. Each fire and explosion incident analysed averaged €1.7 million in BI costs alone.
