When it comes to business interruption insurance, Marsh has proposed new methods of calculating declared values and indemnity periods, different wording for wide-area damage policies and even the creation of a single BI policy that responds to a range of primary covers.
The reason for the radical approach is simple: Traditional insurance wasn’t designed to cope with the global web of suppliers and customers that make up most businesses today, the broker said in its report, Business Interruption Insurance Efficacy.
Interconnectedness means that natural catastrophes can still be the worst-loss scenario facing businesses if only because of their direct or indirect exposure through global supply chains or an international customer base. But BI includes other risks to revenue: terrorism, supply-chain failure and cyber-attacks.
Since those risks don’t fit existing insurance categories and property damage is still one of the major exposures a company faces, property damage/business interruption (PD/BI) is one of the main insurances purchased to address them, Marsh said.
But PD/BI policies are proving least effective when it comes to one of the biggest causes of business interruption: supply-chain disruption. The risk accounts for around 50 to 70 percent of all insured property losses equaling $26 billion a year, according to the Allianz Risk Barometer 2014, which surveyed more than 400 corporate insurance experts from 33 countries.
The PD/BI policies often address supply-chain failure through restrictive suppliers’ extension clauses, which provide an indemnity to the insured in the event of a loss of gross profit arising out of physical loss or damage at a direct supplier’s premises, Marsh noted. The physical loss is sometimes also restricted to fire, lightning, explosion and aircraft perils.
A review by Marsh of its own clients shows that while most (77 percent) retain cover for unspecified suppliers, only 33 percent purchase tailored cover for specified suppliers, and just 2 percent consider secondary suppliers and 1 percent, bespoke non-damage supply chain policies is minimal.
Further, “physical damage is not in the top three causes of supply chain disruption,” said Linda Conrad, director of strategic business risk management at Zurich Financial Services, who participated in a webcast sponsored by Marsh about BI.
Marsh said opportunities exist within traditional policies to design wider cover that provides greater limits for defined suppliers and extends cover to secondary suppliers of suppliers.
“The insurance industry is able to deliver new supply chain policies now and, as companies establish a clearer picture of exposures, such products will become more economically viable,” the report said.
Even when it comes to a risk more commonly associated with traditional policies, wide-area damage, the coverage can fall short.
“There is often a mismatch between the expectation of BI policies and the reality of the contract in place,” Marsh said.
The expectation may be for cover in the event of financial loss as a consequence of physical damage, but the cover actually only compensates for insured perils at the insured premises, Marsh said. More uncertainty arises from the argument that losses are as a result of an event (rather than damage at insured premises).
“There are different strategies organizations can employ to address the ‘wide area damage’ wordings issue, including a consideration of the trends clause,” Marsh said.
The provision under the trends clause that the loss must be adjusted “but for the damage” could be amended to state “but for the event causing damage,” it said.
Marsh’s report also called for a new approach to calculating net profit values required under PD/BI policies.
“An underwriting mechanism based on annual wage roll and accounting gross profit could provide a similar declaration mechanism for companies that is less liable to error, while providing underwriters with an adequate indication of exposure,” Marsh said.
The penalties for getting values wrong can be significant, it noted. In 2012, 40 percent of alldeclarations were too low–by as much as 45 percent, according to the Chartered Institute of Loss Adjusters.
Equally important is getting the indemnity period right: Businesses are increasingly recognizing the importance of setting carefully considered indemnity periods, rather than accepting standard 12-month limits.
