Insurers should acknowledge shortcomings of BI cover

Business interruption insurance is not keeping pace with today’s business environment. David Lanfranchi of Marsh outlines five areas for improvements and argues that a fundamental restructuring of BI policies may be needed.

Business interruption (BI) is not just a consequence of property damage; it can be anything that interrupts an organisation’s day to day operations. Terrorism, supply chain failure, natural catastrophes, and cyber-attacks all have one thing in common - the threat of BI. As businesses become more exposed to such major events, risk management and risk transfer need to work together to make companies more resilient.

Property damage (PD)/BI insurance has demonstrated its importance by way of its longevity, but they continue to be structured in a way that would have been familiar to underwriters in the middle of the last century. It is time for the insurance industry to acknowledge the shortcomings of BI cover and build a better solution for buyers.

Our discussions with clients, Airmic members, colleagues, insurers, loss adjusters and lawyers have revealed five primary issues where efficacy can be improved:  

• Getting the values right;
• Setting the indemnity period;
• Wide area damage issues;
• Supply chain risk;
• Claims.

Values

Understanding exposures for risk management purposes is essential, and this is also the case for getting values right to ensure sufficient cover from insurance. Facing a devastating loss is bad enough, but no one wants their claim slashed due to underinsurance.

Getting the core values right is critical for all parties and, while taking the time to calculate correct declarations is recommended, the industry is perhaps at a point where an alternative approach should be considered. Businesses are obliged to submit detailed annual accounts to legislative authorities, and an alternative underwriting approach based on published values would avoid many of the errors encountered.

Indemnity periods

Indemnity periods can only be accurately set with detailed pre-loss work. While the open-ended US earnings approach should be commended, the limited post-reconstruction recovery periods are less than ideal.

Two changes might be considered. First, the option to commence the calculation at either the date of the physical loss or damage or at the time when the business begins to suffer a loss of revenue. Second, underwriting on the basis of two years’ exposure, but with some flexibility. This will enable insurers to be confident of maintaining premium levels, and will ease insurance buyers’ concerns with regard to underestimating exposure.

Wide area damage

The impact of a punitive application of the “but for” rule following the Orient Express Hotels case post Hurricane Katrina (see p15 of this report) remains a threat to buyers in a wide area damage scenario that does not reflect well on the industry.

We echo the comments in a 2012 report from the chartered institute of loss adjusters (CILA) which, based on feedback from its members’ experience in handling claims, argued that, “the market needs to develop a wording that is in line with its intentions and that goes further to meet policyholders’ requirements and expectations”. Extended denial of access clauses provide some comfort; however a re-write of the trends clause should be the ultimate aim.

Supply chain

PD/BI policies were never designed to meet the needs of today’s business, with complex global value chains and increased exposures. The risk landscape has changed beyond recognition and traditional policies are no longer sufficient. The suppliers’ extension clause is often direct only and sub limited. However, in many ways, the industry response to increasingly complex supply chain exposures has been commendable, with the development of non-damage policies and a small number of carriers providing cover for all, not just primary, suppliers.

Full supply chain cover should, however, be the rule, not the exception, and providing non-damage options within the policy framework (at increased premium) provides an easier option for businesses than choosing to purchase a new policy.

Claims

Finally, claims. The assertion in Airmic’s 2014 publication; Efficacy of Business Insurance, that “large claims are being contested far more than previously”, should be a cause of real concern. Pre-loss claims scenario reviews will always be useful and agreed methodologies will help. The claims promises being offered in respect of early interim payments are welcomed; however, the universal application of claims preparation clauses ensures that all policyholders can access professional claims preparation resources, and that claims are presented in a manner that allows for efficient and timely settlement.

Marsh’s report, Business Interruption Insurance Efficacy: Five Key Issues is our contribution to the debate as we seek to improve existing solutions and reshape the industry to address insurance buyers’ evolving needs. We have outlined improvements that we believe can and should be made. However, as we progress, the opportunity for a fundamental restructuring of BI policies is becoming clearer and the option of a single business interruption policy that responds to a range of primary covers may prove the overarching solution required.

David Lanfranchi is project manager at Marsh’s Business Interruption Centre of Excellence. To contact David, please email: david.lanfranchi@marsh.com. 

David Lanfranchi - Marsh