Global weather catastrophies raise critical insurance issues

The global spate of natural catastrophes of late has focused attention on the fact that adequate and correctly scoped insurance is available says Russell Davis of insurance brokers and risk solutions group, Aon South Africa.

“The likes of earthquakes, floods and even manmade problems such as the gas shortage we are experiencing, due in part to a fire at a Durban refinery, remind us once again that global economies are vulnerable to natural and other disasters with significant effects that can reach all the way into our corner of the globe

“Here in South Africa for example, our vehicle industry is reportedly affected by components delivery delays caused by the Thai floods. That was also the case during the Japanese tsunami earlier this year. Similarly, the gas shortages are said to be causing major problems in certain parts of the economy.

“A recent report by Aon’s catastrophe modelling centre of excellence reported that seasonal monsoon rains triggered significant flooding and landslide events throughout parts of Asia.

“In China the economic loss of floods and landslides resulted in an economic loss of US$4,25b. In Thailand, flooding in August and September caused damage estimated at US$1.1b. Other countries hit by floods included India, Pakistan and Cambodia, while Japan, still recovering from the devastating quake and Tsunami, was hit by cyclones, while the Louisiana coastline in the USA had tropical storms and Texas had wildfires.

“Here in South Africa there is a misplaced view that these events are a long way from home, that we are in a geologically safe zone and are not as vulnerable as, say, countries on the edge of the notorious continental plate ‘ring of fire’ or low lying parts of the world that are prone to floods.

“Be that as it may, we are far from immune to such perils as we are reminded every now and then. Moreover, we are integrated into the global economy and are indirectly or directly affected by events that take place many thousands of kilometres away or indeed in our own towns and cities.

“Accordingly, every SA business that relies heavily on large, critical customers and suppliers, needs to consider the impact on their business if supplies were to be affected after an event such as a flooding, tsunami, quake, etc, whether overseas or in our own back yard as it were.

“For example, if the production at a company is halted because supplier ‘B’ has a flood, then company ‘A’ suffers ‘Business Interruption’, i.e. it has to halt production because critical components for a production line are not available.

This risk can actually be insured under what’s known as a Suppliers’ Extension under a Business Interruption policy.

“Bear in mind however, that Business Interruption only follows events insured under your material damage policy (i.e. following fire / flood etc) at your own premises). That means you have to suffer a material damage loss at your premises, covered under your material damage policy, to enjoy Business Interruption cover.

“The good news is that, subject to these provisos, you can extend your Business Interruption policy to include cover for the same insured perils, should they occur at your customers’ or suppliers’ premises.

“That means if supplier ‘B’ has a flood and cannot supply ‘A’ and ‘A’ suffers interruption in the business, then, provided ‘A’ has this extension in place under a material damage policy covering his premises, then cover will respond to the business interruption loss as if the material damage loss at ‘B’ occurred at the premises of A.

Note however you need to make sure that:

1) The risks / perils you insure for relate to your customers and suppliers

2) That the territorial limits under your own policy extends to include those territories where your critical customers and suppliers are situated.

“A prime example is that a number of companies in RSA suffered a business interruption loss because their suppliers in Japan were unable to fulfil their orders on time due to the earthquake and associated tsunami. If the South African companies had taken the appropriate cover indicated above, they would have been able to claim under their own business interruption insurance policy.”