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Business interruption from a global perspective

07 March 2016 Myra Knoesen
Myra Knoesen, FAnews Journalist

Myra Knoesen, FAnews Journalist

Approximately one in five businesses suffers a major business interruption each year. While it is not possible for companies to mitigate all of the risks, these events may affect and hinder organisations’ operational capacity.

Analysing more than 1 800 large Business Interruption (BI) claims from 68 countries in the 2015 Global Claims Review report from Allianz Global Corporate & Specialty (AGCS), risk managers and corporate risk experts say the impact of BI is the top risk companies face in today’s increasingly interconnected and globalised business environment. 

Claim developments

In the AGCS analysis, over the years 2010-2014, the majority of BI claims originated from technical or human factors (88% of BI losses) and not from natural catastrophes.

The top ten causes of BI loss account for over 90% of such claims by value, with fire and explosion being the top cause of BI accounting for 59% of all BI insurance claims globally. Each fire and explosion incident analysed averaged €1.7 million in BI costs alone andnon-natural hazard events account for 88% of BI losses.

The average BI claim in Africa between 2010 and 2014 was €2.05 million. According to AGCS statistics, structural collapse is the most expensive cause of BI loss in Africa, accounting for over 50% of claims by value. However, this was a single large loss.

BI losses are highest by value for claims originating from energy (€3.96 million) and property (€2.21 million) lines of insurance, followed by engineering (€0.9 million) and entertainment (€0.3 million). The highest average value BI claims typically occur in the oil and gas industry, especially for incidents involving energy platforms (averaging €4.2 million in BI losses) as exposures have increased due to larger onshore energy facilities and growing interdependencies between companies resulting in regional CBI claims if one plant is disrupted.

According to the report, increasing interconnectivity of global supply chains drives business interruption risk and losses. Whenever natural catastrophes or man-made disasters such as collapsed buildings, damaged factories or destroyed shipping containers strike, the physical damage is often devastating for companies.

Frequency of BI claims

FAnews spoke to Isaac Mahlangu, Head of Property at AGCS Africa, about BI claims in South Africa and globally.

He said, “South African customers now have access to suppliers anywhere in the world due to globalisation. Some of these suppliers are located in areas that are prone to natural catastrophes. A natural disaster such as an earthquake or flood occurring at a suppliers premise can create a bottleneck for customers, resulting in an increase in BI claims.”

Both the severity and frequency of BI claims is increasing, which are mostly caused by human error or technical failure. However, the less obvious economic impact from 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. 

In future, non-physical damage causes of business interruption could become more relevant, too. Perils such as cyber-attacks, political violence, strikes, pandemics or power outages could potentially cause large losses for companies without damage to property.

Current and future trends

According to the 2016 Allianz Risk Barometer, which surveyed over 800 risk managers and insurance experts from more than 40 countries, the risk landscape for businesses is substantially changing in 2016. 

While businesses are less concerned about the impact of traditional industrial risks such as natural catastrophes or fire, they are increasingly worried about the impact of other disruptive events, fierce competition in their markets and cyber incidents.

According to the report, the top three leading risks for businesses in South Africa are cyber incidents (42%), BI at 32% and changes in legislation and regulation (26%).

BI remains the top peril for the fourth year in succession with 38% of responses (32% in South Africa and 30% in rest of Africa and Middle East). Major causes of BI feared most by companies are natural catastrophes (51%), closely followed by fire/explosion (46%). However, according to the survey’s findings, multinational companies are also increasingly worried about the disruptive impact of geo-political instability as war or upheaval could impact their supply chains or their staff or assets could suffer from acts of terrorism.

More than a third of responses (34%) cited market developments such as intensified competition or market volatility/stagnation as one of the three most important business risks in 2016.

Back up plans

When asked if BI exposures are greater for sectors with high levels of interconnectivity and technology in South Africa, Mahlangu said, “This depends on the robustness of a customer’s business continuity plan, whether they have adequate redundancies and backups in place. Moreover, how often are these plans tested to assess if they will work in an event of a disaster?”

Cyber incidents gained 11 percentage points year-on-year to move from fifth position (first in South Africa and fifth in rest of Africa and Middle East) into the top three risks for the first time (28% of responses). Loss of reputation (69%) is the main cause of economic loss for businesses after a cyber-incident, according to responses, followed by business interruption (60%) and liability claims after a data breach (52%).

In terms of BI and supply chain risk awareness and management, Mahlangu said businesses are becoming aware of the impact of natural disasters at their supplier’s premises and the negative effect this can have on their operations.

“More customers are asking for higher natural catastrophe sub-limits and are working more closely with risk engineers to manage their exposures,” he concluded.

Editor’s Thoughts:
With the top three leading risks for businesses in South Africa being cyber incidents, BI and changes in legislation and regulation, the risk landscape for businesses is substantially changing in 2016. Even though it is not possible to mitigate these risks, they can be managed with the right strategies in place. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected]

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