Canadian Underwriter

Business, interrupted

April 3, 2020   by Brooke Smith, Freelance Writer

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Businesses can lose revenue in any number of ways. Increasingly, they can be shut down for political risks that are beyond the company’s control. Examples of emerging business interruption risks include trade wars, armed conflicts, or political protests. As businesses become more exposed to these sorts of risks, the question arises: Are these types of risks insurable?

In the current age of political unrest and environmental catastrophes, business interruption (BI) ranks high on the list of risks for many organizations. According to Aon’s Global Risk Management Survey, BI was Number 4 on the list of the Top 15 risks for 2019 (up from Number 8 in 2017). The same survey  indicated that one-fifth of 2018’s news headlines involved natural disasters such as Hurricane Michael in the United States or political situations — the Yellow Vest protests in France, for example — that caused major disruptions to businesses.

“In ever-increasing political uncertainty globally, BI has begun to take on more of a political role in terms of [actions taken by or within] countries,” Gary Hirst, Toronto-based president and CEO of CHES Special Risk, observes. By way of example, he cites an economic embargo by one country against another, or perhaps a political action taken by an organization’s home government or even a third-party government.

The growing list

While traditional BI and contingent business interruption (CBI) insurance cover perils like fire, riots and violence that would damage a company’s or supplier’s premises, companies now have to consider further extensions of this type of coverage. “Nowadays, traditional property-based BI coverage is probably 10 years old,” Hirst says. “BI has moved on a lot further than that. Now it extends far greater than just perils and the physical location.”

Extensions might now cover losses due to utility interruption, such as a power outage. “If you’re a business heavily reliant on electricity, then it’s possible to extend your BI to cover the downtime and loss of production as a result of the loss of electricity,” he says.

Another is civil authority. Take, for example, the incidents of gun violence in recent years at Toronto’s Yorkdale Shopping Centre, where police closed down the mall. “That ‘loss of attraction’ is also something that can be covered, in my view, under a BI extension,” Hirst says.

These two interruptions are not necessarily political events, but they are examples of emerging risks in the BI world, in addition to losses due to strikes and riots.

“Last year, we did see an increase in BI claims resulting from damage due to strike, riot, or civil commotion,” says Bernard McNulty, head of claims in Canada for Allianz Global Corporate & Specialty. These types of events are occurring globally and they’re challenging from the standpoint of coverage application and evaluation, he adds. In many cases, they simply slow down the operation or project “instead of completely shutting it down, [for] which would be almost easier to calculate [the losses].”

Even with BI insurance, organizations can still find themselves covering their costs or purchasing more coverage. Consider the typical 12-month indemnity period: In a scenario involving a large, catastrophic loss, sometimes that typical period for BI is no longer sufficient. Scott Feasey, senior vice president of commercial insurance for the Prairie region with Gallagher, says this has been the case with certain classes of risk, particularly in the manufacturing sector.

Imagine the catastrophic loss of a manufacturing plant with a paint line. After a large fire, all the production equipment needs to be replaced and commissioned properly. In this scenario, “the insured is using up their whole 12 months of indemnity and the claim’s not finished,” he says. “They’re having to foot their own bill.”

The risk of losing talented employees is also affecting how clients buy their BI coverage. In a recent ManpowerGroup survey, 41% of Canadian employers say finding the skills they need is their main hiring challenge, and 58% of large companies (250-plus employees) reported talent shortages. Feasey has noticed that organizations are now asking that the entire employee base be insured for a full year, instead of the traditional 60-day, 90-day, or 180-day options.

“Employees are trained and know how to do the job,” says Feasey. “[Businesses] don’t want to lose them, so they’re electing to insure them for a full year.” That’s something, he adds, that didn’t happen often a year or two ago.


Political and health risks

Globally, the political and economic environment is increasingly volatile, but don’t expect BI and CBI to be much of a help for these emerging risks. It’s pretty much status quo from a coverage point of view: Political risk will not be considered.

The blockades of CN Rail tracks by the Wet’suwet’en hereditary chiefs provides one example. For almost a month in February, the blockades halted more than 1,400 freight and passenger trains. The protestors opposed construction of the Coastal GasLink pipeline intended to cross Wet’suwet’en territory in northwestern B.C.

“BI is triggered by an insured peril under the property policy,” as Feasey explains. “So things such as political issues are not something that would be an insured peril, and therefore not triggered under the BI.”

In addition, the blockades wouldn’t trigger the follow-form BI coverage, he adds. “In covered losses, there’s a waiting period of 24 to 72 hours, which is meant to avoid losses — for example, at a shopping mall where there’s a water leak and the store shuts down for one to two days. The waiting period takes care of the potential lost business.”

Or take a delay in the supply of raw goods or materials, which is topical in the wake of the coronavirus (COVID-19) that began in China. Shipping companies that carry goods from China to the rest of the world say they’re reducing the number of vessels. Allard Castelein, CEO of the Port of Rotterdam Authority — the largest seaport in Europe — reported that, at the end of February, the number of departures from Chinese ports is down 20%. According to the United Nations Conference on Trade and Development, China has seven of the world’s 10 busiest container ports.

“A lot of companies, especially manufacturers, have two- to three-month supplies of these items,” says Feasey. “They’re running out; they are facing production delays and potential loss of contracts, which is not something covered by BI.”

Some of these issues might be addressed through other insurance vehicles — stock throughput, for example, or ocean marine cargo — along with the appropriate endorsements.

But at this point, McNulty doesn’t see these kinds of political events as part of standard BI and CBI coverage. At least, not right now. “These events are all happening at the same time that we’re experiencing a hard insurance market,” he says. “When pricing is increasing and terms and conditions are contracting, any limited coverage for these scenarios that we did provide is contracting further. Two or three years ago, we may have given a $10-million sublimit on a strike, riot or civil commotion peril, and that sublimit, depending on the risk, may be reduced to $5 million or $1 million.”

Hirst agrees. “Insurers and managing general agents are fully able to provide these sorts of covers, but typically you don’t offer all the toys in the toy shop to the broker, because there’s an additional cost them and a lot of those additional covers are just not relevant.”

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