Emerging contingent business interruption risk modelling practices hold promise: report

In a more globalized world with complex supply chains, protection for contingent business interruption risk is critical, although modelling for the risk is still in the early states, notes a new report from PwC.

In the first part of its Top Insurance Industry Issues in 2013 report, the company suggests that modelling for CBI risk is in an analogous stage to natural catastrophe modelling following Hurricane Andrew in 1992 – or rather, in its beginning stages. 

The report cites the volcanic eruption in Iceland in 2010, which shut down air travel for days, and the 2011 Japan earthquake and tsunami as prominent examples of business interruption losses. Major flooding in Thailand in 2011 also accounted for supply chain disruptions, it notes.

“The industry has recognized the need for such a model some some time but, despite several notable attempts, no one has yet been able to produce one that adequately quantifies the dynamics of CBI risk,” the report states.

That’s because CBI models must be broader in scope than nat cat modelling and because its exposures are not as well-defined, PwC says.

Still, the move toward a better model for CBI risk is at hand, the report suggests. A model “employing agent-based modelling techniques, geographical information systems (GIS) and industrial supply chain information can be constructed,” the report suggests.

Many industrial firms currently use business impact analysis to look at supply chain vulnerabilities, it notes.

“This information can be practically incorporated into an agent-based CBI model, the output of which can quantify supply chain vulnerabilities both for specific firms and in the aggregate, irrespective of peril, including, not least, terrorist attacks,” the report says.

Widespread adoption of a model by insurers would lead to added capacity for CBI risk protection, PwC concludes, helping to mitigate industrial risks and offer growth for the property and casualty market overall.

PwC will release the entire Top Insurance Industry Issues in 2013 report in March.