Contingent business interruption insurance does not cover some “important supply chain risks,” though some insurers are discussing the possibility for broadening CBI coverage, while a lack of historical data makes it difficult for carriers to underwrite terrorism coverage, Swiss Re suggested in a report released Monday.
“There is a lack of both historical and simulation data for terrorism,” Swiss Re stated in the report, titled Underinsurance of Property Risks: Closing the Gap. “Existing data is mostly classified by intelligence agencies. Further, any attempt to de-classify and model such data in private markets could invite terrorists’ deliberate attempts to evade prediction.”
Terrorism coverage is “generally provided by the private sector and is backed up by the government,” Swiss Re noted. “Because terrorism risk has many qualities that make it difficult to insure, insurers limit their exposure. The resulting limited supply of coverage means that for some insureds, it will be either entirely unavailable or available at prices that are prohibitive.” [Click image to enlarge]
In the report, Swiss Re noted its own data shows that over the past ten years, worldwide, economic losses from natural disaster events was about $180 billion a year. All figures are in United States dollars. More than two-thirds (70%), or $127 billion a year, in natural disaster losses were uninsured, Swiss Re noted.
“The share of uninsured property losses as a result of natural catastrophes varies by region,” Swiss Re reported. “Typically, the gap is smaller in industrialised than in emerging markets, where 80-100% of economic losses are uninsured.”
Swiss Re included a graph depicting the annual expected natural catastrophe property damage losses, both insured and uninsured, for 30 countries.
The United States, Japan and China “account for the biggest chunk of the global property protection gap,” in absolute terms, with expected annual uninsured losses of more than $81 billion, Swiss Re reported.
“Earthquake risk makes up the majority of the gap in the US and Japan, while flood risk comprises nearly half of the expected uninsured loss in China,” according to the report. “The prominence of these three countries in absolute terms is driven not only by natural exposure, but also by population, geographic area and property values.”
Swiss Re also included a section on “man-made” risks that “challenge the boundaries of insurability.”
In addition to terrorism, those risks include CBI coverage.
“Some important supply chain risks are not covered by CBI insurance, such as intangible or indirect losses (eg, loss of reputation, loss of customers, IT failures between key suppliers and customers nor financial failure at one or the other),” Swiss Re stated. “There are discussions about insurers providing a broader form of CBI insurance to also include non-damage losses. However, insureds have so far been reluctant to provide more transparency into supply chains in order to facilitate greater insurer understanding of the complex exposures.”
The supply chain risks that are coverage include CBI, contingent extra expense (CEE), service interruption, off-premises power interruption (OPP) and denial of access.
“In most parts of the world, coverage is provided on a limited basis within a typical property insurance policy,” Swiss Re said in the report. “CBI covers the potential business interruption and extra expenses to an insured from physical loss or damage at locations of key suppliers of products and services, or at receivers (ie, key customers) of supplies and services. “
Another risk that is challenging to insure is cyber, Swiss Re suggested, noted the annual cost of cyber crime is estimated to be “in the range” of $375 billion to $575 billion.
“A current challenge for specialist commercial insurers is to develop products for operational risk from cyber-attacks that cover both non-damage and physical damage business interruption,” Swiss Re reported. “So far cyber insurance has been focused on third- party data security and privacy risks, with very limited first-party coverage. Policies are limited to covering non-damage business interruption such as network outages.”