Interruption Claims

While business interruption (BI) losses in some Canadian resource sectors were lower in 2015, there was an overall increase in BI and contingent business interruption (CBI) in 2015. The claims experience of Allianz Global Corporate & Specialty Canada is consistent with AGCS’s global offices. Large and complex BI and CBI claims continued to increase in both value and frequency through 2015. Of these, the size and frequency of CBI losses increased most dramatically.

CBI losses take place when an insured’s customer or supplier suffers a direct loss resulting in its inability to supply the policyholder with products or services. This, in turn, generates an insured loss for the client. Modern just-in-time (JIT) inventory strategies – employed by companies to increase efficiency and decrease waste by receiving goods only as they are needed in the production or supply process – has contributed to the increase in CBI losses. Further, large “volume buy” customers are often no longer willing to wait for inventory levels to be stabilized following a loss and the frequency of these customers being permanently lost has increased.

Perhaps another reason for the statistical increase in both direct BI and CBI claims is greater sophistication, experience and diligence on the part of brokers. Brokers tend to understand the risks a large commercial client is exposed to and carefully place a full coverage solution for the client. As such, there are fewer discrepancies between the reported and actual revenue streams.

With an increased accuracy in reporting values, there are now far fewer applications of co-insurance when adjusting BI claims. There has recently been a greater emphasis on broker manuscript or risk-specific policies placed by brokers to better reflect the unique exposures, including BI and CBI risk.

DISASTER RECOVERY

The only exceptions to the size and frequency of BI and CBI losses experienced by AGCS in 2015 were in the commodity sectors, such as oil & gas and mining. In those sectors, lower global commodity prices in 2015 lowered the overall frequency and size of these claims. In many cases, even if there were smaller incidents, they fell within large retention structures or deductibles for these clients.

In Canada, AGCS also experienced a greater frequency and severity of “extra expense” claims in 2015 as businesses proactively minimized BI losses through alternate sourcing and production capabilities. Extra expense coverage responds to labour costs to add extra production shifts, extra shipping costs to transport product from alternate facilities and various other extra charges incurred by clients to mitigate or eliminate BI claims. In many cases, a client with a detailed disaster recovery or contingency plan can eliminate a BI claim completely while incurring a comparatively modest extra expense claim.

From a claims perspective, there tend to be key coverage extensions included in policies – such as the “selling price” clause – which can limit or eliminate a BI claim.

The significance and impact of the global supply chain first became clear in Canada following the tsunami in Japan in March 2011. Following that event, numerous Canadian manufacturers who depend on components made in Japan were affected. These businesses – as well as Canadian wholesalers and retailers of everything from electronics to automobiles – also suffered CBI losses.

These CBI losses were measured and adjusted for the period it took to regain normal operations and, in many cases, for the entire policy indemnity period. From that event, many businesses developed much broader supply networks to spread the risks of losing component parts from any one country or any one regional in the world going forward.

Across Canada, the origin of BI claims differs to some extent from the global experience. From the 2013 floods in Alberta and Ontario, to the 2014 ice storm in the Greater Toronto Area and the 2015 snow load losses in Atlantic Canada, BI claims originating from natural sources represented close to 50% of these claims while BI claims originating from technical or human factors represent the other 50%.

For Allianz, the top causes of BI losses in Canada over $10,000 that were not caused by natural events were as

follows: fire and explosion at 41%; mechanical breakdown at 16%; delayed start-up (DSU) at 13%; collapse (structural, racking or other) at 9%; faulty design/defect at 7%; vehicle or other impact at 6%; vandalism at 3%; cast loss (entertainment) at 3%; and power interruption at 2%.

In Canada, both the oil & gas and mining sectors have large interdependencies with pipeline and rail companies. Although these companies incurred losses in the past, they performed very well in 2015 and were relatively loss free.

The entertainment sector in Canada was also largely loss free in 2015.

Although some cast claims were submitted, production companies worked very effectively to minimize these losses and assisted their cast member(s) to resume work as quickly as possible. The frequency of “set” losses resulting in BI also declined in 2015 as production companies continued to emphasize strong risk management protocols.

INTERCONNECTIVITY

Looking ahead, aside from the perils of data breaches and regulatory fines, businesses need to consider the BI of cyber complications. This exposure is sometimes underestimated by management and will become clearer in the future, especially with greater interconnectivity of systems in everyday life and business operations.

In Canada, cyber claims that result in BI losses are still infrequent and the insurance coverage products that will respond to these losses are still being refined.

Within the next five to 10 years, BI will be seen as a key risk and a major part of the cyber insurance landscape.

Today, many companies are concentrating on managing and controlling cyber risks within their own organization. However, they will increasingly look to extend insurance cover to their supply chains as business exchanges with partners are increasingly being conducted over information technology (IT)

networks. Even if a company is confident in its own IT controls, it is still exposed to cyber risk through its business partners, contractors and supply chains and the level of sophistication and risk management of those business partners varies significantly.

Policyholders need to be clear in their understanding of the effect that cyber incidents could have on their supply chains. They need to understand the following: the implications if they cannot deliver their products in time or if they lose customer data; laws in any jurisdiction that might apply; and the cost if hiring lawyers and IT experts.

Continued high levels of BI are also expected to occur in the heavy manufacturing, power generation and chemical sectors. Those types of operations are incorporating more complex, interconnected supply chains, production or output commitments and reciprocal service commitments. The current climate of lower commodity prices in Canada compresses margins and will continue to strain these complex channels.

In Canada, there is a greater emphasis on predictive modelling to identify areas of potential failures and the subsequent impact to all parties. Carefully considered contingency plans now include in-depth analysis of even the most remote eventualities. Despite all these measures, losses will continue to occur and insurance products will respond.

In order to navigate through business interruptions, insurance providers should listen to clients’ needs at the starting point – and work with clients to ensure that losses are investigated and settled quickly.