Why CBI insurance is on the rise in Canada

Contingent business interruption (CBI) insurance is on the rise in Canada, with an increase in both demand and higher limits, says the CEO and chief agent for Allianz Global Corporate & Specialty (AGCS) Canada.

“This is one of the most difficult risks to underwrite as you are basically trying to understand the complexity of the supply chain and then get a feeling for the overall exposure that a certain company is facing,” said Ulrich Kadow. “Figuring that out requires a lot of in-depth analysis and data that sometimes risk managers struggle to determine for their entire organization. We as an insurance company are in the same boat and have to determine the overall exposure.”

Kadow spoke to Canadian Underwriter Tuesday following the release of the Allianz Risk Barometer 2019. The global report of the major business risks for this year found the Top 3 risks for Canadian businesses are:

• business interruption (BI, including supply chain disruption)
• cyber incidents (Kadow reported AGCS has seen a rise in overall claims costs from such events)
• climate change/increasing volatility of weather.

CBI insurance is an optional extension of coverage that reimburses lost profits and extra expenses resulting from an interruption of business at the premises of a customer or supplier.

What’s contributing to the increased demand and higher limits?

Several factors, according to Kadow. First, supplier networks are getting more complicated.

Second, lean manufacturing, which describes the activity of minimizing waste within manufacturing systems while simultaneously maximizing productivity, can trigger “an even bigger risk,” says Kadow. “If something breaks in the overall supply chain, then very, very quickly you are running into business interruption loss.”

Third is globalization: a natural catastrophe thousands of miles away from a supplier may trigger a CBI exposure for a Canadian company. “It is not a very obvious risk to underwrite,” Kadow said. “So, if you offer limits for that type of risk, underwriters and risk managers and brokers need to be very well aware of what the exposures are, analyze it and then price adequately for it.”

The primary causes of business interruption incidents that global businesses fear the most include:

• cyber incidents
• fire
• explosion
• natural catastrophes
• supplier failure
• lean processes
• machinery breakdown

Another emerging risk is pollution, Kadow said. “If your particular site is housing certain chemicals, there might be pollution exposure following a natural catastrophe event like a flood,” he said. Heavy rainfall or flood could also cause mould, which can be hard to remediate.

Rounding out the Top 10 business risks in Canada were market developments (such as M&A and market fluctuation); changes in legislation and regulation (trade wars and tariffs, economic sanctions, protectionism and Brexit); natural catastrophes (e.g. storm, flood, earthquake); environmental risks (such as pollution); new technologies (e.g. artificial intelligence, 3D printing, autonomous vehicles, blockchain); and shortage of a skilled workforce.