Natural disasters continue to be the leading driver of business interruption claims, Allianz reports.
Extreme weather events, fires and explosions, geopolitical risks, ransomware attacks and COVID-19 have all tested global supply chains in recent years. This is reflected in the results of the Allianz Risk Barometer, an annual survey, which asks businesses to nominate their top risk concerns for the year ahead.
In 2023, cyber incidents and business interruption rank as the biggest company worries for the second year in succession.
Levels of interruption increased dramatically following the pandemic, as shortages and transportation delays exacerbated the business impact of natural catastrophes, fires, and machinery and equipment breakdowns, leading to shortages of materials and spare parts and longer times to complete repairs.
However, many of these supply chain pressures have eased in 2023. Business activity is now closer to normal than it was a year ago, and this is starting to filter through to business interruption claims activity.
Extreme weather dominates recent claims
However, not all business interruption loss activity has eased. The top causes of business interruption claims remain consistent, with the most frequent and expensive damage arising from natural catastrophe and fire and explosion activity with natural catastrophe-driven loss activity rising.
When looking at the costliest business interruption events for large corporations over the past two years, the top 20 are primarily natural catastrophes. Hailstorms in France, and heavy rain and flooding in Slovenia and Italy, as well as in Australia and Germany, have all caused large business interruption claims during this period. As did damage caused by Hurricanes Ian and Fiona, several winter storms in the U.S. in 2022, and storms Dudley and Eunice in Europe.
With a trend towards increased volatility in natural catastrophes, companies need to consider and plan for the impact from a broader range of extreme events.
Extreme weather events are less predictable and harder to prepare for than hurricanes and European winter storms, for example, which are forecast well in advance. Hailstorms, tornadoes and flash floods are usually sudden localized events that can cause substantial amounts of property damage, and in turn business interruption, in a short period of time.
Hailstorms have resulted in several surprisingly large business interruption claims. Many structures are not designed for extreme hail events, and we have seen extensive damage caused to commercial property roofs during recent hail events, with some large areas destroyed.
What really makes a difference to the extent of business interruption is the advance preparation of a robust business continuity plan. And not just theoretical. Business continuity plans must be tested solutions that are updated regularly.
CBI claims peak
While not at their record level of two years ago, contingent business interruption (CBI) claims remain challenging as the impact of natural catastrophes, fires and political violence can ripple through global supply chains in specialist concentrated industries like auto manufacturing and semiconductors.
In 2021, a record number of CBI and service interruption claims were filed, as global supply chains were disrupted by storms, fires and the pandemic. Several large CBI losses were generated by Winter Storm Uri in the U.S. in February 2021, which caused cascading effects on companies and services reliant upon power, including water, transport, and medical services, with the so-called ‘Big Freeze’ particularly impacting the state of Texas.
Less than a month later, a fire at a semiconductor plant in Japan added to the growing global shortage of microprocessors, hitting production in the automotive and electronics industries. The automotive sector was again hit with supply chain problems from the conflict in Ukraine, as the country is an important supplier of parts.
While the level of CBI claims from two years ago appears to have peaked, natural catastrophes continue to disrupt supply chains. The flooding in Slovenia and neighboring countries in August 2023 impacted many factories in the region, including several tier-one car part manufacturers. The resulting disruption to automotive supply chains reportedly hit production at a number of car plants and parts manufacturers.
CBI claims are still among the industry’s top concerns. They are always challenging for insurers because it is never easy to get a clear picture of the whole exposure, and claims can be slow to develop.
Political violence on the rise
Businesses and their supply chains face considerable geopolitical risks with war in Ukraine, ongoing tensions between the U.S. and China over Taiwan and more recently with conflict in the Middle East. So far, these events have only had limited impact on supply chains and shipping routes but could become more relevant for business interruption going forward.
Inflation, political instability and climate change activism have also contributed to rising civil unrest in many parts of the world. According to analyst Verisk Maplecroft, political risk at the start of 2023 was at a five-year high, with some 100 countries considered at high or extreme risk of civil unrest.
ESG concerns and ‘green clauses’
Environmental, social, and governance (ESG) concerns are increasingly featuring in property claims, with implications for the cost and extent of business interruption. Large corporate clients are increasingly concerned about their environmental impact when rebuilding damaged property.
It is encouraging that more companies are concerned about ESG in the context of claims and are interested in alternative solutions. However, sustainable options can also have implications for business interruption and insurance coverage. For example, sustainable options — such as shipping spare parts via a lower carbon-intensive form of transport, rather than air freight — can result in a longer period of business interruption or lead to extra expenses.
Commercial property insurance traditionally pays out on a like-for-like replacement basis, although “green reinstatement clauses” are now being included in some policies that give insureds more flexibility around more sustainable options.
We are seeing more requests from insureds to accommodate ESG requirements in claims, yet this is not always well covered by the wording in standard property policies. We are introducing green clauses that enable insureds to integrate sustainable characteristics into a rebuild, but these are not widespread and do not always cover other areas of ESG, such as expediting expenses. The industry will need to more widely adapt property insurance products and underwriting to accommodate this.