Future of insurance: Non-damage business interruption

The risk of non-physical damage is rising up the corporate agenda particularly as events such as the Covid-19 pandemic, the UK London Bridge terror attack and the Boeing 737 groundings continue to dominate headlines.

Such non-damage business interruption (NDBI) is taking centre stage, in part because the business world has evolved so that intangible assets make up an increasing proportion of an organisation’s value. Research shows that 80 to 90 per cent of market value of large listed companies stems from intangible assets rather than physical assets on the balance sheet.

At the same time, economic trends mean that companies have wider and more vulnerable supply chains than ever before, which leaves them open to interruptions in new and more complex ways.

Three of the main types of NDBI that companies are grappling with include:

• Media and loss of reputation
• Supply chain disruption
• Critical Infrastructure

Roy Baumann, Swiss Re Corporate Solutions explains: “These examples show the wide range of events that can cause non-damage business interruption, and the losses are often substantial. The underlying trend is clearly that economic damage is to a large extent not physical.”

Protecting businesses from non-damage threats

While systemic risks such as pandemics cannot be taken on by the private market alone, other types of NDBI are increasingly being catered to. And risk managers are increasingly looking for solutions to either mitigate or transfer the risks that are posed by threats such as pandemic, people and cyber criminals.

Baumann explains: “There is very clearly increased interest from clients enquiring about solutions to these kind of threats. Largely we are seeing businesses starting out by collecting information first to help them to understand their exposures. I think it will probably be two or three years more before we see actual demand crystallising.”

A gap in the market

While some products do exist to help organisations manage their NDBI risks, these tend to be bespoke rather than mass market. An unintended consequence of this is that risk managers are unlikely to find ‘off-the-shelf’- solutions that will fit their needs. Equally, insurers and other providers are challenged to market their cover in a highly targeted way and to explain to risk managers what risk transfer options are available.

Baumann says: “If you look at products the insurance industry offers today, some of them are over 50 years old with the exception of D&O. As a consequence, there is lots of data available on these products and risks. But with NDBI, because of the various exposures there is a lot of unknown on both sides. Many providers don’t have a good grasp of the issues and the insurance industry hasn’t developed major appetite for these kinds of risks.”

“Compare something like the coronavirus pandemic to a fire policy. Fire and buildings are well understood, so you know what the damage will be if you have an event. But it is difficult for the insurer to say what the damage will be if a pandemic happens, or what kind of losses a business might face.

Communication is key

The lack of off-the-shelf products doesn’t mean that risk managers can’t find ways to transfer their risks. Instead, it means that finding solutions needs to be a two-way street between the insurers and the insureds.

Baumann explains: “On the customer side it is critical that they are able to articulate their problem. Unfortunately, this is not as easy as it sounds. The good news is that the insurance market likes being challenged on these things. While products may not be readily available, the more information we have the better we can support our customers in finding the right solution.

“More standardised products will eventually become a reality. They have to – because the customer demand is there. In order for that to happen, insurers need a better understanding of what the market wants, and customers will have to meet that information requirement. But that’s a while off and in the meantime, businesses that want to transfer their risks will need to go for bespoke solutions.”

“I just hope that the hard market doesn’t deflect attention too much from the underlying trend towards systemic risks. If clients are facing double digit expense on other fronts then their attention can tend to deflect, but as the stats show, non-tangible asset losses are growing each year so it is important that businesses protect themselves from perils that cause them risk.”