Growing supply chain interconnectivity increases business interruption risk

Increasing interconnectivity of global supply chains is driving business interruption (BI) risk, with the potential of one event generating many claims from large numbers of companies, Allianz Global Corporate & Speciality (AGCS) said in a new report.

The effects of interconnectivity and interdependencies are of growing concern, the insurer said, and play an important role in many emerging risks, such as climate change, cyber, pandemics and power outages.

“There needs to be more awareness and understanding of the risks linked to increased levels of interconnectivity and interdependency, and more consideration given as to how we manage them,” said Michael Bruch, emerging risks specialist at AGCS.

As a result of increased interconnectivity, a solar storm or a cyber-attack on a power grid could result in countrywide blackouts lasting days, or potentially weeks, with a multitude of knock-on effects, explained Bruch.

Over the past ten years, claims related to business interruption have increased significantly. For its latest report, AGCS has mapped the amount of BI claims by region and by line of business and the main causes for these claims. Between 2010-2014, fire and explosion were the cause of 78% of BI losses in Europe.

Almost all large property insurance claims now include a major element of BI, with BI losses typically accounting for the lion’s share of large property claims, the insurer said.

“The average large BI property insurance claim is now in excess of €2.21m. This is around 36% higher than the corresponding average direct property damage loss (€1.63m).”

Furthermore, non-physical damage causes of BI could become more relevant in future. Perils such as cyber-attacks, political violence, pandemics and power outages could potentially cause large losses for companies without damage to property.

For example, a number of losses following the Tianjin explosion in August are the result of subsequent interruption of flow in stock and production because the port was closed by authorities. Such losses would only be covered by emerging non-damage BI policies, AGCS said, which only a few companies have purchased to date but which more and more businesses are becoming interested in.