Cost of business interruption increasing

News   •   Dec 14, 2015 09:40 GMT

Collapsed buildings, damaged factories or destroyed shipping containers: Whenever natural catastrophes or man-made disasters strike, the physical damage is often devastating for companies. However, the less obvious economic impact from business interruption (BI) is often much higher than the cost of the actual physical damage and presents a growing risk to operating in an increasingly interconnected world.

The Global Claims Review 2015: Business Interruption In Focus report from Allianz Global Corporate & Specialty notes that BI now typically accounts for a much higher proportion of the overall loss than was the case 10 years ago. The average large BI property insurance claim is now in excess of €2 million, which is 36% higher than the corresponding average property damage claim of just over €1.6 million.

Both severity and frequency of BI claims is increasing, which are mostly caused by non-natural hazards such as human error or technical failure rather than from natural catastrophes. The top 10 causes of BI loss account for over 90% of such claims by value, with fire and explosion being the top cause, accounting for 59% of all BI claims globally. The top ten of causes of business interruption ranked by value were:

  1. Fire and explosion
  2. Storm
  3. Machinery breakdown
  4. Faulty design/material/manufacturing
  5. Strike/riot/vandalism
  6. Cast loss (entertainment)
  7. Flood
  8. Collapse
  9. Human error/operating error
  10. Power interruption

The growth in BI claims is fuelled by increasing interdependencies between companies, the global supply chain and lean production processes,” explains Chris Fischer Hirs, CEO of AGCS. “Whereas in the past a large fire or explosion may have only affected one or two companies, today, losses increasingly impact a number of companies and can even threaten whole sectors globally."

Interdependencies between suppliers can be a big unknown and many businesses are dependent on key suppliers. Business continuity planning should not only be part of a company’s own supply chain management programme, but should also be extended to all of its critical suppliers. It is important that supply chain management is treated as a cross-functional task involving at least functions such as procurement, logistics and finance.

The growing risk to supply chains is something that was also highlighted in the Supply Chain Resilience Report, published by the Business Continuity Institute, which revealed that a tenth of organizations are not aware of who their key suppliers are, a finding that is alarming given that 74% had suffered at least one supply chain disruption during the previous year, and half of these occurred below the tier one supplier.