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Learn about interdependencies and risks of contingent business interruption, and discover state-of-the-art solutions in insurance, risk engineering, and claims management to address these risks.
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CORPORATE BUTTERFLY EFFECT: how to manage interdependencies and “contingent business interruption” Maurizio Castelli
Learning Objectives At the end of this session, you will: • Understand interdependencies and Contingent Business Interruption risks • Understand latest issues facing multinationals in handling CBI risks • Learn state of the art solutions in terms of insurance, risk engineering and claims management to address CBI.
INTRODUCTION RIC004
The Butterfly Effect The butterfly effect is a term used in the chaos theory to describe how small changes to a seemingly unrelated condition can affect complex systems. The term comes from the suggestion that the flapping of a butterfly's wings in South America could affect the weather in Texas, meaning that the tiniest influence on one part of a system can have a huge effect on another part. The concept of the butterfly effect is attributed to Edward Norton Lorenz, a mathematician and meteorologist, who was one of the first proponents of the chaos theory. Lorenz was running global climate models on his computer one day and, hoping to save himself some time, ran one model from the middle rather than the beginning. The two weather predictions, one based on the entire process, including initial conditions, and another based on a portion of the data, starting with the process already part way completed, diverged drastically; contrary to Lorenz’s expectations, tiny, unpredictable variations caused the two models to differ.
A small change to a seemingly “insignificant” part of the supply chain can heavily affect the results of the company, i.e. … Corporate Butterfly Effect
Corporate Butterfly Effect (cont’d) …. i.e. in the global context, companies have to manage their supply chain risk on the different fronts of their suppliers (including utilities), their clients, and their internal interdependencies. Each of these fronts can be affected by several factors and any interruption caused by any of these factors in any point of the chain can result in a severe negative impact on the results of the company.
CORPORATE BUTTERFLY EFFECT: The Insurance Support: Underwriting and claims management
Business InterruptionA changing perspective • The evolution of several parameters in the global landscape affects the perception of risks by insurance markets • Risk accumulation control as a key driver in Property insurance underwriting. • Risk accumulation affected by the business Interruption component as much or more than the direct property damages component. • BI component results from loss of revenues on the affected unit but also from interdependencies and impact coming from suppliers and clients. The increasingly tight connection within the supply chain of an insured company led to a completely different perspectivein calculating BI exposures • his also leads to the need of a much deeper and clear analysis and understanding of the relationship with suppliers and clients, external and internal.
Business Interruption - CBIWake up calls March 2011 Tohoku EQ and Tsunami Sept. 2001 9/11 www.tiptoptens.com http://jedi-tempel.eu/38.html Oct-Nov 2012 Sandy August 2005 Katrina August 2002 Central Europeanfloods July 2011 Thailand floods
Why BI exposure is increasing • ”Contingent BI“: business interruption damages incurred as a consequence of property damages suffered by direct suppliers or customers of the insured, leading to a shortening of supply or demand which results on an impact on its revenues. • Contingent BI damages are increasing because of significant cost saving measures widely implemented: • “Just in Time” (or even “Just in Sequence”) inventory strategies • Reduction of stock capacities • Single source supplier agreement (and “no second molds”) • High level of specialization • Sourcing from low cost countries • Outsourcing production to third parties
Earthquake Japan 2011: main features EQ Tsunami Radiation Supply chain CBI
Earthquake Japan 2011 : coverage issues/lessons learnt • EQ limit • Flood limit • Radiation exclusion • Concurrent causation • Upstream / downstream • Full supply chain • Tier one only/ Tier two • Named supplier • Deductible language • Make up in other areas of the globe
Flood Thailand 2011: main features Area damage CBI Salvage
Flood Thailand 2011: coverage issues/lessons learnt • Flood limit • High Hazard Zone / Flood Zone A • Concurrent causation • Denial of access • Upstream / downstream • Full supply chain • Tier one only/ Tier two • Named supplier • Deductible language • Make up in other areas of the globe • Suppliers and Customers located in the same Industrial region
Hurricane Sandy 2012: main features Saltwater Power outage Access Humidity
General lessons learned from claims management • Implementation of supply chain teams • Reduction of quality standards (temporary) • Move away from single source supplier • Learn more about high hazard zones of customer/supplier • Normal mitigation like in all other BI claims helped • Business Continuity Plans • Move production to other areas • Overtime • Review policy limits • Full supply chain coverage/named supplier • Risk Engineering support
Corporate butterfly effect • Dependency on: • Utilities • Group Interdependencies • Critical suppliers • Outsourced productions • Critical clients • Disruption of logistic chain • Infrastructures (access to facilities)
Corporate butterfly effect: the role of the insurer • Support the client, along with the broker in: • Risk Identification; making sure that dependencies and foreseeable scenarios have been considered and that time element has been factored in properly • Risk assessment: calculate loss scenarios and the corresponding exposure level • Risk Mapping: compare calculated exposures with the insured’s risk appetite and identify suitable level for indemnity limits and deductibles • Identify “named CBI“ versus “un-named CBI“ risks • Based on above analysis understand the coverage needs and design a suitable coverage package • Calculate account risk and portfolio impact (accumulation) to come to an assessment of overall exposure • Define the adequate premium and T&C • Implement and handle a suitable global program including all local legal and tax compliance needs • Ensure proper handling of losses when these will happen
Corporate butterfly effect: the importance of data quality The more the submission is clear, complete and detailed, the more the insurer is able to offer a satisfactory solution in terms of premium level, deductibles, limits, wideness of coverage, wording. In particular, for Cat Nat exposures,Today we have the availability of very accurate tools (in terms of calculation of probability and magnitude of foreseeable events) to calculate the “Nat-Cat” exposure including accumulation. However results can vary significantly even following minimal variation in the address of the location being analyzed. If the information about the risk locations is not accurate, the insurer has to use worst case scenarios data in his assessment of the risk and this is not to the advantage of the insured.
Corporate butterfly effect: insurance coverage • «Traditional» Business Interruption coverage: • Loss of Profit • Extra expenses • “Enhanced” coverage: • Group Interdependency • Special CBI coverage subject to specific sub-limits: • Named and Unnamed CBI • Denial of Access • Service Interruption • Additional special coverages: • Loss of rent • Loss of licenses • Loss of interest • Penalties Time element Extra Expenses Contingent Business Interruption Denail of access Service Interruption BusinessInterruption Interdependency Named CBI Unnamed CBI
Corporate butterfly effect: an integrated approach • Risk Engineering: • Property Damage Loss prevention • Supply Chain Loss prevention • Business Impact Analysis and BI Loss Prevention • Crisis Management • Business Continuity Plans • Underwriting and insurance solutions • Risk Assessment and design of effective insurance solution • BI and CBI capacity and comprehensive coverage • Global Insurance Programs capabilities and know-how • Suitable platforms for effective handling of complex global programs • Claims Handling • Professional claims handling team available around the clock and around the • globe (specific experience and know-how in cross-border claims handling) • Specific experience in handling complex BI and CBI claim • Close cooperation of claims people with Risk Engineering and Underwriting
