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Non-damage business interruption risk: a creative approach required

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By Tina Veale | November 19, 2019

Non-damage business interruption risk requires a robust, multifaceted approach to risk management — particularly for technology, media and telecommunications (TMT) companies.

Business interruption (BI) insurance claims have grown in frequency, complexity and size over the past several years. In fact, losses are 33% larger on average than direct property losses, according to Allianz's Risk Barometer.

BI risk is even more acute for technology, media and telecommunications (TMT) companies, which have become increasingly reliant on technology and third-party suppliers for business-critical needs such as IT functions and data storage. And non-damage business interruption (NDBI) losses, particularly those TMT companies are likely to experience — failure of Internet access, blackouts, software errors and cyberattacks — may not be covered under conventional or even contingent business interruption insurance policies.

Conventional BI versus NDBI coverage

Conventional and contingent BI insurance typically require evidence of physical damage among their terms and conditions to pay for losses. NDBI, on the other hand, is for losses when there is no physical damage to, say, a studio or production facility. NDBI could also cover other exposures that could disrupt operations. For example, political risks — something to think about in the event of labor action, organized blockades or government actions such as those that are creating uncertainty around global 5G networks.

Different exposures require a different approach to risk management

For many TMT companies, NDBI requires a different approach to risk identification and assessment. Conventional business interruption, by comparison, is relatively straightforward. You know a particular facility, for example, and the factors (fire, windstorm, etc.) most likely to cause damage or to disrupt operations.

Yet for non-damage business interruption, the typical TMT company will have to take a much more granular look at third-party relationships, the regulatory environment or trade disputes. It becomes more important to identify supply chain vulnerabilities, loss of Internet access and other exposures.

Rank your NDBI risks and close the gap

Given that NDBI essentially expands the scope of risk, it also becomes more important to rank each risk by the threat it poses to the company’s success, considering such factors as customer retention and protection of revenues and cash flow. In insurance terms, this puts the focus on high-impact events or the cumulative effect of certain low-impact events.

As material risks are identified and measured, it’s important to conduct a gap analysis of existing risk management activities, including risk transfer. Examining such coverages as conventional business interruption, cyberinsurance, political risk and trade credit reveals the gap in coverage provided via traditional insurances. This provides an opportunity to gauge the potential value of NDBI or contingent BI in the case of property risks among third-party suppliers or clients.

Expand analytics’ role in mitigation

Once you identify your risks, you can apply mitigation methodology to avoid risk or to mitigate the effect of a risk event. For a TMT company, it is especially important to understand the cause of risk as well as its interactions — for example, the long-term loss of viewers (and revenue) with extended disruption of Internet access.

Part of the challenge is measuring the potential scope of a particular risk and its consequences against your risk appetite. Such a balancing act requires significant risk modeling capability, sometimes using your internal data in combination with insurer data. Given that NDBI risks can take many forms, effective modeling is crucial to determine its full threat to the enterprise and to identify appropriate risk mitigation actions.

Both risk identification and mitigation efforts present opportunities for a triage process that can determine which risks can be managed or taken on the balance sheet or handled cost-effectively through a captive, alternative risk transfer or transferred to the insurance markets.

Think creatively about risk transfer

Although insurance is just one risk transfer option, it’s worth nothing that insurers are playing an increasingly effective and even creative role in developing NDBI policies. Aided by artificial intelligence and other analytical capabilities, insurer actuarial and modeling effectiveness continues to grow.

Capacity is available, though the market and coverage prices are firming. However, in laying out an effective risk assessment and mitigation process, it becomes easier to determine which risks fit best with insurance markets versus those that should be retained, held in a captive or financed in the capital markets.

Parametric insurance solutions, where payout is triggered by objective and transparent indices (e.g. U.S. Geological Survey earthquake magnitude) rather than actual losses, is another exciting alternative. Parametric solutions can pay claims quickly at times when insureds face unanticipated costs and potential liquidity issues.

A combination of advanced simulation technology, big data and risk portfolio optimization is another way that CFOs and risk managers can deploy insurance to volatility and minimize their total cost of risk. This approach enables better informed decisions about risk finance strategy in the aggregate rather than within line-of-business silos, further reducing volatility and costs.

NDBI risk-hedging options must be designed with broader corporate needs in mind, with revenue preservation and long-term profitability top the list. As TMT companies adopt new and more complex business models, risk management must be dynamic and flexible enough to meet changing business conditions and contribute to corporate resiliency. But by taking a creative approach to NDBI and weighing the various options for mitigating exposures, TMT companies can find the opportunity amid the risks.

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Tech, Media & Telcom Industry Specialist
U.S. Northeast Center of Excellence

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