BI insurance and nat cats: what you need to know

In the hours, weeks and months that follow a natural catastrophe, corporates and insurers can find themselves in a tango around what is – and isn’t – covered by their insurance policy.

Business interruption (BI) insurance often plays a major role in a company’s ability to rebuild following a nat cat, so risk and insurance managers must get their coverage right.

An Australian risk manager from a construction and engineering firm says traditional BI insurance is predicated on a loss or event occurring at the insured’s premises.

“Whilst this is still a key risk which should always be considered, the increasing reliance on a network of suppliers and organisations needs to be better addressed in standard insurance policies.

“Extensions for coverage for damage – caused by natural catastrophes – at suppliers’ premises should be explored by risk managers and their brokers.”

Stanley Cochrane, head of property Asia-Pacific at Swiss Re Corporate Solutions, says the challenge with BI in relation to natural catastrophes is around wide- area damage and accumulation.

“For example, in the event of a major earthquake or flood, we have thousands of policy owners affected, so we have thousands of BI covers triggered.

“Then, because the resolution of BI damage is based on the time it takes, there can be problems in terms of not having enough loss adjustors to investigate the damage.

“Then there is the shortage of critical suppliers and tradesmen to do the repairs in order get businesses back up and running, so there are many aggravating circumstances when you have nat cat events,” Cochrane explains.

Of course, insurance is just one aspect of an organisation’s resilience to nat cats.

The Australian construction risk manager says: “Aside from insurance alone, which takes time to quantify losses and negotiate settlement, risk managers should be proactive in their response plans to natural catastrophes.”

He says a business should have well-drilled crisis management and business continuity plans that give the organisation resiliency in operations. This may include having back-up ‘warm-locations’ for critical operations while ensuring support activities can be delivered remotely.

“Also, understanding the supply chain exposures and alternatives are key for a prudent risk manager. Knowing where goods and services are being supplied from and how they can be augmented or replaced quickly should give the risk manager confidence in their ability to respond to natural catastrophes.”

Australian RIMS board member Cathy Murray says it is important to have good relationships with your suppliers and service providers, so that in the event of a major loss, they might be more inclined to serve you first – something that could help mitigate the scale of the loss.

“Another point is to have a claims protocol established and, most importantly, written into the policy, which could include: preferred loss adjusting companies including the individual loss adjuster for both material damage and business interruption; ability for the insured to contact and appoint the loss adjuster out of hours, as not all claims personnel have mobile phones; and KPIs around response times and communicating with the insured,” she says.