A manufacturing and hospitality hub that’s high-value, export-driven and supply chain-centred – it’s no surprise APAC is so focused on business interruption. But how are risk managers handling concerns when coverage can be hard to secure?
In the wake of the largest business interruption event of the modern era – the COVID-19 pandemic – all signs suggest the thorny area of disrupted or halted operations remains at the top of worry-lists for APAC businesses.
BI was named as the top risk in Asia Pacific, surpassing cyber incidents, which had ranked top for the previous three years, in January’s Allianz Risk Barometer 2023.
This echoed findings from Aon’s 2021 Global Risk Management Survey, which also had BI edging out cyber attacks as the number one risk for APAC firms.
“Clearly it is a risk that is front of mind for leadership and management across APAC”
In fact, BI has been a permanent fixture as a top ten risk in the survey, which is now into its third decade.
Bruce Gordon, global risk consulting leader, Asia Pacific, Commercial Risk Solutions, at Aon, says “It is remarkable the consistency with which APAC respondents have ranked BI higher than [most] other regions around the world – clearly it is a risk that is front of mind for leadership and management across APAC.”
So why are APAC businesses so focused on BI?
Supply chain reliance
While BI is an international issue, it narrowly came second to cyber incidents in the global view of key risks in Allianz’s Risk Barometer 2023.
However, in Asia Pacific, the barometer found that BI ranks in the top three risks in all countries and is the number one risk for major regional players Singapore and South Korea.
The common features of the Singapore and South Korea manufacturing sectors are that they are both high-value, very export-focused and dependent on external demand.
“We see companies in South Korea focusing more on BI as compared to other key risks such as cyber or natural catastrophes”
Jude Cross, regional manager, Allianz Risk Consulting Asia-Pacific at Allianz Global Corporate & Specialty (AGCS), explains: “Global supply chains and distribution are key to their success and hence these companies are very sensitive to supply chain disruptions, such as availability, delays or volatility in material or component prices.”
Hailee Jang, head of property at Allianz Global Corporate & Specialty (AGCS) South Korea, adds: “We see companies in South Korea focusing more on BI as compared to other key risks such as cyber or natural catastrophes, as BI cover is considered an essential – sometimes even mandatory – first layer of protection.
This is because the industry sector is dominated by heavy industries including automobile, steel, energy, chemical, EV battery and technology, which are more exposed to BI risks.”
A big concern of businesses post-COVID is business interruption caused by events where physical loss or damage has not occurred. Another concern is obtaining enough BI cover following a cyber attack, as well as interruption due to a disruption with an insured’s customers or suppliers.
“For BI caused by physical loss or damage, the cover can normally be found in the marketplace, but is it enough?”
AXA XL’s head of property & casualty, marine, and aerospace-Asia, Todd Wilhelm, says: “Currently the market has not responded to these concerns due to the potential systemic risk across an insurer’s portfolio.
”A similar concern is shared within the casualty space via lack of interest in insuring pure financial loss.
“For BI caused by physical loss or damage, the cover can normally be found in the marketplace, but is it enough? That’s the challenge insureds have today.”
For almost every industry, an interruption to the business, be it manufacturing or services, is damaging or potentially fatal to the survival of the enterprise.
ASIAN HOSPITALITY HARD HIT
Many parts of the region rely on hospitality. And hospitality relies on BI to survive when forced to close. But procuring coverage can be a challenge, especially for start-ups.
WTW’s head of claims Asia, corporate risk & broking, Neil Thomas, says: “The last few years have seen huge disruptions in the world on multiple fronts, the pandemic being a very good example.
“Prior to that, many policies, particularly in the hospitality sector, such as hotels and related businesses, would have been extended to cover BI resulting from, for example, closure of the premises due to an outbreak of an infectious disease, either on the premises or within a radius of the premises.”
Someone with direct experience of the importance of BI in the hospitality industry is Sharon Xu, director for Asia Pacific Insurance at Marriott Risk Management.
“The hospitality industry is unique,” she says. “Marriott is actually an asset-light company. We do not own most of our assets as we operate hotels on the owners’ behalf. As such, the real exposure for us is in management fees.”
She adds that procuring a good amount of insurance remains a priority, but this can be difficult for start-ups as their exposure levels will not have stabilised in their first three years of trading, making it difficult to price coverage.
“It is important for us to evaluate the triggers of big claims,” she explained. ”This is often around accidents, such as fire and explosions, and then nat cats. We now also have to consider the environment as an element that has a large impact on operations.”
A vital global, cog
Labelled as ’Factory Asia’ by the Asian Development Bank, APAC’s location as a central manufacturing hub between both Europe and the US makes it an essential link in the global supply chain.
“In particular, South Korea, Japan and China play an important role in the global upstream supply chain,” says Ryan Du, senior team leader, Allianz Risk Consulting – Property, AGCS Asia Pacific.
“For example, in the pharmaceutical industry, China and India are major producers of active pharmaceutical ingredients (API) and any BI at these API plants will cause major disruption in other parts of the world, especially in the US or Europe.”
”South Korea, Japan and China play an important role in the global upstream supply chain”
Other APAC-specific examples include the electric vehicles (EV) sector, where China, South Korea and Japan account for a sizable share of global lithium battery production, and the electronics sector where East Asian and Southeast Asian economies account for over 60% of global production exports of electronic parts.
Going Down Under, Australia and New Zealand remain especially vulnerable to BI-related issues, says Gillian Davidson, partner, commercial insurance, at Sparke Helmore Lawyers in Sydney.
“There have been catastrophic losses and associated impacts on businesses in Australia in respect of floods and bushfires, and in New Zealand in respect of earthquakes.”
“It remains to be seen how BI cover will interact with these ongoing and unpredictable incidents. The other side of the coin is the affordability of such cover and how that may be playing out in the minds of insureds.”
“Long before COVID, the conflict in Ukraine and so on made BI and supply chain risk ’fashionable’, APAC business leaders had their risk radars tuned in to both”
Aon’s Gordon says that risk is fungible and fluid, and the last three years has taught the broader community that simply sticking a label on a risk does not mean it will manifest in the manner anticipated.
“The longevity of BI risk perceptions in APAC is therefore a really important one. Long before COVID, the conflict in Ukraine and so on made BI and supply chain risk ’fashionable’, APAC business leaders had their risk radars tuned in to both.”
Gordon continues: “Bitter experiences like a number of massive and tragic natural catastrophe events in the APAC region have offered object lessons on the fragility and vulnerability of energy supply chains, as well as on insurance responses to ’business interruption’ in its literal/non-insurance sense.”
Business interruption solutions
While there is high awareness around BI for businesses, the ability to manage the area remains challenging. And COVID-19 has had a significant impact on how companies plan for BI.
AGCS’s Cross explains: “We are seeing the large conglomerates in Asia Pacific take a more proactive approach to BI, and the thinking around supply chain management has shifted from cost and efficiency towards resilience and reliability.
“While companies all approach BI planning differently, there are some common solutions. First, develop alternatives and/or multiple suppliers. Here we have also seen companies starting to build up their inventory of raw materials and abandon the just-in-time approach.”
Another popular risk management strategy is broadening geographical diversification of supplier networks in response to geopolitical trends, with more regionalisation of supply chains.
For instance, the ’C +1’ model is increasingly common, where companies invest in another country, plus China, to diversify their business and better manage risks.
”We have also seen companies starting to build up their inventory of raw materials and abandon the just-in-time approach”
Cross says: “This is the case for Chinese manufacturers, too, and countries such as Vietnam, Thailand, Malaysia and Indonesia are favourable investment destinations in Asia Pacific.
When approaching BI, companies also need to be mindful about the increasing complexities in the geopolitical environment, such as US-China relations, which can have extensive and profound effects on supply chains.”
To cope with the growing complexity, forward-thinking companies are initiating or improving business continuity management. This means placing more emphasis on stress-testing business continuity plans by conducting exercises based on different scenarios.
WTW’s Thomas says: “Large and well risk-managed businesses in Asia are looking carefully at the spectrum of risks their business faces and considering each risk in turn.”
Of course, many businesses are still recovering from the massive supply chains and system shock that happened during the pandemic.
“We may also see a trend of businesses looking to the insurance market for alternative insurance solutions such as parametric products in respect of extreme weather events”
This led to shortages of raw materials and components, shipping delays, port blockages, even an under-supply of truck drivers.
“Supply chains could not adjust to huge fluctuations in consumer demand. This systemic challenge left contingency plans inoperable and has prompted businesses to rebuild their supply chains from the ground up.
”The experience has created a demand-bulge for relevant BI coverage,” concludes Thomas.
In Australia, many businesses have invested in data tools to understand risks and increase transparency around supply chains, to create inventories, redundancies and contingency plans for business continuity.
“We may also see a trend of businesses looking to the insurance market for alternative insurance solutions such as parametric products in respect of extreme weather events,” says Davidson.
With BI toppling cyber as the major risk focus for APAC businesses and the impact of COVID still fresh in minds, the area is due a sustained period as the top risk across the supply chain-heavy, climate-sensitive region.
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