15 January 2014 Insurance

Hidden disaster costs big worry for insurers

While unprecedented weather patterns are providing complex challenges for insurers, the industry’s biggest concern is actually some of the hidden knock-on effects of such events which are often little understood from a risk management perspective.

Business interruption (BI) and supply chain risks caused by flooding and extreme weather patterns are the specifically big concerns for the industry, according to a report by insurer Allianz.

The insurer’s 2014 annual Risk Barometer report surveyed over 400 corporate insurance experts from 33 countries. It found that the impact of natural catastrophes is also increasing the complexity of business risks, especially for large corporates with international exposures.

According to Axel Theis, CEO of Allianz Global Corporate & Specialty SE (AGCS), 2014 will be a critical year for companies when it comes to dealing with the threat posed by a number of emerging perils. “Identifying the impact of interconnectivity between different risks is a top priority for risk managers,” he said. “Today’s business continuity plans must prepare for an increasing range of risk scenarios which need to reflect the sometimes hidden knock-on effects. For example, a natural catastrophe can result in BI, IT-systems failure and power blackouts, among other perils.”

AGCS risk consulting regional manager, Dennis Murphy, said: “The extreme storms and flooding over the past few weeks are unprecedented and something I have not seen in the 20 years I have been in the industry. The ramifications are being felt beyond those physically impacted to those that rely on suppliers for parts or services.

“Events like these, and the polar vortex in the US and Canada, highlight two key points. Firstly businesses need to have robust business continuity plans designed to react to extreme conditions. Secondly companies need to have a strong grasp of their supply chain and have contingence solutions ready. The Allianz Risk Barometer survey results support this with 43 percent of respondents citing business interruption/supply chain as a primary concern.”

AGCS estimates that BI and supply chain-related losses typically account for 50 percent to 70 percent of insured property catastrophe losses, as much as $26 billion a year.

Featuring in the top five risks globally and top three in the UK is market stagnation/decline which has risen as a concern, previously being placed at ninth in the UK.

Carsten Scheffel, London-based CEO of AGCS UK, said: “From a pure insurance perspective, increased trading from a growing economy may mean larger inventories and greater assets at risk – and greater liabilities. It’s essential that businesses match their coverage to their risks as they grow.

“Economic upturn can mean M&A opportunities, and this can bring a whole new set of challenges. One of the most important is to create a unified risk management strategy across the new company and it’s not unreasonable to budget up to 10 percent over and above the pure acquisition costs to bring risk management to the right level.”

Emerging risks such as cyber threats are the biggest mover in this year’s Risk Barometer climbing up to rank eight from fifteen, while reputation management moved up to six from ten. These rated highest among businesses in service industries.

Amid rising organised cyber criminality, IT security is not enough. “Even with the best risk management framework, companies will never be 100 percent safe from glitches in their IT- infrastructure, failure of internal processes or external cyber-attacks. Each business needs to decide whether it prefers to carry that risk itself or transfer it by taking out a cyber insurance policy,” said Nigel Pearson, global head of Fidelity (including cyber) at AGCS.

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