While insurers are still offering substantial CBI limits to cover losses stemming from supply-chain interruption, industry executives say that high levels of coverage are no longer rubber-stamped, with carriers—still smarting from last year’s experience—now being much more cautious.

As a result, insurance buyers with only limited information about their supply chains and with weak contingency plans can purchase only small sublimits of CBI coverage, say industry executives. On the other hand, policyholders that have both solid information about their supply chains and a strong business-continuation plan can find ample limits.

“It’s really a tale of two markets,” says Duncan Ellis, a managing director and the property practice leader for Marsh Inc. Those companies willing—or able—to share sensitive info on their supply chains are rewarded with minimal rate increases; others have to pay up.

CAPACITY AVAILABLE—IN RIGHT CONTEXT

Despite BI and CBI losses wrought by last year’s catastrophes, insurers are not necessarily cutting capacity for these exposures.

Some insurers will offer CBI sublimits ranging from a few million dollars to $5 million or $10 million. But other insurers offer far greater limits.

The discrepancy in the amount of limits that insurers are willing to provide is determined largely by the size of the risk and how much data the policyholder can provide about its exposures.

A huge manufacturer with production facilities and suppliers around the globe can obtain hundreds of millions of dollars in BI or CBI coverage if the policyholder can justify that much coverage and can provide sufficient data on all of those facilities—including where its suppliers’ production facilities are located. (That does not mean where each supplier’s headquarters office is based, but rather where its production facilities operate. A supplier’s HQ might be located somewhere fairly safe from wind, earthquake and flood risks, but its production facilities could be in the heart of such catastrophe zones.)

There are a handful of big insurers that individually can write hundreds of millions of dollars of BI and CBI coverage for a policyholder, and some of those carriers have provided that much capacity to a single risk. Each of those insurers could provide $400 million of limits individually, says Randy Nornes, Chicago-based executive vice president of Aon Risk Solutions.

However, in most cases, policyholders that want such extensive limits would have to build them through a quota-share program or through multiple layers of primary and excess coverage. Nornes and Marsh’s Ellis say policyholders could build programs that provide $500 million or possibly $600 million of limits.

Conversely, smaller risks and those companies that cannot provide adequate data to their insurers will not be able to line up such huge limits: They might be able to secure only a few million dollars of coverage.

“Insurers are willing to offer [CBI coverage], but they really want to see the underwriting information for it,” says David Finnis, an Atlanta-based executive vice president and the national property practice leader at Willis North America. “That’s something that was really lacking in recent years.”

Volker Muench, head of corporate property underwriting at Allianz Global Corporate & Specialty, adds, “If there is not enough information [from the policyholder], then we are cutting back capacity.”

Linda Conrad, director of strategic business risk management at Zurich Insurance Co., says that desire for more detailed info on supply chains has been driven by reinsurers, which will hike rates and shrink capacity if insurers do not provide that data.

Jim Rubel, a New York-based executive vice president and the head of the global property practice at broker Lockton Cos., points to the influence of insurer-ratings agencies, which he says have grown “more leery” of insurers’ solvency as a function of their accumulation of risk from a single event.

Given the previously unimaginable losses sustained in Japan and Thailand last year, Rubel adds, “insurers are also concerned about unmodeled accumulation of risks.”

One insurer, however, has not changed its underwriting practices in the wake of 2011’s catastrophes: Factory Mutual Insurance Co., which does business as FM Global, already had been seeking the kind of detailed BI and CBI information that many other insurers are only now demanding up front, says Gary Love, the company’s vice president and staff operations underwriting manager.

DIFFICULTIES DELIVERING DESIRED DATA

For those risk managers having to provide insurers far more information on suppliers and their exposures, the problem is that “sometimes it’s tough to get the information,” says Nornes.

Corporate supply-chain managers typically have been more focused on controlling cost rather than risk, he explains, so many do not have on file the breadth of information on suppliers that insurers want.

Thus, says Nornes, “It’s an orphan risk—no one really owns the exposure.”

In some cases, risk managers do not have authority to release the information to insurers because their organizations consider it proprietary, says Willis’ Finnis. In those cases, he adds, risk managers must approach senior executives for the information—and typically provide it subject to a confidentiality agreement from the insurer.

But investing the effort to do a deep-dive analysis of a company’s supply chain can pay off in more ways than just being able to give insurers the data they require.

Such an undertaking can be critical to a company’s business continuity, says Gary Lynch, managing director and global supply chain leader of the risk management practice at Marsh Risk Consulting.

Lynch says one client just a few years ago could not quickly determine whether a catastrophic event would disrupt its supply chain. But after going through an evaluation process, it was able to make that assessment within minutes in May of this year when earthquakes rattled Italy, where one of its major suppliers is located.

Marsh aided the client in developing an in-depth assessment of all the steps required to bring its product to market.

Such an evaluation involves more than just determining which supplier’s factory produces which parts, Lynch notes. It also includes investigating factors such as from which ports parts are shipped.

The importance of each link in the supply chain should then be prioritized to understand what the company’s first measures should be and how much time it has before its supply chain would be compromised by an event.

BI LOSSES LEAD TO HIGHER PROPERTY RATES

In this age of global supply chains, greater risk is giving way to bigger rate.

Since insurers typically cover both Business Interruption and CBI risks within property policies written for large accounts, the price of insuring those business-loss exposures is not a separate rate; rather, it’s assumed into property premiums.

Property policies for midsize companies typically include Business Interruption coverage, but may not cover CBI exposures or provide only small sublimits of coverage.

Property rates had been softening since 2007, with only an occasional spike following a major loss event, such as Hurricane Ike in September 2008, notes Marsh’s Ellis. He estimates that rates have dipped by high-single-digit to low-double-digit percentages annually through 2010 and were 30-40 percent lower in 2011 than in 2007.

But in 2012, brokers estimate that rates this year are 5-12 percent higher than last year, although accounts exposed to catastrophes and those that have poor loss histories could face 30-50 percent increases.

Property policyholders feeling the least rate pressure are those with good loss experience, limited or no catastrophe exposure, and significant data about their Business Interruption and CBI exposures.

Midsize companies face the same rate environment as their large brethren—but a single carrier, not multiple insurers, typically would write their coverage, says Rubel at Lockton. That means, unlike bigger companies, smaller buyers do not have an accumulation of CBI sublimits from multiple insurers to tap, he notes.

Muench at Allianz says even a risk with a checkered loss history could negotiate favorable rates if it provides insurers ample information and has taken measures designed to prevent the losses it already has sustained: “It’s really account-by-account driven.”