Business Interruption covers lost income and added expenses when an owned property is damaged by a covered peril. CBI takes that protection a step further, insuring the policyholder for income loss resulting from covered-peril damage to a dependent property, such as a supplier's manufacturing plant or a key retailer's store. 

Of the estimated $50 billion in losses from the events in Japan and Thailand, a significant portion was related to business-income claims—perhaps as much as $13 billion of the $15 billion of insured losses in Thailand. However, it's difficult to estimate exactly the amount of CBI loss. 

“Unfortunately, the data for events that occur abroad are not collected in a way that would allow this distinction to be readily made,” says Hartwig, adding that insured losses tell only part of the story: “The uninsured losses were much larger, illustrating the need for coverage.” 

In late 2012, Property insurers were rocked by Hurricane Sandy. But the superstorm hasn't translated into a flood of CBI claims despite massive direct damage claims—at least yet. “The areas impacted by Sandy aren't big manufacturing areas,” says Jeffrey Beauman, vice president of All Risk underwriting for FM Global. “People aren't outsourcing to that part of the world, so you don't have a big concentration of suppliers like you had in Thailand.”

However, total CBI losses from Sandy will take time to be fully calculated. “It's still early,” cautions Stephen Clarke, assistant vice president with ISO's Commercial Multi-Line Division. “Sandy did impact areas where businesses had a reliance on infrastructure and shipping. I don't think we've seen the [CBI] losses run through.”

ONCE BITTEN, TWICE SHY

Underwriters—while still willing to offer the coverage—have grown increasingly cautious when it comes to CBI, especially with regard to the limits they are making available.

“Before [2011], confirmation that you had a business-continuation plan in effect used to be enough [to secure CBI coverage],” says Dave Finnis, national Property practice leader for Willis North America. “Today, [underwriters] want to see a copy of the continuation plan. They want a list of key suppliers and customers, the percentage [of business] each represents, and information about them.”

Because CBI coverage is often wrapped into a Property package, it's difficult to determine the exact impact of recent years' events on pricing across the industry. However, brokers report that pricing has firmed, particularly on the hardest-hit manufacturing segments: auto and high-tech. Buyers in those sectors are also having difficulty simply maintaining existing CBI limits (see Ford sidebar). 

“It all depends on the client and premium, but the limits have come way down [for some companies],” says Rick Miller, chief broking officer at Aon Risk Solutions' U.S. Property practice.

“I would say for 75 percent of the insureds out there, we can match up a CBI limit with their need,” says Ellis. “But there are about a quarter of accounts that have such enormous exposures, or can't provide information to the satisfaction of the underwriter, that they can't get the limit they need.” Unless a quota-share arrangement can be placed, those clients face self-insurance in excess of available limits. 

SECOND-TIER, UNNAMED EXPOSURES

CBI coverage is stratified into tiers. First-tier coverage applies to an insured's direct suppliers and partners. 

Brokers report that first-tier sublimits of $75 million to $100 million are common. “Above that [amount], underwriters really want to know 'who and why,'” says Marsh's Ellis. “They want those suppliers named and they will do a lot more underwriting.” 

Second-tier coverage is also available—for when suppliers to an insured's suppliers suffer damage that leads to losses for the policyholder. While historically such second-tier coverage was custom crafted at a buyer's request, it is set to become more standardized. In early 2012, ISO revamped its Dependent Property Coverage to include the second tier. The form has been approved in most states and is expected to be available for use by mid-year. 

But brokers claim that many Property insurers have severely curtailed multi-tier coverage. Willis reports that for some of its clients, the market is excluding it altogether. 

“Most carriers want to focus on tier 1 and tier 1 only,” adds Ellis. “We're also seeing an exclusion of some of the perils covered on tier 2, where carriers will offer contingent BI, but not for earthquake and flood.”

One of the big challenges for insurers with CBI in general and multi-tier exposure in particular is properly pricing these complex risks. Underwriters and actuaries are working to get a better handle on multi-tier rates, with various sources working to develop multi-tier CBI models, including consulting firm PwC. 

“[Our model] is in the beginning stages. We liken it to the state of nat-cat modeling following Hurricane Andrew,” says Joe Calandro, managing director in PwC's Insurance Advisory Practice. “Now we have to populate the model and use it.”

Another big obstacle is that many insureds are either unable or unwilling to actually name all the parties in their supply chains, but endorsements are available—at the right price—that will cover unnamed suppliers or customers. 

According to Beauman, FM Global “routinely” provides $25 million of coverage for unspecified risks, and it is not uncommon for the company to write limits of $50 to $100 million. 

SEEKING SUPPLY-CHAIN MANAGEMENT  

From a risk-management perspective, one of the lessons coming out of the catastrophic events of recent years is the need for a better understanding of supply-chain management. 

“There is a lack of understanding of the global supply chain,” says Erik Nikodem, Property product-line executive in the U.S. and Canada for AIG. “Clients think they're diversified because they have suppliers from multiple countries around the world, but in reality they are still sourcing unique components [from one company]. So when something happens to one of those suppliers, it shuts the whole system down.”

AIG has stepped up its efforts to help customers understand global risks and develop contingency plans, including hiring more nat-cat engineers and supply-chain experts. Although risk managers might like to hear that there is a new and easy method for managing supply-chain risk, there is no shortcut for due diligence.

“There are too many risk managers who do their job from within the confines of the office,” says William Austin, principal of Austin & Stanovich Risk Managers LLC. “What they've learned through losses is you need to get into the nuts and bolts and bowels of your organization. You need to get deep into the procurement process, and as you struggle to identify your [probable maximum loss] with any one of those suppliers, you can work with your existing Property insurer to help you understand how you can structure your insurance to provide increased operational-expense coverage.” 

“The information you need [to deliver to insurers] falls into two categories: physical and financial,” says Ellis. “Physical from the standpoint of exactly who is supplying componentry, where they are, and whether information is available on those plants—which key suppliers shouldn't have an issue providing. On the financial side, you need to know what is the impact of losing that supplier, how can those supplies be alternatively sourced, and in what time frame.”