Scope for re/insurance, cat bonds & ILS to tackle key business risks

by Artemis on January 20, 2015

As 2015 gets underway organisations continue to view business interruption (BI) and supply chain risk as the main threat to operations, with the impact of natural catastrophes and fire/explosion risks following, according to a recent Allianz report.

Germany-based international insurance and reinsurance provider Allianz, recently published its fourth annual Allianz Risk Barometer 2015, and the results highlight potential growth and expansion opportunities for the reinsurance linked investment, catastrophe bond and insurance-linked securities (ILS) sector.

The study surveyed more than 500 insurance experts and risk managers from across 47 countries, in order to ascertain how serious potential risks are perceived.

46% of responses ranked business interruption (BI) and supply chain risks as a top concern going into 2015, while the threat of natural catastrophes and fire or explosion received 30% and 27% of votes, respectively.

It’s unsurprising that for the third year running BI tops the list of concerns for companies throughout the Europe, Middle East and Africa, Americas and Asia Pacific regions, as “companies can sometimes take years to fully recover from the knock-on effect of a disturbance,” explains Allianz.

Similarly, that natural catastrophes and fire or explosion risks are firms’ second and third most serious perceived threats in 2015, also fails to shock. According to the study these two perils are the cause of BI that businesses fear the most, highlighting the extremely damaging knock-on effect that can take place.

“The lessons of the Bangkok floods and Japan tsunami have resulted in growing awareness from businesses of the knock-on effects from BI and supply chain management. Companies now have a greater understanding of the need to monitor risk aggregations, not just geographically, but also in business interruption exposures,” explained Allianz Global Corporate & Specialty (AGCS), Chief Executive Officer (CEO), Asia Mark Mitchell.

Such risks could provide an opportunity for catastrophe bonds, ILS and structured reinsurance solutions to be used. Parametric cover in the forms of cat bonds, or other reinsurance structures and the involvement of the wider ILS sector would be an excellent way to start the task of protecting businesses from the potential threats of BI.

As perils like terror risks, natural disasters, fire and explosions’ resulting BI impact on a company often outweighs the actual incident itself, protection with individual, tailored and specific parametric triggers could provide a much-needed back bone for institutions globally.

These risks are hard to quantify and sometimes even harder to model, meaning that parametrics could provide a tailored, highly responsive, source of contingent financing that acts as a supplemental protection against the potential BI that results from catastrophe events.

As the business world and economies in general continues to see greater interconnectivity the direct impact of a natural disaster, terror threat, or similar, on one company, can greatly affect it or another, as supply chains in a globalized market become disrupted and detached.

A similar threat is posed by the expanding severity and frequency of cyber threats, which was one of the highest movers up the table of concerns in 2015 for businesses, coming in 5th with 17% of votes. Respondents consider cyber as the top emerging risk over the next five years, and as firms become increasingly digitalised, again a BI threat can be seen.

The fact that for three consecutive years BI and supply chain risks, aggravated more by natural disasters and other perils, is still the major concern for businesses in 2015, is something that shouldn’t be taken lightly. This really is an opportunity that the ILS market could take in hand, having already established the products and structures necessary to effect coverage.

A source of financing that is contingent of an event occurring at a  specified magnitude or level of impact would be extremely welcome by multinationals most exposed to BI and supply chain disruption. However a change of mind-set may be required to accept such products or solutions and of course they need to be sold in the right way and to the right people. But the opportunity is clear as many of these risks are under-insured, not insured at all or thought to be protected, although mostly insufficiently.

As the reinsurance market continues to be flooded by both traditional and alternative or capital markets capacity, along with heightened competition, it would surely benefit all parties within the space to put some of this capital to work to mitigate the impact BI and associated risks have on firms’ balance sheets and portfolios.

A number of brokers in the capital markets arena have cited the use of parametric triggers as suitable for corporations exposed to BI from natural catastrophes. There is little to no basis risk here, if treated as a supplemental and highly responsive piece of a holistic insurance and risk management program.

That should make them attractive to buyers, if they are given the chance to appreciate them as the contingent business interruption protection they can be structured to provide, while for investors or traditional markets providing the necessary capacity would be welcomed.

You can download the Allianz Risk Barometer via its website here.

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