Opportunity for ILS to mitigate BI losses from natural catastrophes

by Artemis on January 22, 2016

The latest risk barometer from Allianz, its fifth in the series, reveals that organisations still perceive Business interruption (BI) and supply chain disruption as the main threat to operations, with 51% of respondents citing a fear that natural catastrophes will cause BI losses in 2016.

“Business interruption (incl. supply chain disruption) ranks as the top peril in the Allianz Risk Barometer for the fourth year in succession with 38% of responses rating this as one of the three most important risks for companies,” explains the report.

The report surveys more than 800 risk managers and insurance industry experts from over 40 countries, in an effort to understand how serious potential risks are perceived.

Artemis discussed the Allianz Risk Barometer that forecasted 2015 in January last year, where BI losses again ranked number one on the list of main threats to business operations, with 46% of respondents noting this.

And while the percentage has decreased by roughly 8%, Allianz notes this is likely owing to the fact that many “of the other top 10 global risks such as natural catastrophes, fire and explosion, cyber incidents and political risks can also have severe business interruption (BI) implications.”

“It’s not surprising that natural catastrophes top the causes of BI global businesses fear most as these events always lead to business interruption,” said Global Practice Group Leader, Property, AGCS Property Underwriting, Volker Muench.

Responses that cited natural catastrophe events as a stand-alone, and main threat to their business in 2016, actually declined compared with previous years to 24% (30% in 2015).

This is likely in part due to the fact that global insured losses from natural catastrophe events have been benign in recent years, with 2015 being the lowest nat cat loss year since 2009.

But despite catastrophe losses remaining benign, with global, annual re/insurance industry losses from natural catastrophe events in 2015 at just $35 billion, over half of survey responses still expressed concern that nat cat events will cause BI losses during 2016.

Hugh Burgess, Global Head of Mid-Corporate and Head of Corporate Lines North America, AGCS, provides some insight into the persistent and rising BI threats; “The primary driver behind increasing BI losses is that interconnectivity of risk is growing day-by-day, as technology, globalization and social change create a complex web of relationships and interdependencies with ‘just-in–time’ and ‘lean’ manufacturing now standard practices.”

Add to this the reality that business and asset values are increasing across the globe, particularly in places like Asia-Pacific, which are highly susceptible to natural catastrophe events, but also increasingly contribute to global production, the losses from BI events have the potential to be far-reaching and significantly costly.

“Major loss events such as the Japanese earthquake and Thailand floods in 2011 saw hundreds of businesses file such insurance claims, with the majority of these notifications coming from companies based outside of the affected areas,” notes the report.

BI topping the list of executive and analyst fears for the coming year, and for the fourth year running at that, is something that really does require attention and increased dedication to mitigate losses.

With the potential losses so vast, it’s unlikely that the insurance and reinsurance industry alone would be able to sufficiently address the issue, instead the entire risk transfer space, and in particular the insurance-linked securities (ILS) market can, and should play a key role in creating solutions.

Specifically, parametric cover in the forms of catastrophe bonds, and other reinsurance structures and the involvement of the broader ILS sector would be a solid, and viable way to begin the task of protecting businesses from the potential threats of BI.

The varied structures utilised in the reinsurance linked, insurance-linked securities and catastrophe bond space are highly suited and capable of protecting businesses against BI losses as a result of natural catastrophe events.

BI, natural disasters, fire and explosions, political risks, and increasingly cyber threats are all risks that represent a concern for businesses moving forward, and can be very difficult to quantify, and in some cases just as hard to provide adequate modelling for.

Meaning that parametric structured solutions could offer a responsive source of reliant financing that acts as a supplemental protection against the potential BI that results from catastrophe events.

Ample capacity continues to flood the global reinsurance marketplace, from traditional and alternative sources, and it would surely benefit all in the sector to deploy some of this capital into structures to mitigate the impacts of BI losses globally.

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