Business Interruption: Looking Beyond the Physical

The high costs of natural catastrophes, acts of terrorism, and other disasters that can directly affect businesses are well known. In 2017, global insured losses from disaster events totalled a record USD 144 billion, according to Swiss Re. But organisations’ normal operations also can be disrupted as a result of indirect causes. The good news is that businesses can take steps — including purchasing insurance coverage — to address many of these risks.

Myriad Causes of Disruption

Beyond the direct effects of hurricanes, earthquakes, flooding, and terrorist attacks, business interruption can occur without physical damage to your property or contingent property. In the last decade alone, significant disruptions have resulted from:

  • Political and social unrest, including the Arab Spring movement.
  • Cyber-attacks and technology failures, including 2017’s WannaCry and notPetya attacks.
  • Pandemics and epidemics, including Ebola, Asian bird flu and Zika.
  • Supply chain interruptions, including supplier bankruptcies and port closures due to labour strikes.
  • Loss of business stemming from terrorist attacks and mass shootings in Paris, Las Vegas, Sydney and elsewhere.

Businesses can also be disrupted as a result of regulatory actions, raw materials shortages, product recalls or contamination events, and other factors. And there’s the potential that you’re indirectly affected as a result of natural disasters and other events causing damage to your suppliers’ suppliers.

Mapping Exposures

In order to properly manage these potential causes of disruption, you must first understand the range of indirect exposures that could affect you absent a traditional physical damage trigger, especially your supply or value chain ones. Among other steps, it’s critical that you engage in enterprise risk and supply chain mapping, risk quantification, and other exercises to help you:

  • Better understand your second- and third-tier suppliers, meaning those organisations that provide component parts or ingredients to the suppliers from whom you directly purchase.
  • Catalog critical non-physical assets that contribute to your organisation’s revenue, including technologies, relationships, knowledge, skills, and people.
  • Identify areas of potential improvement in resilience plans.
  • Spot potential insurance coverage gaps.

Consider Insurance

In addition to traditional insurance programs that can respond to direct physical damage, you should talk to your insurance advisor about options that address many other disruption types. These include:

  • Contingent business interruption coverage, which can protect against physical damage suffered by key suppliers.
  • Cyber insurance, which has evolved to cover not just data breaches but technology-driven business interruption.
  • Political risk and trade credit insurance, which can cover exposures related to government actions, instability, and insolvency.
  • Non-physical damage business interruption policies (NPDBI), which can provide coverage for loss of revenue without a physical damage trigger.
  • Parametric insurance solutions for pandemics and epidemics, which can be triggered by changes in public sentiment rather than direct physical losses.

With risk increasingly interconnected and interdependent in today’s rapidly changing world, your resiliency depends on how well you manage disruption, no matter its source. With the right mix of traditional and advanced risk mitigation and risk transfer strategies in place, you can overcome direct and indirect business interruption more effectively and better protect critical assets and your bottom line.

For the latest updates on Australia’s business interruption claims landscape, see:

COVID-19 Australian Business Interruption Test Case Update (May 2021)

COVID-19 Australian Business Interruption Test Case Ruling (Nov 2020)

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Luke Stratford

Head of Claims Solutions, Marsh Advisory, Property Risk

Marsh Pty Ltd (ABN 86 004 651 512, AFSL 238983) (“Marsh”) arrange this insurance and is not the insurer. The Discretionary Trust Arrangement is issued by the Trustee, JLT Group Services Pty Ltd (ABN 26 004 485 214, AFSL 417964) (“JGS”). JGS is part of the Marsh group of companies. Any advice in relation to the Discretionary Trust Arrangement is provided by JLT Risk Solutions Pty Ltd (ABN 69 009 098 864, AFSL 226827) which is a related entity of Marsh. The cover provided by the Discretionary Trust Arrangement is subject to the Trustee’s discretion and/or the relevant policy terms, conditions and exclusions. This website contains general information, does not take into account your individual objectives, financial situation or needs and may not suit your personal circumstances. For full details of the terms, conditions and limitations of the covers and before making any decision about whether to acquire a product, refer to the specific policy wordings and/or Product Disclosure Statements available from JLT Risk Solutions on request. Full information can be found in the JLT Risk Solutions Financial Services Guide.”