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• The costliest business interruption events for large corporates in recent years have been dominated by natural catastrophe activity.
• Contingent business interruption (CBI) claims remain challenging as the impact of natural catastrophes, fires, and political violence can ripple through global supply chains.
• Environmental, social, and governance (ESG) concerns are increasingly featuring in property claims, with implications for the cost and extent of business interruption.
• What really makes a difference to the extent of business interruption is the advance preparation of a robust business continuity plan.

Extreme weather events, fires and explosions, geopolitical risks, ransomware attacks and the Covid-19 pandemic have all tested global supply chains in recent years. This is reflected in the results of the �ǿմ�ý Risk Barometer, an annual survey which asks businesses to nominate their top risk concerns for the year ahead. In 2023, cyber incidents and business interruption rank as the biggest company worries for the second year in succession.

Levels of interruption increased dramatically following Covid-19, as shortages and transportation delays exacerbated the business impact of natural catastrophes, fires, and machinery and equipment breakdowns, leading to shortages of materials and spare parts and longer times to complete repairs. However, many of these supply chain pressures have eased in 2023, according to Scott Inglis, Head of Global Practice Group for Property and Business Interruption Claims, �ǿմ�ý Commercial. “Business activity is now closer to normal than it was a year ago, and this is starting to filter through to business interruption claims activity,” says Inglis.

However, not all business interruption loss activity has eased. The top causes of business interruption claims remain consistent, with the most frequent and expensive damage arising from natural catastrophe and fire and explosion activity (see box), with natural catastrophe-driven loss activity rising, according to Sarah Versavaud, an Executive General Adjuster in the Chief Claims Office at �ǿմ�ý Commercial.

“When looking at the costliest business interruption events for large corporates over the past two years, the top 20 is dominated by natural catastrophe activity,” says Versavaud.

“Hailstorms in France, and heavy rain and flooding in Slovenia and Italy, as well as in Australia and Germany, have all caused large business interruption claims during this period.” As did damage caused by Hurricanes Ian, Fiona, and several winter storms in the US in 2022, and storms Dudley and Eunice in Europe.

The growing relevance of natural catastrophes to business interruption claims in recent years reflects the wider trend for higher losses from extreme weather events. Insured losses from natural catastrophes in the first half of 2023 were $43bn, well above the 10-year average, according to Munich Re [1]. Near-record severe thunderstorms, tornadoes and hailstorms in the US accounted for more than half of this six-month total. 

With a trend towards increased volatility in natural catastrophes, companies need to consider and plan for the impact from a broader range of extreme events, according to Versavaud: “Extreme weather events are less predictable and harder to prepare for than hurricanes and European winter storms, for example, which are forecast well in advance. Hailstorms, tornadoes, and flash floods are usually sudden localized events that can cause substantial amounts of property damage and business interruption in a short period of time.”

Hailstorms have resulted in several surprisingly large business interruption claims, Versavaud explains. “Many structures are not designed for extreme hail events, and we have seen extensive damage caused to commercial property roofs during recent hail events, with some large areas destroyed. We had one large corporate client that suffered roof damage from a hailstorm that caused major disruption to the business.

“What really makes a difference to the extent of business interruption is the advance preparation of a robust business continuity plan. And not just theoretical. Business continuity plans must be tested solutions that are updated regularly,” says Versavaud.

While not at their record level of two years ago, contingent business interruption (CBI) claims remain challenging as the impact of natural catastrophes, fires, and political violence can ripple through global supply chains in specialist concentrated industries like auto manufacturing and semiconductors.

2021 saw a record number of CBI and service interruption claims notified, as global supply chains were disrupted by storms, fires, and the pandemic. Several large CBI losses were generated by Winter Storm Uri in the US in February 2021, which caused cascading effects on companies and services reliant upon power, including water, transport, and medical services, with the so-called ‘Big Freeze’ particularly impacting the state of Texas. Insured losses have been estimated at more than US $15bn [2], with economic damage significantly higher.

Less than a month later, a fire at a semiconductor plant in Japan added to the growing global shortage of microprocessors, hitting production in the automotive and electronics industries. The automotive sector was again hit with supply chain problems from the conflict in Ukraine, with the country an important supplier of parts.

While the level of CBI claims of two years ago appears to have peaked, natural catastrophes continue to disrupt supply chains. The flooding in Slovenia and neighboring countries in August 2023 impacted many factories in the region, including several tier-one car part manufacturers. The resulting disruption to automotive supply chains reportedly [3] hit production at a number of car plants and parts manufacturers. 

“As well as affecting suppliers in the automotive industry, the floods in Slovenia impacted firms downstream in the supply chain, resulting in claims notifications. This was a recent event and claims are still developing,” says Versavaud.

“CBI claims are still among our top concerns. They are always challenging for insurers because it is never easy to get a clear picture of the whole exposure, and claims can be slow to develop.”

Businesses and their supply chains face considerable geopolitical risks with war in Ukraine and ongoing tensions between the US and China over Taiwan, and more recently with conflict in the Middle East. So far, these events have only had limited impact on supply chains and shipping routes but could become more relevant for business interruption going forward. “There are a lot of political headwinds out there right now,” says Inglis.

The Russia-Ukraine conflict has resulted in some claims, mostly property damage and consequential business interruption from retail businesses with exposures in the region, explains Versavaud. “It can be challenging to get a handle on such claims, where getting loss adjusters on the ground is sometimes not possible. We work closely with insured clients to get a better picture of the extent of the damage.”

Inflation, political instability, and climate change activism have also contributed to rising civil unrest in many parts of the world. According to analyst Verisk Maplecroft [4], political risk at the start of 2023 was at a five-year high, with some 100 countries considered at high or extreme risk of civil unrest. According to Versavaud, a wave of protests in France this summer following the fatal shooting of teenager Nahel Merzouk resulted in significant business interruption claims in retail business from riot cover under property insurance policies.

Environmental, social, and governance (ESG) concerns are increasingly featuring in property claims, with implications for the cost and extent of business interruption. Versavaud says large corporate clients are increasingly concerned about their environmental impact when rebuilding damaged property.

“It is encouraging that more companies are concerned about ESG in the context of claims and are interested in alternative solutions. However, sustainable options can also have implications for business interruption and insurance coverage. For example, sustainable options – such as shipping spare parts via a lower carbon intensive form of transport, rather than air freight – can result in a longer period of business interruption or lead to extra expenses,” says Versavaud.

Commercial property insurance traditionally pays out on a like-for-like replacement basis, although ‘green’ reinstatement clauses are now being included in some policies that give insureds more flexibility around more sustainable options.

“We are seeing more requests from insureds to accommodate ESG requirements in claims, yet this is not always well covered by standard property policy wordings. We are introducing ‘green’ clauses that enable insureds to integrate sustainable characteristics into a rebuild, but these are not widespread, and do not always cover other areas of ESG such as expediting expenses. The industry will need to more widely adapt property insurance products and underwriting to accommodate this,” says Versavaud.

Fire and natural catastrophes are also the most expensive causes of business interruption claims for mid-sized corporates. However, the loss experience can be quite different to that of large corporates, whose supply chains are, typically, more international, and therefore can be more exposed to any disruptive event in today’s increasingly interconnected global economy, such as production being halted in the automotive or electronics industries, explains Inglis.

“We still see loss of earnings business interruption claims for mid-corps, but the risks are different. Due to the turnovers involved, large corps must be more mindful of CBI exposures. Although, of course, every company, regardless of size, should be aware of their CBI risks.”