Contingent Business Interruption, insurable or not? Ask JLT

17th June 2011, London: A perennial theme from the JLT  8th Global Communications, Technology and Media (CTM) Forum held in Salzburg in May, was the extent to which certain exposures, including contingent business interruption (CBI), network security, and non-physical damage business interruption, can be properly and adequately insured with sustainable and material capacity.

The recent Japan earthquake and subsequent tsunami has once again brought the issue of contingent business interruption to the fore. Peter Hacker, Partner Global Head, CTM Practice, JLT Specialty Limited (JLT), said that for the first quarter, "it was clearly a cat capital event, although an earnings event for the broader lines of business. He asked whether underwriters underestimated this event, not on the property or business interruption side, but with regard to contingent business interruption (CBI)". He described CBI as one of the most under-estimated lines of business in the insurance industry.

He said that he believed that most underwriters do not know how to rate and properly reserve business interruption from a contingent point of view. "Not because of a lack of intellectual capacity, but because they don't have bespoke actuarial tools for this type of risk," he explained. "The Japan case showed that the supply chain has various tiers. The tiers that will be the triggers for the losses will not be first and second tiers, but third and fourth tiers. CBI losses are unknown and that is the scary thing, potentially an invite for disaster and dispute if not distinctively structured and stress-tested"

He pointed out that none of the insurers so far have been in a position to disclose and reveal the split of the losses, and he said he believed that many companies did not price the CBI separately.

"CBI is a catastrophe loss, and corporates are definitely concerned about it more than ever," he said. "But few insurers price it properly. It is often thrown in for a fraction of the required cost of capital. To properly price CBI cover you need a very good understanding of the supply chain, the crisis management, the sourcing of the company, and you need models that allow you to be flexible and to consider different cash flow dependencies, or dependencies between suppliers. In a most technical and proper way, one should quantify, structure and cover the CBI exposure within a stand-alone and bespoke policy. Whilst few companies have taken this approach, JLT's experience suggests that these were the ones who concluded and got their claims paid in a fast and less complicated way."

JLT's CTM Practice will hold an insurance and risk finance session on CBI and Non-physical damage BI in London on July 13th and provide an update on Japanese CBI losses. For more details and registration, please do contact Jennie Morgan.

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