Business Interruption Insurance Research Articles

Exploring the link between financial literacy and business interruption insurance: evidence from Italian micro-enterprises

AbstractThis article examines the relationship between financial literacy and business interruption (BI) insurance among Italian entrepreneurs. Following an increase in unexpected shocks, such as COVID-19 and geopolitical conflicts, a high level of BI risk is expected to persist, especially among small firms, which play a key role in the Italian economy. Using a Bank of Italy 2021 survey of 1998 non-financial firms with fewer than 10 employees, we show a significant positive association between the level of the entrepreneur’s financial literacy and the purchase of BI insurance. Our results highlight the key role of financial literacy in shaping risk management strategies and are robust to different model specifications, also addressing endogeneity concerns.

Component-based estimation of recovery time and time-related expenses after hurricane events

Introduction: Due to hurricane damage, building residents or businesses must be relocated during the recovery time, which leads to time-related expenses (TRE), also known as additional living expenses (ALE) or extra expense coverage (EEC) or business interruption insurance (BIC). TRE are difficult to predict since they depend on the damage and time necessary to repair the building as well as on external factors such as damaged utilities and the availability of labor and materials, among other issues.Methods: In this study, we developed a new TRE hurricane vulnerability model for mid/high-rise buildings. The model combines estimates of repair time (Trepair), delay time (Tdelay), and utilities downtime (Tdown) to predict overall recovery time (Treco).Results: The outputs of the model include 1) TRE vulnerability matrices, which yield probabilities of Trepair, Tdelay, Tdown, Treco, and TRE conditional on either maximum 3-s wind speed or overall building damage ratio; 2) the corresponding vulnerability curves, which yield the mean values as a function wind speed or damage ratio.Discussion: Insurers can use these results to project TRE, and emergency managers and urban planners can use the recovery times to characterize the resilience of coastal communities. This paper summarizes the methodology and illustrates its implementation and results. The selected results of Treco are compared with the recovery times provided using the HAZUS-MH Hurricane Model.

Business Interruption Insurance and COVID-19 in Australia

Business Interruption Insurance and COVID-19 in Australia

COVID-19: Business Interruption Insurance Claims: ‘A Double Jeopardy in the History of Mankind’

The purpose of this paper is to critically examine the judgments of the UK Supreme Court and the Federal Court of Australia on COVID-19 Business Interruption Insurance claims (BII). The UK Supreme Court found that insurers were liable for losses proximately caused by COVID-19. The Federal Court of Australia, on the other hand, found that business interruption losses were only covered if the BII policy incorporated ‘disease clause’ extensions. Since no physical loss is required for the ‘disease clause’ to operate, it is a matter of mere common sense. COVID-19, access, disease, prevention, causation, and trigger

Covering the financial risks of companies in the HoReCa field through insurance contracts and methods of alternative dispute resolution (ADR) for these contracts

The issue of financial risks of companies in the HoReCa field has acquired a new dimension with the situation of the COVID-19 pandemic, as they are forced to reevaluate their contractual risk allocation and financial loss coverage mechanisms. This situation generated a reassessment of the importance of insurance contracts, especially business interruption insurance. The interpretation of clauses in existing contracts that did not expressly refer to the pandemic situation increased the number of disputes generated by this lack of clarity. The present article represents a general presentation of the risks of the activity in the HoReCa field, of the insurance contracts specific to this field, as a way of addressing these risks. The article also refers to the methods of out-of-court settlement of disputes in the field of HoReCa insurance, respectively to the arbitration organised in this field, as well as to the alternative dispute resolution methods (ADR) used in Romania and at the level of the European Union.

Distant relations: business interruption insurance and business closure insurance.

This article looks at COVID-19-related issues in the context of commercial and industrial insurance cover taken out against the risk of infectious disease. The focus is on government action taken and regulation passed in the U.K. and in Germany, respectively, to redress the pandemic. The insurance market offers business interruption (BI) cover (in the U.K. and internationally) as well as business closure (BC) cover (mainly in Germany) to protect against the impact of infectious diseases on commercial enterprises. The insurance law issues that came to be analysed in relation to the COVID-19 pandemic formed the subject matter of widespread litigation in both countries. Judgements were rendered in the Supreme Court in the U.K. (the FCA test case) and in the German Federal Supreme Court and now provide some authoritative legal guidance. However, the outcome of these court battles was totally different, insofar as policyholders were concerned. This article, next to offering some historical legal analysis of BI and BC insurance cover, attempts to explain why policyholders won in court in the U.K. and lost the legal argument in Germany and seeks to reconcile these diverse outcomes. The article ends with a brief outlook on how the pertinent COVID-19 insurance law issues might come to be revisited, both by the markets and in the legal community, in the context of reinsurance coverage.

Business interruption insurance as a means of spreading pandemic-related losses.

This article discusses business interruption insurance as a measure of spreading risk in the context of the COVID-19 pandemic. In drawing a picture of how business interruption insurance has been handled and governed to date by courts and regulators in the U.K., Australia and the U.S., the contribution is specifically concerned with providing tentative answers to two questions: first, whether the design and interpretation of business interruption policies have made it a suitable means of spreading pandemic risks for policyholders; and second, how methods of resolving disputes over pandemic-related losses could improve the position of policyholders in relation to the insurance sector.

Catastrophe insurance and flexible planning for supply chain disruption management: a stochastic simulation case study

Catastrophe-related insurance (e.g. business interruption insurance) is an effective financing tool for global corporations to reduce economic losses caused by high impact events. Flexible operational planning is an often-used tool enabling rapid adjustment of operational plans for reducing catastrophe-related damage costs. The interaction between catastrophe insurance and flexible operations planning has rarely been studied. In this paper, we develop a stochastic programming model for a multi-echelon global supply chain network that we solve to investigate the impact of purchasing catastrophe insurance on supply chain operational planning in a catastrophe-prone environment. Computational simulations are developed for evaluating solution quality and measuring catastrophe-related damage costs. We find that it may be optimal for supply chains to scrap redundant products in catastrophes when customer demand falls below the expected level. Purchasing catastrophe insurance may encourage supply chains to scrap more products, which results in more catastrophe-related damages. From analysing supply chain costs, catastrophe-related damage costs, and operational plans, we find that a higher compensation rate of catastrophe insurance triggers more production activities being planned at the vulnerable node just before the vulnerable time period, especially for low residual value products. Finally, we give managerial insights to help reduce unnecessary damages in catastrophes.

A pandemic business interruption insurance.

We analyze how pandemic business interruption coverage can be put in place by building on capitalization mechanisms and a portfolio management strategy. As evidenced with COVID-19, pandemics affect economic sectors in differentiated ways: some are very severely affected because their activity is heavily impacted by travel bans and constraints on work organization, while others are more resistant. This opens the door to risk-coverage mechanisms based on a portfolio of financial securities, including long-short positions and options in stock markets. We show that such a strategy allows insurers to offer business interruption coverage in pandemic states, while simultaneously hedging the risks associated withalternating bullish and bearish non-pandemic states. These conclusions contrast sharply with the idea of governments being the only solution to the pandemic insurability problem. They are derived from a theoretical model of corporate risk management, and their practical relevance is illustrated by numerical simulations, using data from the French stock exchange.

Recent Cases on COVID-19 and Business Interruption Insurance in USA

Recent Cases on COVID-19 and Business Interruption Insurance in USA

Adverse selection and moral hazard in corporate insurance markets: Evidence from the 2011 Thailand floods

This paper is the first empirical study on adverse selection and moral hazard in the corporate disaster insurance market. By constructing and examining a unique plant-level panel dataset on the 2011 Thailand floods, we overcome the general lack of data that has previously prevented a systematic study on the issue. By exploiting unexpected, large losses caused by a severe disaster, we find evidence of adverse selection for both property and business interruption insurance. Moral hazard, measured by impacts on recovery efforts, is also found for both types of insurance, albeit more salient effects for business interruption insurance.

Interpreting Contractual Rights to COVID-19 Remedies: An Analysis of Cases

The construction industry has been adversely impacted by the COVID-19 pandemic including significant delays on projects and outbreaks of COVID-19 on site. UK legal cases interpreting contractual rights to COVID-19 remedies are analyzed in this paper. The analysis of UK legal cases regarding potential contractual rights to COVID-19 remedies including change in law, force majeure, and frustration has revealed the barriers to recovery of losses. Instead, construction companies could consider focusing on more commonly used contract provisions, for example, extensions of time and prolongation claims or compensation events. The UK Supreme Court has ruled on the possibility of payment from business interruption insurance. Even the UK government has failed to comply with public procurement law under pressure of the COVID-19 pandemic. The High Court in London has ruled that landlords are entitled to recover rent and service charges owed to them by tenants whose businesses were mandated to close by coronavirus restrictions.

Smart Insurance Contracts Shielding Pandemic Business Disruption in Developing Countries and Blockchain Solution

As the Fourth Industrial Revolution gains momentum and involves a plethora of disruptive technology concepts, such as blockchain, they have infiltrated economies that have only experienced a small portion of their scope, consequences, and applications in their different branches. This research aims to examine the potential uses of blockchain technology within the framework of smart contracts in the insurance sector, notably in the event of a pandemic that results in business interruption. Businesses hardly ever take business interruption insurance into account, particularly in a country similar to Lebanon, where natural disasters and pandemics are scarce. Due to the complexity of the task and the numerous requirements for trust in terms of risk consistency, traditional insurance companies are not interested in offering these kinds of insurance contracts. In this current study, a quantitative study was conducted over 213 businesses in various fields and revealed acceptance and socio-demographic differences in the activity sectors of this potentially ground-breaking solution for a developing country that is undergoing a sanitary and economic crisis. As a result, smart contracts and decentralized finance (DeFi) were proposed in the current research as potential solutions to overcome the Lebanese currency devaluation and high insurance costs.

Research on the Complexity of Oligopoly Game under Business Interruption Insurance of the Engineering Project

The convenience of business interruption insurance enables the manufacturer to develop direct channels. This dissertation discusses the price decision of duopoly manufacturers by considering the business interruption risk and the price game model of duopoly manufacturers under business interruption insurance, so that the duopoly manufacturers can produce alternative products and finally sell them to consumers. By using game theory and complex dynamics theory, combined with the numerical simulation method, the result shows that when the decision variable adjustment speed of the manufacturer is too fast, the system will fall into a state of chaos and disorder, and the introduction of business interruption insurance will increase the manufacturer’s optimal sales price and profit. It has a certain reference value to the risk management when the manufacturer faces the risk.

Direct to Consumer using Livestream as an Innovative Marketing Medium during COVID-19

Purpose: Owing to COVID, when many of the physical retail areas were closed and customers were inside, brands were always considering inventive ways to associate with the customers. The accessibility of customers to sellers remained. The live stream was an awesome way to access customers and multiply engagement. Design/Methodology/Application: Establishing a conceptual notion based on model development using the emphasis group - learning method and model analysis using the ABCD listing methodology. Findings/Result: The analyst has recognized that engagement must not be restricted to buyers alone. Livestream is an amazing stage to lock in accomplices as well as internal employees within the company. Livestreaming is long-term of retail and e-commerce. The coronavirus pandemic devastated almost all sectors of the business. Research limitations/implications: Businesses across the country and across the world experienced their supplies, business relations adversely hampered. The demand for most of the products and services reduced to a great extent. The business interruption insurance policy can come to the rescue but unfortunately, if a particular business is not listed on, the policy is not covered. It becomes inevitable to review and reiterate the policies. In many places, in almost all sectors, all spheres, all levels, from the rich to the poor, the losses and damages caused by coronavirus havoc are irreparable. No agency or organization ponders over their compensation of them. Originality/New knowledge/Interpretation/Value: The objective of this paper is to exhibit the most recent patterns and upgrades in live streaming. Moreover, the feasibility of utilizing Livestream as an integrated marketing communication channel is explained. Paper Type: Conceptual research

Impact of Information Asymmetry and Limited Production Capacity on Business Interruption Insurance

We consider a firm that faces a potential disruption in its normal operations can purchase business interruption (BI) insurance from an insurer to guard against the disruption risk. The firm makes demand forecasts and can put a recovery effort if a disruption occurs; both are unobservable to the insurer. Accordingly, the insurer offers BI insurance to the firm while facing adverse selection and moral hazard. We first find that, because of the joint effect of limited production capacity and self-impelled recovery effort, the firm with a lower demand forecast benefits more from BI insurance than that with a higher demand forecast. Anticipating a higher premium, the low-demand firm has an incentive to pretend to have the higher demand forecast to obtain more profit. We then derive the optimal insurance contracts to deal with the information asymmetry and show how the firm’s characteristics affect the optimal contracts. Both high- and low-demand contracts are affected by the firm’s operational characteristics in the same direction, and the informational characteristics impact those contracts differently. We also analyze the case in which the firm can choose its initial capacity and find that, from the firm’s perspective, capacity and BI insurance could be either substitutes or complements. This paper was accepted by Vishal Gaur, operations management.

The history and development of business interruption insurance

This paper chronicles the development of business interruption (BI) insurance in the U.S. The origin of modern-day BI insurance is traced as it evolved from so-called “profits insurance” in the United Kingdom (UK) and an endorsement to basic fire insurance policies in the U.S. to stand-alone BI insurance as it is known today. This paper identifies significant legal rulings and insurance catastrophes that have served as inflection points for the development of BI insurance, as well as major policy formats that have provided cover for the disruption of business.

A joint strategy based on ordering and insurance for mitigating the effects of supply chain disruption on risk-averse firms

We examine the mitigation strategy for a risk-averse firm facing supply chain disruption threat under an all-or-nothing assumption. The firm orders from an upstream supplier to satisfy downstream stochastic demand, and mitigates the damage it suffers from disruption by adjusting its ordering decision and buying business interruption (BI) insurance. We explore the firm's joint ordering and insurance decisions in perfectly competitive and imperfectly competitive insurance markets, and demonstrate that BI insurance effectively reduces the losses caused by supply chain disruption and eliminates the effect of the firm's risk-averse attitude. In a perfectly competitive insurance market, the firm always purchases full insurance coverage; in an imperfectly competitive insurance market, the firm's ordering and insurance decisions are always complementary. We then extend our model to accommodate the firm's overconfidence behavior and partial damage, and conclude that overconfidence about risk probability has a negative effect on the firm's utility and our main conclusions still hold in situations of partial damage.

The impact of the Covid-19 pandemic on the business interruption insurance demand in the United States

The article investigates the Covid-19 pandemic related changes in the demand for insurance services in the Unites States due to business interruptions by employing panel vector autoregression models to a dynamic panel data set of 50 states and District of Columbia for three periods of time: 01 January, 2004 to 28 June, 2020; 01 January, 2004 to January 21, 2020 (pre-Covid period); January 22, 2020 to June 28, 2020 (Covid-period). This paper is the first attempt to obtain estimates by applying Google Trends with a search key word “Business Interruption Insurance”. The data was collected and reduced to a single scale by US states within the widest possible time span. Google Trends Hits and Initial Claims for Unemployment Insurance Benefits are used as endogenous variables in the built models. In the constructed models, the impact of the exogenous variable New Covid Cases is compared with that of over US billion-dollar natural disasters. The impulse responses show a positive relationship between the Google Trends Hits and Initial Claims with the Covid-factor having a significant impact on the responses. The conducted analyses reveal that the demand for insurance services due to the Covid-19 outbreak in the United States can be expected to increase 2–6 times, with the total amount of the incurred costs for the economy due to the virus ranging from 0.3 to 7 percent of the US-2019 GDP. The results lay the foundation for recommending the insurance market participants to lobby for adoption of public-private protection schemes being able to secure a more efficient response to the pandemic-related losses that may occur in the future.

Coalitional strategies of the pharmaceutical supply chain with an option contract to cope with disruption risks

ABSTRACT After reviewing the problems of supply disruption caused by worldwide public health events, a two-echelon dual-marketing-channel supply model is presented in this paper, whose participants are one pharmaceutical company with disruption risks, one pharmaceutical company without disruption risks (NDPC), and one pharmaceutical retailer (PR). Their marketing consists of online and offline marketing channels. The PR signs an option contract with the NDPC to secure an adaptive and continuous pharmaceutical supply. The model is divided into three sub-models: single coalition structure, double coalition structure, and multi-party coalition structure, whose coalitional strategies and profits are investigated respectively. Their optimal decisions under disruption risks also are compared, and their pharmaceutical quality and process resilience are discussed. The merit of the model is to combine option contracts, government double subsidies, and business interruption insurance in the supply chain.