Business Interruption Losses Research Articles

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

Providing pandemic business interruption coverage with double trigger cat bonds.

The aim of this paper is to show how qualified investors in cat bonds can offer adequate pandemic business interruption protection in a comprehensive public-private coverage scheme. First, we propose a numerical model to expose how cat bonds can contribute to complement standard re/insurance by improving coverage of cedents even though risks are positively correlated during a pandemic. Second, we introduce double trigger pandemic business interruption cat bonds, which we name PBI bonds, and discuss their precise characteristics to provide efficient coverage. A first trigger should be pulled when the World Health Organization declares a Public Health Emergency of International Concern (PHEIC). The second trigger determines the payout of the bond based on the modelised business interruption losses of an industry in a country. We discuss moral hazard, basis risk, correlation and liquidity issues which are critical in the context of a pandemic. Third, we simulate the life of theoretical PBI bonds in the restaurant industry in France by using data gathered during the COVID-19 pandemic.

Reinsuring pandemics: the role of government and public-private partnerships between reinsurers and governments.

Pandemic-related business interruption (BI) losses are generally considered 'uninsurable' because, in order to pool sufficient premium revenue to meet valid claims, premiums would be unaffordable for the majority of policyholders. This paper explores whether and how such losses might be made insurable in the U.K. The authors consider post-pandemic governmental responses, including the role of the Financial Conduct Authority (FCA) and the meaning and implications of FCA v Arch Insurance (U.K.) Ltd ([2021] UKSC 1). The central premise of the paper is to highlight the importance of reinsurance in increasing an underwriter's insuring capacity and to illustrate how, with the support of government in the form of a public-private partnership (PPP), 'uninsurable' risks of this type may be made insurable. The authors propose a PPP, 'Pandemic Business Interruption Re', which provides, in their view, a feasible and defensible solution that would confer the benefit of increasing policyholders' faith in the industry's ability to underwrite pandemic-related BI claims and reduce reliance on ex post government aid.

Uncertainty Analysis of Business Interruption Losses in the Philippines Due to the COVID-19 Pandemic

In this study, we utilize an input–output (I–O) model to perform an ex-post analysis of the COVID-19 pandemic workforce disruptions in the Philippines. Unlike most disasters that debilitate physical infrastructure systems, the impact of disease pandemics like COVID-19 is mostly concentrated on the workforce. Workforce availability was adversely affected by lockdowns as well as by actual illness. The approach in this paper is to use Philippine I–O data for multiple years and generate Dirichlet probability distributions for the Leontief requirements matrix (i.e., the normalized sectoral transactions matrix) to address uncertainties in the parameters. Then, we estimated the workforce dependency ratio based on a literature survey and then computed the resilience index in each economic sector. For example, sectors that depend heavily on the physical presence of their workforce (e.g., construction, agriculture, manufacturing) incur more opportunity losses compared to sectors where workforce can telework (e.g., online retail, education, business process outsourcing). Our study estimated the 50th percentile economic losses in the range of PhP 3.3 trillion (with telework) to PhP 4.8 trillion (without telework), which is consistent with independently published reports. The study provides insights into the direct and indirect economic impacts of workforce disruptions in emerging economies and will contribute to the general domain of disaster risk management.

A Study on the Introduction of Government-based Pandemic Insurance

The government has been compensating business interruption loss of small business owners caused by coronavirus through expanded fiscal policies. However, these policies are temporary and have negative effects such as inflation. Even though discussion is underway to introduce pandemic insurance as a sustainable way to recover from business interruption loss, the insurance product has not been developed. This study proposed a pandemic insurance model and confirmed its effectiveness by utilizing previous studies and surveys. A protection-type insurance model based on income and expenses similar to that of existing insurance was first proposed. The results of examining the adequacy of insurance based on other policy insurance operation cases and previous studies showed that the proposed model presented difficulty in activating insurance. Thus the modified pandemic insurance model was proposed, that combines protection-type and savings-type insurance to guarantee the amount paid and interest. Survey results found that people were more willing to sign up for the modified pandemic insurance model than for the protection-type insurance model based on income and expenses. In addition, the modified pandemic insurance model was thought to be a useful insurance model since it has various advantages such as being able to cover long-term business loss, compared to the protection-type insurance model with a similar level of government budget input.

Seismic resilience assessment of buildings: A simplified methodological approach through conventional seismic risk assessment

A simplified methodology to evaluate seismic resilience of buildings through a probabilistic risk assessment is proposed. The methodology uses the results from the conventional seismic risk assessment with the inclusion of social and economic aspects. The seismic resilience assessment process considers the workforce population, repair time, direct and indirect losses. They can be applied within the damage definition stage with the aim of the vulnerability functions for a specific building typology, and loss estimation stage of the probabilistic risk assessment. For the case of the definition of vulnerability functions a previous methodological approach is used with fewer modifications. In addition, a new risk figure called average annual repair time is introduced in the probabilistic risk assessment allowing to obtain the resilience index. Aspects such as expected repair time, quantities of crew members, business interruption losses, workforce population capacity and risk figures: average annual loss, probable maximum loss and average annual repair time are considered. Then, all those aspects are integrated within the exposure, damage, and loss estimation models with additional considerations to perform the calculation of the resilience. Finally, the results are represented by means of a unitless simplified resilience index allowing to be compared among different scenarios. The methodology is illustrated using two study cases. The first one represented its application at damage definition stage and is comprised by 3-, 6- and 9-story reinforced concrete moment resisting frame school buildings designed for special seismic code level. The second one covered the application at loss estimation stage and considers a fictitious portfolio of approximately 190,000 buildings composed by the previous three building typologies located along the whole country of Peru. The results show a highly sensitivity associated to workforce population, repair time, and indirect losses. Conclusions and possible applications related to Disaster Risk Reduction are summarized.

The cost-effectiveness of economic resilience

Society is increasingly focused on resilience to catastrophic events. Firms generally observe two forms of economic disruption, property damage and business interruption (BI). In contrast to pre-event mitigation intended primarily to avoid property damage, firms can use a variety of resilience tactics once the disaster strikes to reduce BI losses by improving stability and continuity of operations. This paper makes a theoretical contribution by incorporating resilience into longstanding economic production theory and by identifying the key components for evaluating the cost and effectiveness of resilience. It also makes important empirical contributions by designing, administering, and analyzing surveys of firms affected by two of the most devastating disasters in US history. This paper is the first to econometrically analyze these production theory relationships, identifying the cost-effectiveness of a full range of explicit resilience tactics. Results show that BI losses exceeded property damage losses by over 900% and, on average, firms avoided $4.57 in BI for every dollar spent on resilience. Generalizable comparative static estimates are presented for the manufacturing sector to test formalized relationships, which identify that tactics capable of improving factor productivity can significantly enhance the cost-effectiveness of resilience.

The Supreme Court on Business Interruption Insurance and COVID-19: Financial Conduct Authority v Arch Insurance (UK) Ltd [2021] UKSC 1

From the early days of the first national lockdown in England, widespread concerns over many different types of insurance claims had been raised. The business interruption losses that the small businesses and enterprises suffered received particular attention and were covered broadly by the national media channels. The policy wordings in question were so varied that it was not possible for any party to provide a clear outcome that will have a widespread effect on such insurance claims. Through the Financial Conduct Authority's involvement, the UK Supreme Court delivered a much-awaited judgment in a test case on the twenty-one selected policy wordings, fourteen of which were held to respond to the Covid-19 related business interruption claims. The significant impact of the test case, which prevented an ongoing uncertainty and avoided protracted litigation for many, is that many thousands of policyholders should now have their claims for business interruption losses paid.

Government insurance for business interruption losses from pandemics: An evaluation of its feasibility and possible frameworks

AbstractMany businesses have suffered severe economic losses due to the COVID‐19 pandemic. Because property business interruption (BI) policies generally do not cover losses caused by a virus, this has led to proposals for some form of government program that would provide this coverage. We explain why private BI pandemic insurance on a broad scale is infeasible. Arguably, BI pandemic insurance has substantial positive externalities and this has implications with respect to the desirability of government provision of this coverage and its financing. Our paper considers the goals of a government BI pandemic insurance program and the challenges it would face with respect to its design and implementation and how they could be addressed. In this context, we evaluate current proposals for such a program, including legislation currently being considered by the Congress. We conclude that creating such a program requires thorough and careful consideration of its features and the tradeoffs involved with its structure. The essential question for policymakers is whether the best possible program would be in the public interest and increase social welfare. Further, political considerations will likely influence the design of any program in ways that would make it less efficient and possibly less equitable.

Resource Sharing: An Empirical Analysis of Firms’ Resilience Through Resource Dependence Theory

According to the Federal Emergency Management Agency (FEMA), around 40% of small businesses never reopen following a disaster and around 90% of firms that do reopen, fail within a year unless they can resume operations within 5 days. Nonetheless, firms can hasten their recovery and increase their survival chances by implementing resilience actions or tactics after a disaster begins. Given that business interruption losses are usually not eligible for public assistance programs, the type of action to be implemented is a strategic decision and will likely depend on some particularities of each business and the market in which it operates. This paper examines one of these resilience tactics – resource sharing – from the perspective of Resource Dependence Theory. By using a unique dataset collected from responses of businesses affected by Superstorm Sandy and Hurricane Harvey and by specifying a sample selection model, this study provides novel conclusions indicating that there is unobserved heterogeneity that explains the strategic decision-making of firms in the post-disaster and that those firms that are more likely to resource share are also the ones that exhibit higher economic resilience. Implications of these findings, complications and future research are discussed.

Business interruption insurance and COVID-19: Coverage and issues and public policy implications.

This study provides a discussion of the impact of COVID-19 on business interruption losses in the U.S. as well as an overview of the commonly relied upon ISO Business Income and Extra Expense (BIEE) insurance policy. The authors offer an analysis of the language contained in the unendorsed BIEE and summarize the arguments as to why business interruption insurance should or should not cover pandemic-related losses. Finally, the authors provide an overview of proposed approaches to address business interruption losses attributed to current and future pandemics.

Feasibility questions about government-sponsored insurance for business interruption losses from pandemics

Widespread economic losses to many businesses due to COVID-19 business closures have led many plaintiffs’ attorneys to assert in lawsuits that business interruption (BI) insurance policies cover these losses, while insurers generally contend that their BI policies exclude coverage for a variety of reasons. We explain the basic coverage contentions below. Additionally, several states are considering measures that would retroactively establish coverage for pandemic-caused losses under BI policies. While the resolution of coverage disputes and the legality of retroactive coverage expansions in the courts is uncertain, clearly there is strong interest in making BI pandemic insurance available going forward. While a few insurers have offered BI pandemic coverage, no firms have purchased it (Lerner, 2020). Further, many insurers are reluctant to expand their BI policies to cover pandemic losses. Hence, there is strong interest in creating a federal government insurance program that would provide BI pandemic coverage. Currently, there are at least two formal proposals to establish such a program. One proposal is the Pandemic Risk Insurance Act of 2020 (PRIA), which was introduced in the U.S. Congress as H.R. 7011; PRIA would establish a Pandemic Risk Reinsurance Program (PRRP) modeled after the Terrorism Risk Reinsurance Program (TRRP) established by the Terrorism Risk Insurance Act (TRIA). Three industry trade associations also have proposed a Business Continuity Protection Program (BCPP) as an alternative to PRIA that is similar in some regard to the National Flood Insurance Program (NFIP). PRIA intends to create a public and private insurance program that would provide BI insurance for pandemics, with participating private insurers retaining 5% of losses above a deductible. We critique the program contemplated by PRIA and discuss the BCPP. Additionally, we consider a program concept of our own design that would also borrow from the NFIP (but would differ somewhat from the BCPP), as well as a program similar to the federal crop insurance program. We conclude that frameworks based on the NFIP or the federal crop insurance program would have several advantages over PRIA, which has a number of problems, but even these alternative frameworks would face many challenges. This policy brief provides a preliminary review of the PRIA and BCPP drafts, as well as other alternative frameworks, and draws from a longer working paper by the authors (Klein and Weston, 2020)

Effects of Business Recovery Strategies on Seismic Risk and Cost-Effectiveness of Structural Retrofitting for Business Enterprises

Recent earthquakes in Italy have significantly affected productive activities, particularly in business interruption (BI) and, consequently, heavy losses for companies, highlighting the need for appropriate seismic risk assessment and management. To estimate seismic risk accurately, both direct (repair/replacement) and indirect (BI) losses must be quantified. Companies’ balance sheets can be used to estimate BI losses, which, however, are very sensitive to business recovery strategies (BRSs) devised by corporate managers after the seismic event. The aim of this study is to evaluate the effects of BRSs on seismic risk estimates and consequently on structural retrofitting cost-effectiveness. A loss model (including direct and indirect costs and BRS effects) was defined, based on a real-life case study (a biomedical packaging company that was damaged by the 2012 Italian earthquake but recovered soon after) and was used in parametric risk analyses assessing several types of company vulnerabilities and seismic hazards. In areas with low-to-moderate seismicity, seismic retrofitting of existing reinforced concrete factories may be justified or otherwise, depending on whether BRSs are considered or not.

A ground-up approach to estimate the likelihood of business interruption

Critical infrastructure (such as transportation, water, electric power, wastewater, and telecommunications) provides the conveyance of goods, services, and resources to communities, which are vital for economic activities. Buildings, bridges, and other structures and components of the infrastructure might be subject to natural and anthropogenic hazards, which may lead to a reduction or loss of functionality of infrastructure. Businesses may experience disruptions because of (i) direct damage to the business properties and facilities, (ii) reduction or loss of functionality of the supporting critical infrastructure, or (iii) impact on social systems affecting the availability of the workforce at a specific business and supporting businesses as well as customers. Current approaches do not model the functionality of business properties and supporting infrastructure, generally obtaining only empirical estimates of business interruption losses. Such predictions might not be applicable to different businesses, supporting infrastructure, social systems, locations, and hazards; and they would in general not reflect possible changes in the built environment due to mitigation strategies and interventions. This paper proposes a mathematical formulation that overcomes the limitations in the current approaches. The proposed formulation models and quantifies the likelihood of business interruption with a ground-up approach by incorporating the dependency of business operations on physical structures, infrastructure and social systems. The paper illustrates the proposed formulation by investigating the business interruption of an example food retail store in Seaside, Oregon subject to a seismic hazard.

Simulation-Based Exceedance Probability Curves to Assess the Economic Impact of Storm Surge Inundations due to Climate Change: A Case Study in Ise Bay, Japan

Understanding storm surge inundation risk is essential for developing countermeasures and adaptation strategies for tackling climate change. Consistent assessment of storm surge inundation risk that links probability of hazard occurrence to distribution of economic consequence are scarce due to the lack of historical data and uncertainty of climate change, especially at local scales. This paper proposes a simulation-based method to construct exceedance probability (EP) curves for representing storm surge risk and identifying the economic impact of climate change in the coastal areas of Ise Bay, Japan. The region-specific exceedance probability curves show that risk could be different among different districts. The industry-specific exceedance probability curves show that manufacturing, transport and postal activities, electricity, gas, heat supply and water, and wholesale and retail trade are the most affected sectors in terms of property damage. Services also need to be of concern in terms of business interruption loss. Exceedance probability curves provide complete risk information and our simulation-based approach can contribute to a better understanding of storm surge risk, improve the quantitative assessment of the climate change-driven impacts on coastal areas, and identify vulnerable regions and industrial sectors in detail.

Mitigation and Resilience Tradeoffs for Electricity Outages

Large-scale electricity outages have the potential to result in substantial business interruption losses. These losses can be reduced through a number of tactics within the broader strategies of mitigation and resilience. This paper presents a methodology for analyzing the tradeoffs between mitigation and three categories of resilience. We derive optimality conditions for various combinations of strategies for a Cobb-Douglas damage function and then explore implications of a less restrictive Constant Elasticity of Substitution damage function. We also calibrate the model and perform Monte Carlo simulations to test the sensitivity of the results with respect to changes in major parameters. Simulation results highlight the possibility that substitution away from mitigation towards resilience may lower total expected costs from large-scale outages for a given level of risk reduction expenditure when the marginal benefit of resilience is high relative to the expected marginal benefit of mitigation.

Forensic Engineering Analysis of an Electrical Substation Fire in a Manufacturing Plant in Brazil

A cable splice failure in one of the cables associated with one of the 6 MVAR capacitor banks in an electrical substation at a manufacturing plant in South America caused a fire in the 88/4.16kV electrical substation. The fire caused the plant to stop production for approximately 29 days while temporary repairs were made. Operating two shifts per day/seven days a week, and stopping for maintenance once a year, the manufacturing production generates approximately $750,000 in revenue per day. The cable splice failure caused an electrical short circuit in the substation 4.16kV distribution system for approximately 120 seconds. The cable splice failure ignited the adjacent cables in the cable tray, causing damage to various sections of the 4.16kV cables, three 88kV disconnect switches, and four 88kV – 4.16kV transformers. The cable fire in the electrical substation resulted in property damages and business interruption losses with an estimated value of $20 million. The four 88kV – 4.16kV transformers that were in service at the time of the substation fire were exposed to voltage transients and electromagnetic forces produced by the short-circuit currents for approximately120 seconds.

Quantifying and Monetizing Renewable Energy Resiliency

Energy resiliency has been thrust to the forefront by recent severe weather events and natural disasters. Billions of dollars are lost each year due to power outages. This article highlights the unique value renewable energy hybrid systems (REHS), comprised of solar, energy storage, and generators, provide in increasing resiliency. We present a methodology to quantify the amount and value of resiliency provided by REHS, and ways to monetize this resiliency value through insurance premium discounts. A case study of buildings in New York City demonstrates how implementing REHS in place of traditional backup diesel generators can double the amount of outage survivability, with an added value of $781,200. For a Superstorm Sandy type event, results indicate that insurance premium reductions could support up to 4% of the capital cost of REHS, and the potential exists to prevent up to $2.5 billion in business interruption losses with increased REHS deployment.

INSURANCE � MECHANISM IN CLIMATE CHANGE ADAPTATION IN ROMANIA

ABSTRACT Climate changes are a constant matter for all countries in the world and Romania is also facing the disastrous effects of this phenomenon. Risks associated with climate change need to be managed in order to reduce damages and insurance plays an important role in risk management worldwide. Flood risk is a major risk associated with climate change in Romania and a mandatory insurance policy for all homeowners was introduced by Government in order to reduce losses' effects. This research indicates the fact that even if is mandatory, many houses remained uninsured. Natural disasters affect both individuals and companies, therefore insurance as a method of handling risks needs to be a solution for all to cover property damages and business interruption losses. Keywords climate change, disaster, insurance

Zurich Insurance Uses Data Analytics to Leverage the BI Insurance Proposition

As the interdependencies due to global trade and interconnected value chains have grown, firms and their value chains have become more prone to disruptions. Consequently, many firms resort to business interruption (BI) insurance to transfer the disruption risk. Given the limited amount of literature available about BI loss and claims characteristics, insurance companies and their customers will benefit from the insights that resulted from the project underlying this study. The project involved a collaboration between Zurich Insurance and the Swiss Federal Institute of Technology Zurich, in which we extracted a large amount of data pertaining to BI claims from various data sources and analyzed these data. We found, for example, that the average share of BI losses has increased significantly over the past 15 years. Moreover, the BI risk exposure, measured as BI share of the total insurance claims, the average recovery time, and the increased costs of working, differs significantly based on the industry affiliation of the firm experiencing the loss. Our results have implications for the targeted risk assessment of BI risk exposures and the development of tailored supply chain risk management practices and risk transfer along the value chain.