Business Interruption Losses Research Articles

Impact of Two Connection Types on the Behavior and Losses of a Steel Hotel Building Under Strong Winds in Mexico

Two connection types are examined under a life-cycle point of view, for a regular framed steel hotel building located in Mexico under a strong wind hazard, to compare their cost-effectiveness and provide practical recommendations. Although FEMA has fragility curves for housing facilities under strong winds, there are no curves for medium height or tall buildings like the one used to illustrate the formulation. The critical connections were identified through a series of preliminary analyses of the ten stories building, which were performed under scenario wind velocities, and a detailed finite-element model was used to evaluate the connection limit state and the failure probability at both levels: the connection and the overall building. The cost-effectiveness of bolted and welded connections was examined, as alternative designs, through the calculation of the expected life-cycle cost. Envelope damages are explicitly considered as facade components and windows are usually damaged and cause important losses. In addition, the potential loss of contents is assessed as a consequence of water infiltration after the building envelope is damaged, and the expected business interruption losses, from the repairs required, are included in the cost analysis. The correlation coefficient between wind velocity and rainfall intensity, given the occurrence of a hurricane, is calculated and incorporated on the simulation of rainfall intensity. Recommendations to mitigate losses are proposed in terms of the fragilities found and the cost of mitigation measures. It is shown that low-cost improvements, on the facade and windows anchorage conditions, strongly reduce the expected losses and the cost–benefit of these measures decreases as the building importance increases.

A methodology for estimating business interruption loss caused by flood disasters: insights from business surveys after Tokai Heavy Rain in Japan

This study proposes a probabilistic methodology for estimating the business interruption loss of industrial sectors as an extension of current methodology. The functional forms and parameters are selected and calibrated based on survey data obtained from businesses located in the inundated area at the time of the 2000 Tokai Heavy Rain in Japan. The Tokai Heavy Rain was a rare event that hit a densely populated and industrialized area. In the estimation of business interruption losses, functional fragility curves and accelerated failure time models are selected to estimate the extent of damage to production capacity and production recovery time. Significant explanatory variables, such as inundation depth, distinct vulnerability, and the resilience characteristics of each sector, as well as the accuracy of fit of the model, are analyzed in the study. The function obtained and the estimated parameters can be utilized as benchmarks in estimating the probabilistic distribution of business interruption losses, especially in the case of urban flood disasters.

Hackers Are After More than Just Data: Will Your Company's Property Policies Respond When Cyber Attacks Cause Physical Damage and Shut Down Operations?

ABSTRACTRecent attention on high profile data breaches has overshadowed a potentially greater risk: cyber attacks on large industrial companies causing physical damage, potentially releasing contaminants, and shutting down operations. A handful of publicly reported cyber-attacks, including explosions at an oil pipeline and a steel mill, have highlighted the potential vulnerability of these companies' internet-facing industrial control systems to hackers. The insurance industry has reacted to the growing risk of privacy-related data breaches by marketing and selling so-called “cyber policies.” But these policies typically exclude coverage for property damage and are ill-suited to cover the magnitude of business interruption losses that could result from an extended shutdown of a large industrial operation. That leaves policyholders to look to their traditional property policies. This article examines the cyber-attack risk that large industrial companies face and how those companies' traditional property insurance policies may help mitigate that risk.

Review of two Japan Typhoon catastrophe models for commercial and industrial properties

Commercially available natural catastrophe (cat) models have significantly improved the decision-making processes utilized by the insurance industry to price and manage cat risk. However, lack of historical loss data, and the need to make a large number of assumptions during the course of development of such models can lead to material biases in their outputs. It is crucial that insurance companies identify these sources of biases and adequately adjust the model outputs. In this study, we present methods that can be utilized for performance evaluation of cat models independent of the underlying peril or region. We illustrate the application of the proposed tests by reviewing two commercially available Japan Typhoon cat models (referred as models A and B) and evaluating their performance in quantifying commercial and industrial property losses. We have identified important limitations in both models including not accounting for storm surge and model specification uncertainty. We observed significant differences between the modeled losses for commercial exposures and uncertainty estimates for the corresponding event losses. Performed sensitivity tests indicate potential inconsistencies in Model B’s assumptions related to the quantification of loss severities across geographic regions, the estimation of contents and business interruption losses, and modeling of inland flooding. Additionally, our comparisons indicate that Model B assumes typhoon landfall frequencies significantly lower than historically observed values. Conducting the proposed tests on Model A also suggests potential underestimation of the losses for both the strongest category of typhoons and typhoons with losses primarily driven by rain-induced flooding. While modeling companies recognize some of these potential limitations and plan to address them in their next updates, it is important that they continue providing increased flexibility in adjusting model parameters and allow insurance companies to develop their own views in management and pricing of cat risks.

Climate change impact assessment of metal-clad buildings subject to extreme wind loading in non-cyclonic regions

A risk assessment is conducted to assess the risks and economic impact of roof cladding wind damage for low rise metal-clad industrial and commercial buildings located in non-cyclonic regions of Australia. Roof cover loss includes structural, interior, contents and business interruption losses. The economic risks are calculated as the product of hazard likelihood, fragility, and loss, over the 50-year design life of metal-clad buildings representative of new construction and designed to be nominally sealed. The analysis includes time-dependent changes in wind patterns due to a changing climate. The climate adaptation (or risk mitigation) strategy examined is a change to the Australian National Construction Code requiring that all roller, sectional or large access doors for metal-clad buildings in non-cyclonic regions of Australia be wind-rated according to Australian Standards. It was found that a wind-rated door reduces damage risk by 15–35%. Specifying wind-rated doors for all new construction in non-cyclonic regions enhances resilience and is cost-effective if the additional cost per building is less than $10,000. Climate change has a minor effect on the cost-effectiveness of wind-rated doors.

Development of a Risk Framework for Forecasting Earthquake Losses in Port Systems

Ports play a critical role in transportation infrastructure but are vulnerable to seismic hazards. Downtime and reduced throughput from seismic damage in ports results in significant business interruption losses for port stakeholders. Managing risks from systemwide disruptions resulting from earthquake damage has been studied as a central element of a project sponsored by the National Science Foundation Network for Earthquake Engineering Simulation (NEES) program. Presented are the concepts and methods developed for the seismic risk management of a portwide system of berths. The framework used to calculate port losses is discussed, particularly the use of spatially correlated ground motion intensity measures that estimate damage to pile-supported wharves and container cranes, the repair costs and downtimes subsequently determined via repair models for both types of structures, and the impact on cargo handling operations calculated via logistical models of the port system. Results, expressed in the form of loss exceedance curves, are calculated.

Improving Catastrophe Modeling for Business Interruption Insurance Needs.

While catastrophe (CAT) modeling of property damage is well developed, modeling of business interruption (BI) lags far behind. One reason is the crude nature of functional relationships in CAT models that translate property damage into BI. Another is that estimating BI losses is more complicated because it depends greatly on public and private decisions during recovery with respect to resilience tactics that dampen losses by using remaining resources more efficiently to maintain business function and to recover more quickly. This article proposes a framework for improving hazard loss estimation for BI insurance needs. Improved data collection that allows for analysis at the level of individual facilities within a company can improve matching the facilities with the effectiveness of individual forms of resilience, such as accessing inventories, relocating operations, and accelerating repair, and can therefore improve estimation accuracy. We then illustrate the difference this can make in a case study example of losses from a hurricane.

Estimation of property loss and business interruption loss caused by storm surge inundation due to climate change: a case of Typhoon Vera revisit

This paper estimates property loss and business interruption loss under scenarios of storm surge inundation to explore the economic impact of climate change on Ise Bay, Japan. Scenarios-based analyses are conducted with respect to Typhoon Vera, which caused the most severe storm surge in the recorded history of Japan in 1959. Four different hazard scenarios are chosen from a series of typhoon storm surge inundation simulations: Typhoon Vera’s landfall with respect to the condition of the past seawall; Typhoon Vera’s landfall with respect to the condition of the current seawall; intensifying Typhoon Vera, but retaining its original tracks; and intensifying Typhoon Vera, but choosing the worst tracks from various possible typhoon tracks. Our economic loss estimation takes advantage of fine geographical scale census and economic census data that enable us to understand the spatial distribution of property loss and business interruption loss as well as identify the most potentially affected areas and business sectors on a sub-city scale. By comparing the property loss and business interruption loss caused by different hazard scenarios, the effect of different seawalls is evaluated and the economic impact of future climate change is estimated. The results indicate that although the current seawall can considerably reduce the scale of losses, climate change can cause Ise Bay to experience more serious storm surge inundation. Moreover, the resulting economic losses would increase significantly owing to a combination of climate change and the worst track scenario. It is, therefore, necessary to consider more countermeasures to adapt to climate change in this area.

A Case Study on Estimation of Business Interruption Losses to Industrial Sectors Due to Flood Disasters

The case study we present on estimating business interruption (BI) loss to industrial sectors due to floods in Aichi Prefecture, Japan, involves four steps – estimating the business interruption loss rate (BILR), estimating the spatial distribution of hazard information, identifying the spatial distribution of exposure such as firms and employees, and calculating BI loss based on the BILR, hazards, and exposure information as input. Validation was conducted by comparing estimated BI loss to economic loss calculated by an index of industrial production (IIP). We found that the proposed methodology quickly and feasibly estimates BI loss once water depth is obtained. Estimated BILR and BI loss in the industrial sector provides information enabling individual firms to formulate business continuity plans and design risk management strategies.

Probabilistic modeling of business interruption and reputational losses for process facilities

This article presents probabilistic models to estimate business losses due to abnormal situations in process facilities. The main elements of business loss are identified as business interruption loss and reputational loss. The business interruption insurance approach is used to model business interruption loss. The subelements of business interruption loss are modeled based on expert knowledge using Program Evaluation Review Technique, which are then integrated using the Monte Carlo simulation approach. The reputational loss is considered as Weibull distributed, and the parameters are estimated by applying a scenario‐based approach. Copula functions are then used to develop the distribution of the aggregate loss, considering the correlation between business interruption and reputational losses. The application of the loss models is demonstrated using a distillation column case study. The models presented here provide a mechanism to monitor process facility's business performance, with associated uncertainties, and to make swift operational and safety decisions. This will help to improve process facilities safety performance and optimal allocation of resources where they are needed the most. © 2015 American Institute of Chemical Engineers Process Saf Prog 34: 373–382, 2015

Determining Business Interruption Losses for Small Business

Business interruption insurance often referred to as lost profit or loss income insurance is written and purchased to protect a business for when its operations are interrupted and income is reduced due to the occurrence of a covered peril. The determination of the actual economic loss can be difficult and controversial. The loss computation depends on the determination of what the sales would have been had there been no loss event and what expenses should be subtracted from the estimated sales. In this paper, we discuss the issues with business interruption claims, and theoretically correct approach to measure a firm’s loss due to an interruption in operations from a covered peril. We present an example showing calculation of economic loss due to business interruptions.

Modeling business interruption impacts due to disrupted highway network of Shifang by the Wenchuan earthquake

A highway network plays an important role in sustaining business operations in a regional economy. However, in the event of catastrophic earthquakes, a highway network is very vulnerable to suffering physical damage as a result of the violent ground shaking. The failure of the highway network leads directly to business interruption impacts on the highway transportation sector, which subsequently sets off a ripple effect on other sectors due to economic interdependency. This article was aimed to estimate the business interruption impact on Shifang’s economic system triggered by the disrupted highway network resulting from the Wenchuan earthquake. A regional computable general equilibrium model is applied to simulate the business interruption impact. Moreover, a specific aspect of economic resilience has been incorporated into the model to explore its contribution toward reducing business interruption losses. The study results indicate that business interruption losses without a resilience factor total approximately CNY 1.08 billion, 47.37 % of the direct economic losses attributed to Shifang’s disrupted highway network as a result of the Wenchuan earthquake. When economic resilience is included in the model, the potential business interruption losses are reduced by 88 % through restraint of the negative aspects of business interruption impacts.

Disaster Risk Decision: A Dynamic Computable General Equilibrium Analysis of Regional Mitigation Investment

ABSTRACTFor implementation of specific actions to reduce risks, there is lack of a unified tool to compare different mitigation investment strategies and to prioritize alternative mitigation measures. Organizations usually address some operational risks such as business interruption (BI) losses. Computable general equilibrium (CGE) models are state-of-the-art economic tools to account for BI losses. This study proposed a new, improved dynamic CGE model to analyze and compare mitigation investment measures that aim at reducing BI losses. The new model, a time-recursive dynamic model reflecting the recovery and reconstruction period, connects reconstruction investment with reconstruction funds source, such as from government, household, enterprise, or outside a disaster-affected area. The 2008 Wenchuan earthquake in China was selected as a case study to illustrate the new model. Some interesting topics about mitigation investment were analyzed: (1) the relative importance of pre-disaster reduction investment versus post-disaster reconstruction investment; (2) post-disaster economic recovery with the contribution of insurance compensation; (3) the optimal ratio between mitigation funds collected from the disaster-affected area and that collected from outside the disaster-affected area; (4) the rational division of limited mitigation funds to each year during the restoration and reconstruction period.

Estimating the Economic Losses of Hurricane Ike in the Greater Houston Region

AbstractHurricanes Katrina and Rita in 2005 caused tremendous economic losses in the Gulf Coast region. Though Hurricane Ike in 2008 was relatively less severe, it still caused significant damage in the Gulf Coast Region, especially in Houston, Texas, the fourth largest city and the sixth largest metropolitan area in the United States. This study obtains the storm parameters of Hurricane Ike from the National Hurricane Center (NHC) and then employs a hurricane model to estimate the strength of wind and the property damages by census tract. To fill the gaps in disaster loss estimation models, this paper adopted a systematic method that combines disaster models, a regional input/output model, and a spatial allocation model to estimate the spatial distribution of property damage and business interruption losses of Hurricane Ike in the Greater Houston region. The modeling results of property damage are reasonably close to the estimates from insured damage claims after Hurricane Ike. The spatial distribution o...

Investigation of superstorm Sandy 2012 in a multi-disciplinary approach

Abstract. At the end of October 2012, Hurricane Sandy moved from the Caribbean Sea into the Atlantic Ocean and entered the United States not far from New York. Along its track, Sandy caused more than 200 fatalities and severe losses in Jamaica, The Bahamas, Haiti, Cuba, and the US. This paper demonstrates the capability and potential for near-real-time analysis of catastrophes. It is shown that the impact of Sandy was driven by the superposition of different extremes (high wind speeds, storm surge, heavy precipitation) and by cascading effects. In particular the interaction between Sandy and an extra-tropical weather system created a huge storm that affected large areas in the US. It is examined how Sandy compares to historic hurricane events, both from a hydro-meteorological and impact perspective. The distribution of losses to different sectors of the economy is calculated with simple input-output models as well as government estimates. Direct economic losses are estimated about USD 4.2 billion in the Caribbean and between USD 78 and 97 billion in the US. Indirect economic losses from power outages is estimated in the order of USD 16.3 billion. Modelling sector-specific dependencies quantifies total business interruption losses between USD 10.8 and 15.5 billion. Thus, seven years after the record impact of Hurricane Katrina in 2005, Hurricane Sandy is the second costliest hurricane in the history of the United States.

The Aftermath of Catastrophes: Valuing Business Interruption Insurance Losses

With the onslaught of tornadoes, hurricanes, and floods in recent years, business interruption losses have been staggering. Many businesses do not survive such catastrophes. Even business owners that purchased business interruption insurance, which is intended to ensure that a business’s revenue stream continues during an interruption in its operations, often find that their insurers have dramatically different views regarding the amount of the losses that should be reimbursed. The reason for this disparity in views is that the loss valuation provisions in business interruption insurance policies provide very little guidance regarding how business interruption losses should be calculated. Thus, disputes regarding the valuation of business interruption losses frequently arise and courts and juries are forced to resolve such disputes with widely varying, inconsistent, and unpredictable results. This lack of predictability has placed a burden on the legal system because far more business interruption cases are tried than are necessary. This Article analyzes the origins and purpose of business interruption insurance, as well as the courts’ inconsistent interpretations of the standard form business interruption loss valuation provisions. The Article then offers an interpretation of the existing loss valuation provisions under the rules of policy interpretation and considers whether the result would be different if the language were analyzed from a product liability perspective in light of the fact that policies are non-negotiated contracts of adhesion sold on a take-it-or-leave-it basis. The Article concludes with an analysis of the public policy considerations related to the payment of business interruption insurance losses and proposes alternative loss valuation formulas to be used in the future that should provide for consistent, fair and predictable loss valuations and payment of claims without litigation.

Earthquake risk assessment and optimal risk management strategies for Hi-Tech Fabs in Taiwan

In this paper, we build an event-based seismic hazard assessment and financial analysis model for Hi-Tech Fabs in Taiwan. As we know, the low occurrence rate, tremendous loss and high uncertainty are characteristics of earthquake disasters. To handle the above issues, the model integrates knowledge from many fields including earth science, seismology, geology, risk management, structural engineering, the insurance profession, financial engineering and facility management. The portfolio of data from the site survey indicates that the model can be used to calculate the event losses (including buildings, contents and business interruption losses); furthermore the average annual loss and loss exceeding probabilities also can be calculated. The total earthquake risk cost, which includes earthquake insurance premiums, average annual retained loss and equivalent annual retrofit cost, is defined as an indicator for selection of optimal risk management strategies.

Seismic Response Analysis of Container Crane

Earthquakes pose a threat to large-scale container cranes. Previous earthquakes damaged many container cranes, which had a significant impact on business interruption losses of the port. In this paper, a container crane’s seismic response is analyzed in ANSYS. First, a finite element model of a container crane is developed. Then, based on the equations of structural dynamics, the four most important modes of the container crane are extracted. Finally, a time history analysis is conducted to obtain the displacements of some critical nodes on the crane model under the excitation of an earthquake wave. The result of this paper provides a reference for the seismic design of container cranes.

석유화학공장에서 피해지역 및 재정적 손실에 의한 사고 피해크기 비교

PSM 제도와 더불어 사고 피해크기 예측기법은 국내 석유화학공장에 많이 보급되어 활용되고 있으나, 사고로 인한 영향, 즉, 작업자, 조업중단, 유틸리티에 미치는 영향을 고려하지 않고, 비상조치계획을 수립하고 있어서 다소 현실적이지 못한 문제점이 있다. 따라서 본 연구에서는 현실적인 비상조치계획을 수립하고, 위험기반 안전관리를 수행할 수 있도록 하기 위하여 석유화학공장의 설비에서 사고로 인한 피해지역과 재정적 손실을 산출하여 사고 피해크기를 비교 분석하였다. 피해지역을 기준으로 하는 경우에는 장치손상지역, 상해지역 그리고 독성지역을 동시에 고려한 안전지역을 기준으로 피해크기 등급을 산출하여야 하고, 또한 공정의 특성 및 주변 환경을 고려하면 피해지역을 기준으로 하는 것보다 재정적 손실을 기준으로 하는 것이 현실적인 사고 피해크기 산출방법이었다. The consequence analysis (CA) is widely using in the petrochemical plant through adoption of the process safety management (PSM) system, but it has not practical problem that the CA was not reflected effects for employee count, business interruption loss, utility usage, and etc.. In this study, to establish the practical emergency response plan and to achieve risk based management, the consequence based on the damage area and the financial loss were estimated and compared through application on facilities in the petrochemical plant. If the damage area is used, the consequence category must be determined by safety area considering simultaneously damage area, fatality area and toxic area. Also, the consequences based on the financial loss is more practical method for the case of considering process properties and circumstances.

Regional Economic Impacts of a Verdugo Scenario Earthquake Disruption of Los Angeles Water Supplies: A Computable General Equilibrium Analysis

This paper advances the state of the art in the development and application of a computable general equilibrium model to estimate the business interruption impacts of a Verdugo scenario earthquake on the water system serving Los Angeles. The model has been especially designed to incorporate engineering and spatial aspects of this system in the context of the regional economy to include resilience responses at various water outage levels. The Verdugo earthquake scenario and Monte Carlo simulations show that water outages in LA County could result in business interruption losses of several billion dollars without any resilience adjustment. However, a reduction of these losses by more than 90% is possible through the application of several types of resilience on the customer side, most prominently rescheduling production, in addition to conservation, input substitution, and storage of water. Allowing the price of water to rise to reflect its scarcity would reduce the losses even further.