There are inherent issues in the market’s underwriting process that makes it difficult for carriers to provide effective business interruption cover on a sustainable basis.
Business interruption claims have always made up a large share of the indemnities paid by insurers in the political violence and terrorism market and they are making a big impact at present.
Unfortunately, however, it is not always easy to ensure clients secure adequate coverage for such claims or that they are adjusted well following an insured event. The challenge is greater when claims arise from denial of access and other non-damage losses, especially in developing parts of the world, where access to audited accounts or historical revenue data is not readily available, protracting the adjusting period if the business affected has a seasonal trading cycle.
Clients buy generic political violence and terrorism cover as balance sheet protection but an event – perhaps a series of riots – will not affect all businesses in the same way. A sole trader with a single shop, for example, may see their bottom line affected more by localised rioting than a national retailer with multiple outlets. Larger companies can often steer customers to another location, but a police cordon in place for just a few days may deliver a serious blow to an uninsured greengrocer with only a single outlet.
This was highlighted following the terrorist attack on London Bridge and Borough Market in 2017. Many of the businesses purchased coverage through Pool Re, which covered the physical damage and business interruption losses. However, businesses that suffered no damage but were unable to open for days as a result of the police investigation were left in a precarious position. Denial of access coverage was available to them, but few had appreciated its significance so most had not requested it.
Similarly, in 2015 after the Paris terrorism attacks, hotels could not admit guests for long periods, with retail and hospitality businesses unable to operate properly due to restrictions.
Today, we are seeing steps being taken in Lebanon, New York, Minneapolis, Santiago and Hong Kong to minimise property damage from demonstrations, but this is having unintended financial implications. The affected businesses may not have been directly targeted by terrorists or rioters, but their revenue stream is often hit. The range of potential events and their loss implications should always be considered fully when coverage is underwritten and sold.
“Clients buy generic political violence and terrorism cover as balance sheet protection but an event – perhaps a series of riots – will not affect all businesses in the same way”
Unfortunately, the real value of business interruption coverage – protecting the client’s bottom line – is not emphasised enough as the focus is often on physical damage, which is the easier loss to quantify. Materials and equipment required to reinstate a physical asset can be easily established and obtained, whether for a Western high street retail outlet or a rural mine in a developing country. However, the complexities involved in calculating loss of revenue, increased cost of working or loss to third-party suppliers or customers are completely different for these two operations. Yet in many cases the same wordings are applied with little consideration given to differences in accounting procedures; how taxes may have an impact on rebuild or down time; potential penalties for failing to meet a contractual obligation; or how the value of a loss is calculated if goods are sold at spot or cash market prices.
In today’s environment, riot has become a greater concern for many businesses than terrorism. That shift creates greater business interruption challenges for underwriters, brokers and their clients, since the nature of the peril is very different. A riot in any shopping street, anywhere in the world, is unlikely to see every shop looted. However, undisturbed businesses may not be permitted to reopen for several days owing to the damage to neighbouring shops or the presence of investigating or patrolling police. Even builders on-site may prevent normal footfall – let alone lingering reputational concerns.
Frequency is another difference. Terrorist incidents tend to be isolated events, but riot damage may be serial. In several recent cases, riots have been characterised by repeat performances. In Egypt during the Arab Spring and Chile over the past winter, for example, the mayhem was renewed every weekend, affecting the same parades of shops. Businesses along those routes suffered diminished revenues for many months, leading to complex business interruption claims.
Several policy extensions can protect against such losses but, for many businesses owners, access to these products is often limited and knowledge of what is available is very much driven by how they buy their insurance. For many small businesses, buying insurance is a box-ticking exercise, with little thought given to ancillary coverages. Often, however, it is small businesses that need to consider these coverages more thoroughly than larger ones, which have access to alternative revenue streams or lines of credit to help them survive during difficult times.
The availability of suitable adjusting skills presents a further challenge for underwriters, especially in the developing world. Even when well-known firms are engaged, they may employ a local adjuster unknown to the underwriter and ill equipped to handle a complex business interruption claim. This problem is magnified in countries where ongoing conflict or security concerns prevent adjuster access to a location.
That said, a local adjusting firm will in many cases be better qualified to make an assessment on its home turf – although it may seem less appealing to a distant underwriter. Meanwhile, information barriers within insurers can prevent underwriters and claims handlers from speaking to each other to ensure the best results from the outset. New tools such as the Lloyd’s Market Association’s Gemini Claims Expert platform are a great help when looking to appoint approved, registered local expertise.
The London market has not yet completely understood these inherent challenges in the political violence market’s business interruption insurance process. Whether underwriters, brokers, or claims specialists, we all need to consider these factors, alongside the technicalities of coverage extensions. By understanding them, we will be able to deliver better suited coverage for clients that is more profitable for risk carriers.