Business interruption - an evolving risk category in 2017

The 6th annual Allianz Risk Barometer - a renowned study analysing the risks faced by corporates on a global scale, was released recently. This blog focuses on the findings of that study, in the ever-expanding and dynamic area of business interruption and its far-reaching effects.

Top risk for 2017
New triggers for business interruption are emerging constantly, making this the top risk for 2017. In fact it’s the fifth consecutive year this peril has taken the top spot – and for good reason.

Large companies are at a higher risk when it comes to the immediate threat of business interruption – in the survey, 45% of large-sized companies identified business interruption as one of their top 3 risks. This drops to 27% for smaller-sized companies.

Business interruption is expanding from damage-driven events to intangible threats that used to be uninsurable events. Damage-driven events include fire and explosions (44%) and natural catastrophes (43%) - the two top causes of business interruption which businesses fear most.

Cyber and other intangibles
The growing area of business interruption involves incidents that cause large losses without causing property damage. Non-physical threats are on the increase – supplier failure (33%), cyber incidents (29%) and wider disruption by a terrorist event (10%). This unpredictable category of business interruption can result in massive losses for companies without them ever suffering any physical loss such as damage to property.

The Internet of things (IoT) and the on-going digitalisation of businesses are the main drivers behind non-physical damage business interruption. Business systems are constantly exposed due to necessary technological upgrades as well as factors such as system interconnectivities and reliance on outsourcing suppliers. Hackers are not the only threat, as much as 88% of global business interruption claims originate from technical or human factors*.

Threats that impact production
Single-source, low-cost suppliers in countries chosen for their cheap labour can be a ticking time bomb as supply chain failure for a business employing such cost-cutting measures represents enormous risks. Supply chain disruption is the potentially devastating consequence of relying on a single supplier. A sensible strategy to mitigate risk and to ensure an enduring, resilient business is supplier diversification. To effectively identify and understand supply chain exposures, businesses need to constantly update their continuity plans as part of their supply chain risk management programmes.

Political violence
Businesses can be affected by terrorism or political violence without being a direct victim of a violent event. By being located in close proximity to an area where protests or strikes are taking place, a business can be affected when police cordon off the area, limiting access to businesses. In addition to the reality of a direct or indirect threat, businesses should also consider the impact of such a threat on their supply chains and suppliers.

Political instability is rife all around the world and South Africa is no different. Increasing discontent with service delivery, unemployment and the on-going #FeesMustFall protests are constant political and social concerns that could erupt quickly and without much warning. In this kind of situation, a number of businesses in different areas may be affected. It is important for businesses operating in South Africa to take a broad view on the potential impact of business interruption on their operations and prepare for each scenario with sufficient consideration of all the contributing factors.

Talk to your Garrun broker to arrange for a thorough analysis of all the business risks you need to consider.

*Global Claims Review: Business Interruption in Focus, Allianz Global Corporate & Speciality