June 26th, 2007
Guessing game jitters: as companies cut costs and boost productivity by using complex inventory management techniques, they may be unwittingly putting themselves at risk for a property loss—their own, or that of a key supplier. This murky pool of unknown and unknowable risk is giving underwriters a bad case of the jitters
The only sure thing about underwriting contingent business interruption risks in today’s fast-paced business climate is that it’s all about unknowns.
And in a global economy with heightened productivity demands, more frequent outsourcing and intricate manufacturing supply chains, the job of the commercial property underwriter handling this complex risk isn’t getting any easier. Insurers frequently find themselves groping for basics–such as corporate names, locations and other rudimentary details–when they try to write this cover for their corporate clients.
“It gives everybody nightmares,” says Jamie Miller, senior vice president and chief property underwriter for the Americas at XL Insurance America in Stamford, Conn., referring to contingency risks that are not scheduled. That means the insured’s suppliers are not identified on the policy. “It’s a crap shoot and you don’t know exactly what you are underwriting.”
Unlike the traditional business interruption coverage that is part of a commercial property policy and contains the soothing specifies that underwriters crave, contingent business interruption cover heads out into unknown territory. It covers corporations against some of the same named perils–such as fire or earthquake–that can force a company to lose income and file a business interruption claim. The so-called CBI coverage goes a step further and covers a corporation for the loss of income that stems from business interruption losses suffered by its suppliers. An auto manufacturer, for example, may have to temporarily shut down its manufacturing plant if its seat belt supplier experiences a fire at its production facility and can’t ship the seat belts.
CBI cover also protects a corporation against income losses incurred if a major customer experiences a damaging fire, for example, and is temporarily out of business and can no longer buy the corporation’s products, be it cars, refrigerators or semi-conductors. But since the risk manager of a corporation can usually identify its customers, underwriters don’t worry too much about this contingency risk. It is the risks associated with suppliers–especially the unnamed suppliers that are labeled “unscheduled risks” or “an unnamed contingent time element”–that can cause sleepless nights.
“The supplier usually is not named and the risk manager isn’t aware of all suppliers,” says Robert Bean, senior vice president of underwriting and reinsurance at FM Global in Johnston, R.I. “The risk manager could identify key suppliers, but it can be time-consuming and changes over time.”
And the void doesn’t end with unnamed suppliers operating in unspecified locations that may be halfway around the planet. Underwriters and their fussy engineering staffs may be in the dark about the quality of construction of the supplier’s manufacturing facility. And they may not know anything about the supplier’s commercial property insurance coverage and whether it includes adequate business interruption limits that will let the supplier absorb the loss and get back to work turning out the seat belts, for example, for the U.S. auto manufacturer.
“Not only may I not be able to name the location, but I also can’t tell in precise terms what the construction standards were for the supplier’s manufacturing site, what the building is made of and how it is protected against potential losses,” says John Gallagher, senior vice president of global property, at Ace USA Global Property in Philadelphia.