Lessons From the Tianjin Explosion - Business Interruption and Contingent Business Interruption
The port of Tianjin is a hub for advanced industry and financial activity, and the massive explosion that occurred in August of 2015 resulted in 165 deaths; eight people missing and 798 injured; 304 buildings, 12,500 vehicles and 7,500 containers were either damaged or destroyed. In my last blog, I wrote about the lessons we can learn from the risk accumulation and modelling challenges exposed by the Tianjin explosion. This blog focuses on Business Interruption (BI) and Contingent Business Interruption (CBI).
The main difference between BI and CBI insurance is what triggers coverage. In very simple terms, a BI policy covers the loss of profits following damage as a result of an insured peril to a policyholder’s own facility while a CBI policy covers the loss of profits following damage as a result of an insured peril that shuts down a policyholder’s supplier or customer.
Businesses that suffered direct loss and damage as a result of the Tianjin explosion may have experienced severe disruption to their business with possible long-term consequences. Having BI insurance is of course a useful financial backstop that protects the business. However, it does not totally insulate a business from the more serious long-term consequences of a decline in market share, loss of customer confidence, loss of investor confidence or a potential plunge in share price resulting from such interruption.
Business today is conducted with customers and suppliers located around the world. Asia is a hub for manufacturing and production, with a high concentration of production and logistics sites scattered across India, China, East Asia and Southeast Asia. The economic model of sourcing raw materials and/or critical components from any global location in order to reduce costs and enhance profits is the accepted norm. Supply chain resilience is also critical in ensuring that businesses continue to operate efficiently. However, recent events - such as the Japanese 2011 Tohoku Earthquake and Tsunami, and the Thailand floods of 2011 - were a wakeup call for the insurance industry. After the Thailand floods in 2011, the supply of hard drives stalled, causing computer manufacturers around the world to experience disruption - and as a result, losses in production. The CBI losses from the Thai floods and the Tohoku earthquake resulted in losses of more than USD 1.5 billion each. The inability to get production facilities back up and running quickly after these events led to high-level supply chain disruptions, causing entities inside and outside the loss locations to suffer significant business interruption losses.
These events, combined with the recent impact of the Tianjin explosion, should motivate the (re)insurance market to re-evaluate its BI - and especially its CBI exposure - from such events. In a 2011 survey of 552 companies across 62 countries, the UK Business Continuity Institute found that 85% of these companies experienced at least one supply chain disruption in the preceding year. Of that, a significant percentage responded that the disruption was not smoothly resolved, leading to losses in productivity and revenue, increased costs, increased regulatory scrutiny and a fall in shareholder confidence. Risk management is the key for businesses to ensure they have in place a resilient supply chain. A robust risk management strategy and an allied business continuity management plan will assist businesses in mitigating disruption to their supply chain.
What we do and how we champion improvements will determine if we as an industry have learned lessons from this event. Better data within the supply chains can help ensure that risk carriers are fully in possession of all the relevant information they need to determine what risks to accept. Disasters like Tianjin will occur, but how we as an industry cope with them will be determined by how well we plan for them.
- BBC News.
- Asia Insurance Review - Lessons from Tianjin - A wake-up call for risk accumulation awareness.
- Swiss Re Sigma Study.
- Allianz Global Corporate & Specialty (AGCS)’s Safety and Shipping Review 2016.
- How Many? A Dictionary of Units of Measurement, Russ Rowley, The University of North Carolina.
- SAS Analytics.
- Allianz Global Corporate & Specialty (AGCS) Managing Disruptions Nov. 2012.