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Business Interruption: once damaged, twice destroyed

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The damage bills from hurricanes like Harvey or its successor, Irma, amount to billions. But these could be far smaller in comparison to the costs of business interruption.

Allianz SE
Munich, Sep 06, 2017

As Hurricane Harvey final moves off the Texan coast leaving behind damage of up to 180 billion US dollar, the next tropical storm seems poised to arrive. U.S. weather experts predict a 55 to 60 percent chance that Hurricane Irma will make landfall between Florida and the East Coast this coming weekend, after having swept across the Lesser Antilles, and Puerto Rico.

Classed as a Category 5 hurricane, Irma threatens to be even more devastating than Harvey, which was Category 4 at its peak. The difference between the two on the Saffir-Simson Scale is wind speeds greater than 157 miles per hour (252 km/h or higher) opposed to 130-156 miles per hour (209-251 km/h). According to the U.S. National Hurricane Center (NHC), Irma could cause a sea level rise of three meters, heavy rains and huge destructive waves. Rick Scott, Governor of Florida, has declared a state of emergency.

The Atlantic hurricane season is in full swing. Harvey was the first major hurricane to make landfall since Wilma in 2005. The physical destruction caused is readily apparent: an estimated 40,000 homes were destroyed, roads flooded, and life interrupted for everyone in the greater Houston area.

Allianz-street flooded by hurricane harvey

Companies face a double risk

After the physical damage, companies and businesses also face the risk of business interruption (BI), which is any disruption of usual operations. The economic impact of BI is less obvious, but can amount to far more than the physical damage – and is growing. According to the Global Claims Review 2015, Allianz Global Corporate & Specialty (AGCS) estimates that BI typically accounts for a far higher proportion of the overall loss than ten years ago. The average large BI property insurance claim now amounts to more than €2 million ($2.39 million).

“Clearly, flood and property damage from the storm itself are major threats to businesses, but property damage isn’t necessarily the main cause of disruption for our clients,” says Steven Kennedy, the Regional Head of Property, Energy, and Engineering Claims for AGCS North America. “Business interruption losses can be anticipated, resulting from a loss of power, inability to gain access to premises or problems with a supplier.”

In general, BI claims are increasing, although the rise is mostly due to non-natural causes such as human error or technical failure. In terms of natural hazards, floods are the leading cause of claims, according to AGCS.

Production and supply endangered

“BI exposures are largest for sectors with high levels of interconnectivity and technological values, as well as concentrations of risks in single locations such as automotive, semi-conductors and power and petrochemical plants”, says Alexander Mack, AGCS Chief Claims Officer.

Hurricane Harvey ripped through one of the most important energy hubs in the United States causing ten key oil refineries and production facilities to close. These facilities normally refine about 4.4 million barrels of oil a day, according to Business Insider, the yearly energy need of about 45,000 US citizens. In total, about 25 percent of U.S. refining capacity was offline due to the storm.

The impact of Harvey could stretch fare beyond damages to energy industry facilities. The interruption of business could cause macro-economic problems, says Ellen R. Wald, geopolitical and energy consultant to Forbes Magazine. With refineries down, the supply of refined products like gasoline has fallen, which will eventually cause prices to rise. This will be reflected along the value chain with every day expenses such as travel and groceries expected to increase.

How can companies prepare?

Planning for emergencies is critical. “Claims work starts long before a storm or flood hits – it’s about preparing businesses for the worst-case scenario”, explains Steve Kennedy.

In the 2016 Risk Bulletin “Protect Your Employees and Business from Flood Damage,” AGCS advises to take special care of specific and essential equipment or areas vital to production or business. These should be relocated to safer areas, such as higher floors. Also, important machinery, stock or reports should be moved to higher elevations. If that is not possible, floodgates should be installed and sandbags readied. It is also worthwhile to maintain an independent pump – running on fuel – to extract water.

Emergency processes should be closely monitored, tested and developed. While flooding in areas prone to hurricanes cannot be prevented, the impact on business can be greatly reduced.

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