But for companies, the material damage only accounts for part of the losses. The "invisible" damage, namely the revenue and profit lost as a result of a disruption, is a far heavier burden for them to shoulder. Often, the full magnitude of these losses only becomes apparent some time later. As a result, it is virtually impossible to put a figure on the macroeconomic and insured losses caused by Sandy at the moment – which is also reflected in the wide range of estimates that are being thrown around. Past experience, however, tells us that business interruption and contingent business interruption (CBI) – which provides insurance cover in the event of a failure of a key supplier caused by physical damage – typically account for 50 to 70 percent of overall catastrophe losses.
Insurers have to cough up, via P&C insurance policies, not only for the repair work to buildings and factories, but also for a large chunk of the financial losses. Offering protection against natural hazards like these is at the core of our business model. But often, even a generous claims payment is only of limited use to companies if their competitors have eaten into their market share in the meantime, or if confidence among investors has suffered. This is why companies have to do everything in their power to get back to business as soon as they can for their own good. At large corporations, contingency plans that trigger a whole cascade of measures in extreme situations are part of the standard repertoire.
Often, however, companies do not even have to be affected directly. Globalization means that events have global domino effects. If a key supplier or a company's own production facility goes out of operation due to a natural catastrophe, this often means that the production lines on another continent also end up at a standstill. The floods in Thailand in November 2011, for example, also left their mark on the balance sheets of US companies: because suppliers north of Bangkok were flooded with meters of water and had to suspend production for months, global production of computer hard drives fell by one third. PC manufacturers in Silicon Valley had to slow down their manufacturing activities and buy the missing components at higher prices elsewhere.
Global supply chains turned out to be the Achilles heel of the global economy. Because every single link in the chain has been built to ensure maximum cost efficiency, sudden downtime can have far-reaching implications. The eruption of the Icelandic volcano Eyjafjallajökull, which grounded air traffic across Europe for several days in 2010, the earthquake disaster in Japan and the flooding in Thailand one year later have highlighted just how vulnerable our modern manufacturing and procurement networks are. These events have prompted a rethink at many companies. Attempts are being made to strike a new balance in the conflict between low costs on the one hand, and redundancy on the other. Companies are making more of an effort to identify critical suppliers and analyze their production locations. If, for example, an Asian supplier has its manufacturing facility in a region prone to earth quakes, conscious moves are made to establish a relationship with an alternative supplier in another region. A truism of security economics holds true for the streamlined procurement processes: redundancy is expensive, but no redundancy can prove to be even more expensive.
As an insurer, we also have to keep an eye on the accumulation of risks in our portfolio. After all, if a catastrophe brings a production cluster to a standstill, this could hit a large number of our customers in one fell swoop. In order to ensure that we can make the required capital available to pay out on business interruption claims in the future, we have to examine this accumulated risk even more precisely in our books. In this respect, we need more of an insight into the supplier structure and supply chain risk management of our customers. It is not just the damage per se that bothers me, but the damage that could have been avoided or, worse still, the damage that catches us off guard.
Dr. Axel Theis, CEO of Allianz Global Corporate & Specialty
Dr. Axel Theis is CEO of the industrial and specialty insurer Allianz Global Corporate & Specialty (AGCS). The lawyer has been working at Allianz since 1986 and took up his first management position in the liability segment in 1992. This was followed by further positions held in the P&C segment at Allianz in Germany, before Theis moved to Sydney as member of the Board of Management of Allianz Australia. He was appointed to the Board of Management of Allianz Versicherungs-AG in 2001, where he was among the managers responsible for global industrial lines. He was the driving force behind the establishment of AGCS, one of the world's largest insurers of industrial companies and specialty risks in aviation and shipping, in 2006. In 2011, AGCS reported total premium income of EUR 4.9 billion and the company employs a workforce of more than 3,400 in 28 countries.