1 Contigent business interruption 5
1.1 Suppliers’ and customers’ extensions 5
1.2 CBI–an underestimated risk 6
1.3 Underwriting aspects 7
Risk quality of suppliers and/or customers 7
Degree of insured’s dependency 8
Some principles affecting the extension 9
Insurance terms and conditions 11
Further conditions and extensions 13
Accumulation and reinsurance aspects 14
1.4 Public utilities 16
1.5 Loss of access (ingress/egress) 16
Annex 1: The risk management process with external dependencies 19
2 Virtual world, real threats 23
The legal environment 24
Technical dependency 25
Malicious acts and hacktivity 25
2.1 Information Systems Business Interruption (ISBI) 26
The sum insured 27
What cannot be covered 27
Risk assessment 28
2.2 Conclusion 29
Annex 2: E-commerce business marketplaces and the
electronic supply chain 30
3 Other special covers 33
3.1 Contingencies 33
Non-physical damage 34
3.2 Advance loss of profits insurance (ALOP) 36
Insured party 36
Sum insured 36
Period of insurance 36
Loss settlement 37
3.3 Liquidated damages and force majeure covers 38
The liabilities 39
The insurance covers 39
Annex 3: Business interruption in livestock production 41
4 Related reading 45
After an insured business interruption, the insured should find himself in nearly
the same financial position he would have been in had the loss never occurred.
Easier said than done! Anyone ever involved in a business interruption claim
can attest to how difficult it is to juggle its many inherent challenges. These not
only include “intangibles” such as reduction in turnover compared to projected
business results, but also relate to various problems of business operation
maintenance and/or re-launch of production under adverse circumstances.
A Swiss Re business interruption publication which appeared in 1998
addressed major characteristics such as internal and external susceptibility to
disruptions, income at risk, objectives and forms of cover, but it touched only
briefly on special issues. The publication in hand probes BI specialities which
have gained importance over the past few years.
In today’s “global village”, business processes in industry and commerce form
a chain of interrelated activities by highly diverse, but interdependent parties.
Technological progress is moving at tremendous speed. Raw materials and
products need to be finished and assembled according to extremely tight
schedules. In particular, international companies now outsource part of their
original activities or enter complex partnerships with external organisations.
By doing so, they lose a degree of control over resources, business processes
and the very product itself.
Insurance markets and insurance products could hardly stagnate in this ever-changing environment. The growing exposure linked to the use of internet and
telecommunication services has become crucial. Sudden and accidental failure
of IT systems, minimum requirements on protection and backup procedures,
and the assessment of new types of cyber risks are among these burning
Not all the products, wordings, extensions and alleged simplifications devised
by the trade in the soft cycle represented genuine improvements. Indeed, with
regard to business interruption, some rather suspect methods of insuring large
companies’ interdependencies were occasionally applied. Non-transparent
exposures and accumulations were the unfortunate result of such practice.
Outlining the problems of BI insurance and offering some solutions in this
publication is to underline Swiss Re’s decisive strategy. In return, the authors
anticipate a fruitful dialogue with underwriters around the globe.
3 Swiss Re: Contingent business interruption and other special covers
4 Swiss Re: Contingent business interruption and other special covers
A Fire in Albuquerque Sparks Crisis for
European Cell-Phone Giants
Extract adapted from a report by Almar Latour,
Staff Reporter, “The Wall Street Journal”,
29 January 2001
...the blaze in an Albuquerque, N.M. semi-conductor plant burned for just 10 minutes
last March. But far away in Scandinavia, the
fire touched off a corporate crisis that shifted
thebalance of power between two of Europe’s
biggest electronics companies, both major
players in the global electronics industry.
Both companies bought computer chips from
the plant, which is owned and operated by
Philips Electronics NV of the Netherlands. The
flow of those chips, which are crucial compo-nents in the mobile phones they sell around
the world, suddenly stopped.
Philips needed weeks to get the plant back to
capacity. With mobile phone sales booming
around the world, neither customer company
could afford to wait.
But how the two companies responded to
the crisis couldn’t have been more different.
Company “A”, which was Europe’s largest
corporation by market capitalisation at the
time, met the challenge with textbook crisis
Company “B” moved far more slowly. And it
was less prepared for the problem in the first
place. It didn’t have other suppliers, and in
the end, came up millions of chips short of
what it needed for a key new product.
“We did not have a contingency plan”, con-ceded the marketing director for consumer
goods at Company “B”.
5 Swiss Re: Contingent business interruption and other special covers
1 Contingent business interruption
What happens to a business after a fire? Production slows down or stops and
turnover decreases; profits begin to diminish and eventually turn into losses as
wages and other charges continue to accrue.
What happens, however, if goods or services cannot be supplied to the busi-ness because of material damage at the premises of a supplier or, perhaps
even worse, after a fire on the premises of an important customer? Depending
on the type of industry, it may be difficult to find alternative suppliers or new
customers. For some businesses, in fact, the risk of reduction in turnover
triggered by an event outside their control may be as high as that of material
damage on their own premises.
Since most business processes extend beyond the boundaries of a single
manufacturing or assembly plant, management’s awareness of dangerous
interdependencies has risen sharply. The importance of adequate insurance
against the consequences of business interference after property damage
elsewhere than on the insured’s premises is growing fast, triggered by rapid
technological and organisational changes. Therefore, it is essential for under-writers to pay strict attention to the assessment of contingent business inter-ruption exposure and to apply technical underwriting of the risk.
1.1 Suppliers’ and customers’ extensions
Insurance for business interruption at the insured’s premises caused by mate-rial damage at the premises of a supplying company or customer is neither
new nor “exotic”. In fact, almost every business–be it large or small–depends
on raw material, semi-finished and finished products from outside sources
and on customers to whom its goods and services are sold. In the motor
trade, for instance, dependencies on certain sole producers of critical parts
and components triggered the development of suppliers’ extension from the
first half of the last century.
Terms and conditions of the extension, as well as terminology, vary greatly
from country to country. They may even differ according to the insured’s trade
and occupation. Further, they are influenced heavily by diverse underlying BI
systems, the US versus the UK system, for example.
The purpose of CBI insurance
(suppliers’ and customers’ extensions)
To pay for the insured’s actual loss of busi-ness income arising from the necessary
suspension of his operations during the
period of restoration and extra expenses ...
UK and elsewhere
To indemnify the insured for loss of gross
profits arising from reduced turnover and
higher working costs during the indemnity
... as a result of an insured event (material
damage at outside premises which the
insured does not own, operate or control).
6 Swiss Re: Contingent business interruption and other special covers
It is neither possible nor necessary to outline the existing differences in terms,
variations in conditions and terminology. Technical literature describes the
systems relevant to their particular markets. However, where it may prove
helpful, differences are referred to in the relevant chapters.
The principal elements of contingent business interruption are the same all
over the world, and this publication addresses the main underwriting features.
In difficult market periods, underwriters run the risk of overlooking some of
1.2 CBI – an underestimated risk
Industry and commerce today are facing fierce competition, extreme cost con-sciousness and smaller margins. Raw material is transported in the most rapid,
rather than the safest way, industrial robots are working at full or over their full
capacity in serial production, semi-finished products and finished components
are delivered only minutes before they are assembled. Duplication processes,
back-up for critical elements and buffer stock to ease the effect of an incident
Suppliers’ bottlenecks: Figure A
There are basically two methods for estimat-ing a production outage. When only very little
is known about a given production process, it
is necessary to fall back on a “black box”
In this example, the paint shop of an automo-tive assembly plant is gutted by fire, with the
result that the subsequent steps–assembly
and finish, for example–can no longer be
executed. In fact, the preceding steps cannot
be carried out either,and the entire operation
is brought to a standstill. As a result, the
purchaser–a sales organisation–sustains a
The black box view: no matter which process
segment is affected, the entire plant is
forced to close. If information is scarce, any
estimate regarding the loss probability and
resulting business interruption period will
only be very rough–if at all possible.
7 Swiss Re: Contingent business interruption and other special covers
have been abandoned and certain businesses depend on single-source supply
to a dangerous degree. In short: in a modern, complex supply chain, redundan-cies are reduced and vulnerabilities greatly increased.
How have business interruption insurers responded to this increasingly
challenging environment within the last ten years? In many cases, they
1.3 Underwriting aspects
The main underwriting features for the extension of business interruption
insurance to suppliers or customers can be categorised as follows:
risk quality of supplier and/or customer;
insured’s degree of dependency;
insurance terms and conditions;
accumulation and reinsurance aspects.
Risk quality of suppliers and/or customers
Whether directly or indirectly, everyone in a supply chain is interdependent;
the main problem for the insureds’ business is that both the performance and
safety measures of suppliers and customers are beyond their control. There-fore, delivery of vital material, parts and components cannot be safeguarded.
Modern industrial concepts such as “extended enterprise” may mitigate the
problem some, since close cooperation fosters better knowledge and under-standing of what transpires in the chain. Conversely, close cooperation may
mean that products are developed and designed jointly. In case of an incident,
replacement may become an even greater problem.
Surprisingly, underwriting features–such as suppliers’ and customers’ situa-tions, the condition and locations, working processes, material, machinery
and equipment, as well as protection and prevention measures–seem to have
been of little concern to business interruption insurers in the recent past.
But the revival of technical underwriting in the current market has seen a
thorough risk analysis of key suppliers and customers once again become
a standard, if not indispensable part of the job. We strongly suggest that,
without exception, suppliers’ and customers’ risk quality be checked, the key
elements of such an examination being:
address and situation of premises;
exposure of locations to fire, explosion and natural perils;
exposure of locations to socio-political perils (if insured);
structural and technical fire and explosion protection;
organisational protection (eg intervention, emergency planning, staff
machinery, equipment, state of technology;
work processes, storage, critical components and materials;
key suppliers’ and customers’ own dependencies.
New production methods and impact
Just-in-time production, outsourcing, single-source supply, the discontinuation of buffer
storage and other “lean production methods”
all have the effect of reducing safety margins.
They also increase vulnerabilities and depend-encies in almost all industries and commercial
Underwriters with in-depth knowledge of these elements will better under-stand the vulnerabilities to material damage and be able to locate the “Achilles
heel” of suppliers and customers.
Degree of insured’s dependency
Suppliers’ and customers’ extensions can only be granted to those business
organisations – be they manufacturers, assemblers or distributors – which
are aware of the effects of material damage to their suppliers’ or customers’
premises. While incidents at outside premises would invariably be beyond
their immediate control, they – and their insurers! – should be able to assess
the impact on their own operations.
8 Swiss Re: Contingent business interruption and other special covers
Suppliers’ bottlenecks: Figure B
A more sophisticated approach can be taken
if more information is available about the plant.
For example, in the automotive production
process, the paint shop is a bottleneck because
there is no redundancy within the plant, and
every car body must go through this stage.
Moreover, since the finish coat contains sol-vents, there is the possibility of an explosion
and fire occurring at this vital point.
This type of information facilitates the evalua-tion of organisational, technical and construc-tion-related fire-prevention measures, and
conclusions as to what can happen if there
is an “incident” in the paint shop. Estimates
regarding property damage and the business
interruption period will thus be considerably
9 Swiss Re: Contingent business interruption and other special covers
Such an analysis embraces the following:
probability and duration of an insured loss;
quantifiable effect on own business operations;
loss mitigation possibilities (eg Can critical parts, equipment, components
be ordered elsewhere? What is the time element under normal conditions
and in the worst case to resume normal supply or to find alternative
extra expenses for the above measures.
The insured’s business recovery plans should include:
a general response concept in respect of supply shortage and delivery
impact mitigation management (eg buffer storage of critical components,
resources planning for critical situations;
image management (because of additional increase in cost of working!);
adequate insurance programmes.
Any incident at premises outside the insured’s control can become a crisis
and any crisis may provoke a disaster. The underwriter’s duty is to determine
whether or not the insured has taken all measures to minimise the “ripple
Some principles affecting the extension
Underwriters would do well to consider the following:
Material damage proviso (UK system)
One must understand that this clause does not apply to CBI extensions.
Among other things, it cannot be automatically assumed that the cause of the
loss is accepted by the material damage insurer. Without the suppliers’ or cus-tomers’ consent, it may even be difficult to find out the exact cause of the loss.
Therefore, insurers do well to envisage an additional claims condition in order
to expand the insureds’ actions in obtaining the required particulars.
However, the non-appliance of the proviso mentioned above should not be
misunderstood. The CBI extension is governed by the underlying business
interruption cover which must be in respect of material damage. The effect
of the extension is only to add certain premises over which the insured has
no direct influence and not to expand the character of the cover–for example
by the inclusion of non-physical loss or damage.
Difference in perils
Another effect of the missing material damage proviso for premises outside
the insured’s control may be that extra perils are added to the extension.
However, if suppliers’ or customers’ premises are heavily exposed to natural
perils (eg flood) and if such perils are added, these considerations must, of
course, be reflected in the rating. For the sake of better transparency, it is far
preferable to keep insured perils identical.
10 Swiss Re: Contingent business interruption and other special covers
Schematic representation of the insured’s
Many organisations are linked up with the
insured company, creating dependency cas-cades across many levels including suppliers
and their suppliers, customers and their suppli-ers, power suppliers and communications
services, and even operations that are not
contracturally linked up with the insured,
eg leader locations.
11 Swiss Re: Contingent business interruption and other special covers
Insurance terms and conditions
Further to be considered are:
CBI risks are often underrated or even “tend to be forgotten” in the rating
process. However, in order to technically rate the risk, the following simple, yet
effective approach, should be considered:
The basis is each supplier’s/customer’s material damage rate (within the
relevant locations). This indicates best how often a CBI loss may occur at
the insured’s premises. In other words: it reflects the probability.
Once the probability has been determined, the likelihood of a CBI loss, ie
the vulnerability, must be assessed. This is no easy task, as the relevant
factor is not automatically available. Roughly, the factor can be expressed as
the supplier’s/customer’s theoretical “BI loading” in respect of the item(s)
upon which the insured depends. The underwriter may improvise by esti-mating the adjustment factor–which should correct the underlying material
damage rate–to achieve this artificial loss of profits rate.
There may be a mitigation factor for redundancies and recuperation
possibilities on the suppliers’/customers’ and on the insured’s side. This
factor mainly depends on satisfactory results of supply chain audits and
The degree of dependency is represented by the percentage of estimated
gross profits chosen for each and every supplier/customer, ie the corre-sponding limits.
Finally, credits may apply for deductible, waiting period and–in exceptional
cases–for loss limits which do not meet the full exposure.
Expressed as a formula, the above reads as:
Net CBI premium = MD rate ? vulnerability adjustment ? mitigation factor ?
degree of dependency ? BI TSI – (corrections for deductible + loss limit)
Net MD rate 0.5‰
Vulnerability factor 1.8
ie artificial BI rate for relevant item(s) = 0.9‰
Mitigation factor 0.7
BI sum Insured 50 million
Degree of dependency 30%
ie 15 million
Loss limit 10 million
credit, say, of 5%
Deductible 2 million
credit, say, of 20%
Net CBI premium = 0.5‰ ? 1.8 ? 0.7 ? 0.3 ? 50 m ? 0.75 = 7 086
The resulting net premium must be loaded for cost and expenses as required.
It is best practice to calculate the percentage of the insured’s dependancy as
precisely as possible for each and every named supplier and customer. The
results of these estimates should be indicated either as a percentage of gross
profits or as monetary limits. In view of the accumulation risk, underwriters
should not tolerate any deviation from this practice.
Deductibles and waiting periods
Similarly, what might be considered “alibi” deductibles are no longer admissible.
Production techniques that are geared to minimum costs and maximum output
have made large companies increasingly vulnerable to supply-chain disruption.
What is worse, there seems to be little room left for buffer stock. This means that
business interruption following a supplier’s failure to deliver immediately is part
of an entrepreneurial risk taken willingly and consciously, which, as such, should
not be insured. Hence, underwriters must insist on meaningful monetary or time
12 Swiss Re: Contingent business interruption and other special covers
13 Swiss Re: Contingent business interruption and other special covers
Further conditions and extensions
Named suppliers of suppliers (and the like)
Although this type of extension may be perfectly legitimate for certain business
classes, such as chemical and semiconductor industries and motor trade, under-writers should stay reserved. The cover can only be granted exceptionally and
for specific reasons; it takes risk carriers another step back in the supply chain,
thereby reducing transparency and creating almost uncontrollable accumula-tions. Technically, a simple amendment of the ordinary (named!) suppliers’
extension clause will do the trick: the named suppliers’ suppliers and the exact
premises are added beneath the direct suppliers.
If this type of risk is underwritten, the following principles apply: