Expert view: Managing business interruption in the intangible economy

The world of business is becoming more and more intangible, reshaping and transforming the risk landscape along the way. But what does this mean for risk managers?

Until recently, the main stock value of a company was in its physical assets – property, plant and machinery, for example. These were the assets that took prime position on the risk register and areas of protection prioritised by risk managers. But in today’s globalised and digitally-advanced world, revenue-generating value is increasingly locked up in intangible assets. More precisely, a company’s intellectual property, data, and reputation – the nonphysical – now makes up 80% of a corporate’s market value, a portfolio of assets which therefore did not attract risk managers’ attention in most companies some 20 years ago.

In risk management terms, this means shifting the focus of protection from physical assets to safeguarding existing and future revenues generated from IP, data and reputation. It means reforecasting risk scenarios for the intangible economy, which can involve anything from regulatory intervention, political violence to supply chain, logistics and distribution difficulties, all of which can halt operations, cause short- to long-term freeze on revenues, and tarnish reputations.

Take the insolvency of Korea-based shipping company, Hanjin, as an example. Merchandise en route to retailers around the world were stranded when the company – the world’s seventh largest container shipper – filed for bankruptcy in 2016. The impact for associated retailers? Non-physical damage business interruption (NDBI) throughout global supply chains, resulting in significant loss of revenues.

Holiday operators often fall victim to risks to their intangible assets. Natural perils have forced operators to relocate holidaymakers to safer locations. The loss to these companies were not related to property or physical damage – they own no hotels – it was NDBI and resulting expenses from having to move hundreds en masse to safety, and subsequent loss of revenue due to drops in bookings after such events.

The lesson from these two examples is that traditional risks still manifest in the intangible economy, but the loss scenarios are increasingly made up of NDBI events. In an evermore complex business environment, insurance programmes will need to evolve to accommodate an inevitable rise in NDBI incidents in the future. Companies will suffer the perils if they turn a blind eye to this trend, as one travel organisation recently found.

Affected by severe weather conditions, this travel company clocked up significant expenses when relocating its holidaymakers. When it tried to claim against its insurance, it found several months into the claims process, that its insurance programme – made up predominantely of physical damage business interruption and CBI – would not respond as expected.

What this has prompted is a wider conversation over how it – and corporates at large – can simplify their insurance programmes, combining it with NDBI coverage. For many loss scenarios, the answer can be found in parametric insurance. Sticking with the travel company and weather events to further illustrate my point, the natural peril it suffered could, generally, have been measured. This enables insurers to create an index from independent data providers which can trigger (mostly fixed) insurance payments when e.g. windstorms reach or exceed agreed thresholds on the index. If this is the case, claims are paid – without hesitation or dispute. In addition, the use of advanced technologies such as the internet of things, AI and automation can provide useful data to parametric insurance solutions, all of which help to objectivise the triggers for payments by the insurer.

What this example also illustrates is the importance and value of insurance in a fast-changing and complex business environment. Insurers are transforming the way in which they do business to cater for the risks of the intangible economy. Off-the-shelf policies are being replaced by tailor-made and more sophisticated but simplified insurance programmes. No longer is insurance simply a risk carrier, it is fast becoming a financing tool, enabling businesses to take risks that are vital to grow their company.

What do I mean by this? Say, for example, you are a highly-leveraged hotels company with huge debt but you have the backing of investors to open a new hotel overseas. There are risks such as airport closure owing to weather-related events or your online booking systems shutting down because of a cyber incident. These scenarios could result in short-term insolvency. All these threats, however, are insurable. And procuring the right insurance programme will enable businesses to take entrepreneurial risks.

But for corporates to really reap the benefits of insurance as a financing tool, collaboration between insurer, broker and risk manager must be strengthened. Insurers and brokers should be brought into discussions about risk financing and insurance procurement much earlier in the process, perhaps even during initial risk analysis. Because, together with the risk manager, a structured and full-responsive insurance programme can be built to cover a fuller spectrum of risks.

This leads me onto one of the greatest hurdles that risk managers face internally: challenging and changing the long-held perception among internal stakeholders that insurance is simply an annual transaction and a nuisance. To overcome this and to ensure greater collaboration between risk managers and business unit heads; and risk managers and the insurance market, there are three key steps:

1. Simplification of risk and insurance terminology: risk managers can better articulate the value of insurance and enterprise risk management by refraining from jargon and adopting language used by department heads to ensure they can resonate with your message.

2. Draw on real-life case studies: from Hanjin’s insolvency and supply chain implications to gaps in coverage as experienced by travel organisations, facts and figures of recent loss scenarios and the resulting consequences, provide evidence to support a business case for NDBI, parametric insurance and other tailor-made solutions.

3. Engage with internal stakeholders: once you have homed in on the right ‘business’ language, ensure you engage with all stakeholders, from CFOs, business unit leaders right through to communications and marketing. This isn’t just about ensuring internal stakeholders simply understand insurance, they need to actively provide resources and back and support the risk management plan. The communications and marketing department can be immensely helpful in simplifying the message and in distributing it across the company.

Doubtless to say, the complexity of today’s business environment calls for stronger risk management and to ensure that we, as a community, can better target and address modern-day risks, we need to ensure greater partnerships across the board.