Below is a complete example of a hot topic update from the PracticeView monitoring service. It includes background information, client discussion points, and resources and commentary which can be used by your firm and its professionals to stimulate discussions with clients and/or prospects. Click here to learn more or subscribe to PracticeView.
Background
Earthquakes, tornadoes, flooding, and this past summer’s Hurricane Irene have taken a toll on policyholders and insurers alike. In July, Munich Re reported that “An exceptional accumulation of very severe natural catastrophes makes 2011 the highest-ever loss year on record, even after the first half-year.” Numbers are continuing to be assessed, but at this point, it is still too early to determine the ultimate economic impact of this year’s natural disasters on businesses. Factors that must be taken into consideration include property damage, clean-up costs, interruption of business, supply chain disruption, and extra expenses associated with business recovery or relocation.
Business interruption coverage is designed to restore the policyholder to the financial position it was in before the property damage occurred, namely to reimburse the business for its lost profits. It can take weeks or months for the impact to be fully known, and calculating lost profits is further complicated in the midst of an economic downturn. Another difficulty lies in determining the level of compensation awarded to policyholders when answering the question of “number of occurrences”: When an earthquake shook Japan, followed by a tsunami, does the policy measure the event(s) as single or multiple occurrences?
In the aftermath of the earthquake and tsunami that struck Japan in March and triggered a meltdown at the Fukushima nuclear power plant, global insurance broker, Willis Group, has developed a new insurance product to cover business interruption costs for companies with key locations, suppliers or customers situated in the vicinity of a nuclear power station. Policyholders are beginning to reassess their coverage for events that do not cause physical damage, and Willis’ response with their new product is serving to meet those specialized needs.
Implications
Insurance providers must cover themselves to remain in business, making certain they have an accurate assessment of the risks they are underwriting. They must write contracts explicitly outlining how coverage applies and which circumstances are excluded. In order to be competitive, they must continually be exploring new niche markets for development.
Client Discussion Points
- Is the insurance provider using a comprehensive and appropriate risk analysis model?
- How can the insurance provider improve the communication process with its policyholders?
- Can the insurance provider develop niche products to better meet the needs of clients?
Resources & Commentary
- Navigant – Challenges of Catastrophe Modeling
- Edwards Wildman – Munich Re Reports 2011 Costliest Year on Record for Natural Disasters
- Jenner & Block – The Insurance Aftermath of the Recent Earthquakes and Tsunami in Japan, Flooding Along the Mississippi River, and Tornadoes in the South: Addressing the ‘Number of Occurrences’ Question
- Insurance Day – Consider the Benefits of Calculating CBI
- Business Insurance – Buyers Review New Kinds of Supply Chain Risk Coverage
- Law360 – Aftershock — Coverage Issues Post East Coast Quake
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