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Perspective

Contingent Business Interruption in Petrochemical Business – An Underestimated Exposure?

July 21, 2016| By Martin Zorn | Property | English

Significant changes in the petrochemical industry over the last decades have included many former chemical and petrochemical giants selling their petrochemical businesses to focus on chemical operations specializing in “pharmaceuticals, performance materials, industrial chemicals, etc.” Internal customers and suppliers (former interdependency exposures) suddenly became external customers and suppliers, and thus a Contingent Business Interruption (CBI) exposure.

CBI typically provides coverage if an insured suffers a direct physical loss at a (key) supplier or customer, resulting in an interruption of its own business. This can also include indirect customers and suppliers (so called second-tier, third-tier, etc. suppliers/customers.) Accurately assessing the risk in these cases is a challenge for risk managers and underwriters as CBI exposures can be very difficult to quantify.

In many cases, the policies of these customers and suppliers were / are handled by the same large international insurance companies, potentially resulting in unknown aggregates − one occurrence can now trigger a claim under two or even more policies.

CBI is typically sub limited in the policy wordings; however, often no or very limited information exists about the number of exposures or the number of suppliers and customers exposing the limit. Furthermore, in many cases only limited or even no information is available regarding the risk quality of these external suppliers or customers. Even the annual monetary CBI exposure by a specific supplier or customer comparable to an annual BI sum insured is typically unknown, in which case it is unclear whether the CBI limit represents an amount that would be exhausted in one week, one month or half a year.

How can an underwriter adequately rate a CBI exposure without this information? We have seen situations where a loss triggers CBI at a supplier and as a consequence triggers another CBI claim at a supplier of the supplier. However, if there is no direct contractual relationship to that supplier, it can even be difficult to get information about the cause of loss which is needed to decide whether a CBI claim is covered.

Why is all of this particularly critical? If an insurer covers several companies along the supply chain, one loss occurrence can trigger claims under several policies. As an example: Damage to a steam boiler supplying an ethylene cracker (a facility that converts ethane to ethylene through a series of complex processes), results in an interruption of ethylene production. Let’s say there are several customers receiving ethylene from this cracker. The insurer that covers part of the cracker PD/BI loss is also the insurer for one of the customers and one of the suppliers for that customer. The customer and the supplier both claim a CBI loss and both limits are fully triggered. So from this one occurrence, the insurer has losses via three policies.

If a natural catastrophe hits the supply chain, the loss potential can be even more significant. Even modest limits can add up to very large amounts if a large number of policies are affected. Clear internal guidelines should define the amount of uncertainty that an insurance company is willing to accept in their book, with particular attention paid to exposure from unnamed customers and suppliers.

Gen Re can help you think through your CBI exposures and offer a tailored reinsurance solution.

 

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