Real clear business interruption: CatNet® Premium solves BI risk mystery

What if someone told you an insurer can miss the mark on a severe weather loss estimate by as much as 40%? You'd think we were in the dawn of the Industrial Age. But no, it's 2024, and in this era of abundant data and analytical capability the answers to the BI mystery are just now emerging – much to the delight of underwriters, actuaries, risk engineers and CFOs. We sat down with Youngsuk Kim, Director of Data Science, and Shabaz Patel, Vice President of Data Science and Solutions, One Concern and Dave Evans, Senior Property Solutions Manager, Swiss Re Reinsurance Solutions to talk about the new Business Interruption module in CatNet®.

Youngsuk: Business Interruption risk (BI) continues to surprise people. It is a risk that's not fully understood and difficult to plan for, which means insurers and their customers tend to be very surprised when there is severe weather and there are losses. In lieu of the right data and analytics, the industry has had to do the best it can using other proxies like flood zone data and property damage estimates. Those things consistently miss the mark for BI, though, especially when the losses are due to damage outside of an insured building.

Shabaz: Every year proves that guessing or using a scaling factor on physical damage to the building doesn't work because the losses come in and there's a significant gap between estimates and reality. There was always a question mark around BI and no one could answer it.

Youngsuk: Business downtime from natural catastrophe events consistently result in claims that make up a sizable percentage of insurer paid losses. We have spoken with insurers who say it's as high as 40%. This is tens of billions of dollars annually!

Youngsuk: Some catastrophe modelers can generate estimates around BI by basing their projections on building damage. That's the fallacy because you might have a business within a building that is built to withstand severe weather and not realize it's located in an area with suboptimal utilities, or reliant on roads that become impassable due to flooding or fallen trees, or an airport that has to suspend operations until it is safe to fly. These factors are at play even if the structure itself sustains zero damage and they can have a tremendous impact on operations and revenue.

Dave: This is a new offering. No one else is providing BI insights around dependency risks so nobody is getting the complete picture. Without great data, insurers tend to be pretty conservative around BI, meaning if they don't fully understand its potential impact on a business they'll offer limited coverage or even decline a submission, which keeps feeding the widening protection gap. CatNet® with BI gives insurers the confidence to underwrite and price risks so they can offer more coverage at an adequate price – a win-win for insurer and insured.

Dave: Some don't even realize that they're getting their BI projections from a cat model that's based solely on damage to the property. The difference between that and what One Concern has brought to CatNet® is like night and day and it can make a huge difference in the loss estimates.

Youngsuk: The industry has done the best it can with the available tools. Typically, this has involved relying on loss experience or estimates based only on building damage. This approach is failing because climate patterns are changing, infrastructure is aging, inflation is driving up the cost of repairs, and the most aggressive development is occurring in disaster-prone areas.

Dave: CatNet® is full of hazard layers. Premium users can access the US Business Interruption Risk module where they can look up a property, click on BI and see number of days of potential downtime time in a given year. They can drill down and see what perils are likely to cause the downtime and get more specific information on tail risk. They can even understand how much of the risk is driven by impacted utilities versus communities versus transportation in and out of an area.

Shabaz: Public infrastructure is continually evolving and we refresh the data to our models to ascertain their potential impact on business continuity.

Shabaz: Let's say a new power substation goes online serving the property. Without the underlying BI data from CatNet® an underwriter would not have information on the substation the buildings depend on. That substation could be miles away from the property and subject to a much different hazard than the property itself was. It radically changes your view on risks. Of course, these are generally large infrastructure investments which don't change very often, but the consequences of not capturing those updates can be significant.

Dave: And this is important because we identified in One Concern a partner with vast data, computing power, resources and intellectual property – all devoted to solving this one critical gap in the industry. That makes this partnership a natural fit, allowing us to deliver unique, high-value data elements to our customers.

Youngsuk: We're talking to underwriters who consistently struggle with BI risk. We’re talking to actuaries and product managers who are looking to refine existing products and/or build new insurance offerings for BI. We're also getting a lot of interest from risk engineers because they know how hard it is to capture this critical insight. They can spend weeks conducting an inspection at a property but they know how hard it is to analyze all of the dependencies that a business relies on.

Dave: Actuaries, technical underwriters and risk engineers are amazed at how much data is being thrown at this problem once they dig into it.

Dave: CatNet® Premium with BI is a win-win: insurers can profitably write business they have avoided, and in turn provide more access to coverage for insureds because they're now able to measure something that was previously unmeasurable. Insurers accessing sophisticated BI data represents a big step toward closing the protection gap and helping make the world more resilient.