Latest business interruption cover doesn't need a physical trigger

Among the latest developments in business interruption insurance is coverage for nonphysical damage, which some experts believe could fill important gaps for the telecommunications sector.

Zurich, Switzerland-based insurer Zurich Financial Services Group Inc. intends to launch a contingent business interruption product within the next few months that brokers say is unusual in terms of the scope of nonmaterial risks it will cover.

Product preview

The global product is being designed to protect a company's revenue against disruption to its supply chain, said Hans Lienhard, global chief underwriting officer, Zurich Global Corporate in Europe, the large commercial unit of Zurich.

Traditional business interruption policies need a physical trigger--fire, flood, or earthquake--for the coverage to operate.

The new insurance will be triggered by a host of typically uninsurable risks that have no physical trigger, such as employee strikes, supplier insolvency or a cyber attack, said John McCully, senior underwriter for property at Zurich Global Corporate U.K. Ltd., the London-based subsidiary of Zurich.

Messrs. Lienhard and McCully gave a preview of the upcoming product at the 2007 Marsh Technology, Media & Telecommunications Conference held in Zurich last month.

While Zurich's product is aimed at any industry with supply chain risks, Fredrik Motzfeldt of Marsh Inc.'s global industry practice in London, believes it could be tailored to telecom companies.

"The concept is more that they are going to cover nonmaterial damage business interruption, which is the Holy Grail," said Mr. Motzfeldt, a senior vp.

"What the problem has been with business interruption as a whole is it has become very limited for telecom companies, because a lot of their losses are on the nonmaterial side," Mr. Motzfeldt said. "What we are trying to do is create something that will span across any cause."

Others note that similar offerings are available.

Jardine Lloyd Thompson Group P.L.C. works with insurers to develop nondamage business interruption coverage on a specific client basis, the London-based brokerage said.

But, up to now, the market has been generally fragmented, with some policies covering specific types of nonmaterial risk. For example, a few insurance companies have recently launched various forms of cyber-type policies to protect a company's first-party revenue streams, according to Mr. McCully.

Meaningful capacity

Although the new Zurich cover is not specifically a cyber product, it would include electronic risks, he said.

"I think telecom companies really live and die by the security of their networks," Mr. McCully said. "If something gets into a network that shouldn't be in there--a virus or a hacker--and brings a network down, then that is a major problem for a telecom company."

"Due to the limitations of the traditional business interruption insurance, telecom companies view network security exposures as generally noninsurable trading risks," he said.

Under the Zurich product, if a virus got into a telecom company's system and caused network failure, then the loss would be covered, Mr. McCully said.

In terms of capacity and pricing, Zurich's Mr. Lienhard said those decisions will depend on discussions with partners, namely reinsurers. However, risk managers and insurance buyers have suggested that capacity of $50 million to $100 million would be "meaningful and helpful," he said.

Way forward

Some risk managers who sat in on Zurich's presentation said they were intrigued--although they said they would need to see the final product.

"My thoughts on it were that it was very close to being a financial derivative at the end of the day and that maybe the market would go towards derivatives some day," said Paul Lenzi, director of risk management and insurance at Bell Canada Enterprises Inc. in Montreal.