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Telecommunication companies are questioning the value of business interruption cover, given the complexities in settling claims and backup systems to aid business continuity, experts say.
In response, there is a move by risk managers--in some cases, led by their brokers--to see if there is something better out there. And, in fact, several realistic alternatives are either under development or are already on the market.
Business interruption losses are a real risk for telecom companies, with some of the big losses arising from hurricanes, floods, earthquakes and terrorism. Last December, a strong earthquake off the coast of Taiwan severed two undersea cables, and disrupted telephone and Internet service to millions of users throughout Asia.
And major claims can take a while to resolve. BellSouth Corp. in Atlanta, acquired last year by AT&T Inc., still has not completely resolved its outstanding business interruption claim from Hurricane Katrina in August 2005, according to industry sources.
Business interruption in telecommunications is "an amazingly difficult topic," said Tom Ricketts, managing director, telecoms practice leader, global technology media and telecoms industry practice, at New York-based brokerage Marsh Inc. "There is actually no satisfactory way of identifying how revenue flow within a telecommunications company relates to the assets."
Such inherent complexities can lead to litigation after major business interruption losses. Nearly six years after the Sept. 11, 2001, terrorist attacks on the World Trade Center in New York, there are telephone company business interruption claims that are still outstanding, Mr. Ricketts said.
"Leaving aside all of the complexities, I would argue that an insurance product--especially a revenue protection product--that does not pay a claim within, say, one or two financial periods from the loss, is not actually doing the job that it is supposed to do," he said.
At TDC A/S--Denmark's largest mobile and fixed line provider based in Copenhagen, Denmark--management is currently unsure whether to drop the coverage entirely, said Anja Antonsen, TDC risk manager. "We are in disagreement on it because some people argue that our limit is too low and my argument is a little bit in the opposite direction," Ms. Antonsen said.
One could argue that those telecom companies with numerous backup systems may not need the traditional business interruption product, she said.
And with many telecom companies offering a myriad of services--and therefore having numerous revenue streams--it is difficult for them to determine the size of the loss and have the correct basis of indemnity, experts say.
"For our business, where we have both mobile and land line communications, if one goes down the other one takes over, so it's hard to calculate the loss for us on the business interruption side," Ms. Antonsen said. "That is one of the most complex issues with business interruption."
To address these issues, Marsh has developed a software program for modeling business interruption for cellular telephone companies, which it hopes can be applied eventually to other area telecom operators. The program uses an algorithm that models a claim scenario and produces a revenue loss based on that scenario.
Marsh hopes the model, which it says has been tested by a few cellular operators, will eventually allow telecom companies and their insurers to reach a pre-loss agreement on how to calculate business interruption claims. Once there is a loss, the model is run, based on the actual scenario, to come up with a loss figure to be paid by the underwriter. Marsh hopes to launch the model later this year or early 2008, a spokesman said.
"Every telecom company I speak to says, 'We would like an alternative to the existing business interruption (product)' because it is difficult for them to tell where they will have the loss," said Fredrik Motzfeldt, European technology, media and telecommunications practice leader at Marsh Ltd., the London-based subsidiary of Marsh Inc.
During the broker's Marsh Technology, Media and Telecommunications Conference, held late last month in Zurich, Switzerland, a number of European telecommunication risk managers expressed how, after a service interruption, they need to react quickly in order to avoid the loss of customers.
"What they need is something that pays quickly, is easier to adjust, and maybe has a smaller limit, so you do more of the underwriting upfront," said Mr. Motzfeldt. "This is where our solution hopefully will ultimately contribute to such an outcome."
Some risk managers said that Marsh's methodology might be useful. "It could be worth having (a pre-agreement), but the problem is how to put it into words that both parties can agree on," said Ms. Antonsen of TDC.
"Obviously, we would be interested in new methodologies," added Paul Lenzi, director of risk management and insurance at Bell Canada Enterprises Inc. in Montreal.
But Peter Hacker, a partner and global practice leader for IFG Communications and Technology, a unit of London-based brokerage Jardine Lloyd Thompson Group P.L.C., said that he was "skeptical" about the use of a single methodology because each market is different in terms of competition, cash flow volatility, regulations and legal environment.
The trouble with traditional business interruption insurance is that the coverage is focused on loss of profits, plus fixed charges, which are more relevant for manufacturers than service providers, such as telecom companies, he said.
For telecom operators, JLT questions whether conventional business interruption is appropriate and has developed its own cash flow based business interruption and nonphysical damage business interruption product. After a service interruption, telecom companies need "immediate action" for increased costs such as for marketing and other operational expenses to keep customers with the company, Mr. Hacker said.
"Our experience is that clients are saying, 'We can't find the right product in the insurance market, why don't we focus on variable costs rather than profit and fixed assets.' I think that is a reasonable way of approaching it," he said.
Insurance companies also are offering business interruption alternatives that could be used to supplement or replace current policies. Some players, such as Zurich-based insurer Zurich Financial Services Group, are developing nonphysical damage contingent business interruption insurance cover (see story, page 12).
Another product, viewed as a potential alternative to traditional business interruption insurance--where claims payments are based on the property damage loss incurred--is a form of agreed value insurance that its developers call "transurance."
Claims paid under transurance are calculated as a percentage of the loss paid under any referenced insurance policy, said Ware Preston, managing director at managing general agent Transurance Services L.L.C. in Trumbull, Conn.
For example, under a $10 million insured property loss, the transurance policy could pay an additional 10%--or $1 million--to be used as the policyholder sees fit--no questions asked, he explained.
The coverage is currently offered by Arch Insurance Group Inc. in New York; AEGIS Insurance Services Inc., a utility industry mutual in East Rutherford, N.J.; and Ironshore Insurance Ltd. in Hamilton, Bermuda.
Mr. Ricketts of Marsh said that transurance is relevant for the telecommunications industry because it covers the collateral losses involved in any major claim, which are not covered by traditional insurance. "In my mind, that actually offers a very interesting potential alternative to business interruption for a telecom," he said.