What is a “Non-Damage Event”?  In its 2017 GLOBAL RISK BAROMETER, Allianz reports that, “Perils such as natural catastrophes and fires are the causes businesses fear most, but the nature of the risk is shifting increasingly towards non-damage events.”   The report identifies some Non-Damage Events… “A cyber incident or the indirect impact of an act of terrorism or political violence are events that can result in large losses without causing physical damage, [and] more of these types of events are expected to occur in future.”

Last week, we covered the release of the Top 10 Global Business Risks for 2017 Report by Allianz (CLICK HERE).  Allianz surveyed 1,200 experts in 55 countries and concluded that Business Interruption (BI) is the top threat that risk managers and CFOs face.  This is equally – if not more – true for small and mid-market businesses as well.  According to Allianz, “Business interruption (BI) entails a loss of income that could impair a company’s revenue stream and thus a shortfall in covering the ongoing costs of doing business.”  The report also notes that, “[BI’s] impact is one of the hardest risks to measure.”

The impact of BI is usually greater than the impact of physical property losses and causes of BI are increasingly caused by non-damage events.  Consider this excerpt from the GLOBAL RISK BAROMETER.

Insurance claims analysis shows that the average large BI property insurance claim is €2.2m ($2.38m), 36% higher than the average direct property damage loss of €1.6m ($1.75m)1 , emphasizing the significant impact BI can have on companies’ revenues. Accordingly, physical perils like fire and explosion (44%) and natural catastrophes (43%) are the top causes of BI that businesses fear most. However, alongside these perils, so-called non-physical or non-damage causes of BI are becoming a much bigger issue. Impact of supplier failure (33%), cyber incidents (29%) and the wider disruption caused by a terrorist event (10%) are just some of the many incidents that can cause large losses for companies without causing property damage. Businesses will need to think about how to mitigate these risks as more of these events occur in future. Meanwhile, BI risk continues to further evolve. For example, insufficient management of societal and environmental risk topics (ESG) could lead to a BI event ordered by authorities moving forward. “BI again tops the Allianz Risk Barometer survey,” notes Volker Muench, Global Practice Group Leader, Property Underwriting, AGCS. “That’s because new triggers for BI emerge constantly. These can range from cyber incidents to market developments to the changing political landscape. Going forward we expect there to be more non-damage triggers of BI.

Note that non-damage triggers of BI are difficult to predict, difficult to measure and only expected to increase.  As noted last week, this provides a compelling case for successful small and mid-market businesses to own their own Captive Insurance Company (CIC) as part of a comprehensive Enterprise Risk Management (ERM) strategy.  A well-structured Enterprise Risk Captive Insurance program blends commercial insurance with captive insurance to address key gaps in coverage.  While commercial insurance may address property damage or liability, it is often inadequate in addressing all indirect losses caused by an adverse event.  Small and mid-market businesses that own their own captive insurance company can also benefit from the 831(b) tax election for small insurance companies.  By definition, small insurance companies receive $2.2 million or less annually in premiums, and can elect to be taxed at a rate of zero percent (0%) on their underwriting profits.  This enables small insurance companies to build up loss reserves to address BI, non-damage events and all other threats highlighted in the Allianz report.  Importantly, premiums paid to a captive insurance are not a sunk cost as the captive is owned by the business, the business owners or another related entity.

With the proliferation of threats, it is wildly logical for successful small and mid-market businesses to take aggressive steps to protect themselves, including implementing an ERM strategy, employing risk mitigation techniques and deploying a powerful web of insurance that blends coverage from commercial carriers and a captive insurance company.