Allianz Notes Rising Business Interruption Costs in Global Claims Report

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The global insurer’s report on corporate claims highlights the impact of macro issues such as inflation and cyber claims, and also a handful of micro trends that have had a big impact on claims costs, such as the growing use of industrial adhesives by manufacturers and poor quality steel produced in China.

AGCS said the COVID-19 pandemic cost insurers less than initially projected, but still had a $44 billion impact that ranked third in a list of costliest natural disasters, just behind Hurricane Katrina and the 9/11 terrorists attacks.

Thomas Sepp

“Companies and their insurers have shown resilience to weather the loss impact of the pandemic, but the ongoing war in Ukraine, a spike in the cost and frequency of business interruption losses and the sustained elevated level of cyber claims are creating new challenges,” stated AGCS Chief Claims Officer Thomas Sepp. “At the same time, the top two causes of claims, fires and natural hazards, remain significant loss drivers for companies.”

AGCS said fire and explosion are the top cause of loss, accounting for 21% of the value all claims. Natural catastrophes follow with 15%, faulty workmanship or maintenance with 9%, aviation collision or crash with 9%, machinery breakdown with 5%, defective product with 5%, shipping incidents with 3%, damaged goods with 3%, negligence or misadvise at 2% and water damage with 2%.

Contingent business interruption was not listed as a separate cause of loss, but the insurer said it is a cause of concern. Business-interruption losses have increased in each of the past five years and and losses last year and the number of claims last year more than tripled from the previous three years.

The “Texas Big Freeze” in February 2021 was the source of many of those claims, AGCS said businesses took several months to ramp up production after power outages caused by record freezing temperatures. Around the same time, a fire at a semi-conduct plant in Japan added to the growing shortage of microprocessors, “sending a ripple effect through global supply chains,” the report says.

Cyber claims continue to be a significant cost driver, the report says. AGCS said it has been handled an average of 1,000 cyber claims a year for the past two years, compared to fewer than 100 in 2016.

“Claims frequency has begun to stabilize however, albeit at elevated levels,” the report says.

AGCS said the directors and officers line is also experiencing elevated loss activity. While securities class action filings fell in 2021, the number of such claims is still above historical level and there are signs that the value class-action settlements is increasing. The growth of special purpose acquisition companies, also called blank check companies, has generated D&O losses. In the meantime, plaintiff’s attorneys have filed more than 10 derivative lawsuits in New York State courts on behalf of shareholders of companies that are domiciled outside the United States, pointing to heightened litigation risk.

Angela Sivilli

“Claims severity has gone up,” stated Angela Sivilli, co-head of the global practice group for commercial D&O and financial institution claims. “For example, shareholder derivative lawsuits typically result in small settlements or corporate therapeutics, like changes to the board. Now we see these cases settle for several hundreds of millions of dollars. We are also seeing larger settlements for cases in arbitration.”

The report spotlights adhesives and quality issues as a claims issue to watch. AGCS said the growing use of industrial adhesives in electronics and car manufacturing has led to a hike in the cost of product liability and recall claims.

“As more manufacturers have reverted to the use of glue and industrial adhesives, we have noticed a significant increase in repair costs over the past 18 months,” stated Birgit Vosper, head of the global practice group for general liability claims. “Some repairs are at least 25% more expensive, if not more, due to the use of adhesives.”

Poor quality in construction is causing a similar spike in liability claims relating t the quality of products manufactured in Asia. In particular, a number of construction projects have been delayed because Chinese steel failed to meet quality standards, the report says. Vosper said AGCS had a $300 million claim for a construction project in Germany where the steel from a supplier in China was unfit.

“This is an issue we see more and more often,” Vosper said.

Innovative designs and new materials and methods of construction are fueling large professional liability claims against architects, engineers, developers and construction companies, the report says.

Claims related to cladding are complex and include many parties, making it difficult to establish liability. The United Kingdom has proposed an extension of the limitation period for filing claims for defective work from six to 30 years. Similar measures have been introduced in Australia, the report says.

“The proposed changes to UK building law would extend the limitation period and possibly shift the burden of defective cladding claims to developers, which could initiate a domino effect on all other involved specialists in the construction project such as architects and engineers, leading to a second wave of cladding-related claims for the insurance industry,” stated Diego Asset, head of the global practice group for professional indemnity claims.

The report is available to readers who enter their contact information here.

About the photo: Evergreen Marine’s Ever Forward container ship is taken to an anchorage south of the Chesapeake Bay Bridge after it was freed from mud outside the shipping channel off Pasadena, Md., where is had spent the past month aground. Allianz’s global claims report says supply chain disruptions are among the issues leading to growing losses from contingent business interruption claims.


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