2. Business Interruption
For visitors to London, the 1.5-mile-long Oxford Street in the West End district, with more than 90 flagship fashion and high-tech retail stores, restaurants and entertainment venues, was the ultimate shopping paradise. In March 2020, when the government issued a lockdown order to fight the COVID-19 pandemic, Oxford Street emptied out overnight. The West End turned into a dead end.
A year later, at about the same time that Aon’s survey was conducted, stores were gradually opening, but about one-fifth of Oxford Street had boarded up for good; more than 50,000 retail and hospitality jobs were lost. Revenues in the district had fallen by more than 80 percent.
What happened on Oxford Street is emblematic of what happened in other cities around the world, from Paris and New York to Tokyo and Rio de Janeiro, where all industry sectors experienced unprecedented disruptions from broadest stay-at-home orders and travel restrictions in human history.
“The pandemic has subverted the traditional way we think about business interruption,” says Richard Waterer, a managing director in EMEA at Aon. “It has been redefined — businesses can be interrupted on a much wider berth of issues. Because of technology and the way we do business, BI [business interruption] can be more systemic. It doesn’t just happen to those in high-risk areas. BI can happen to anyone.”
This risky and volatile environment has propelled business interruption to number two in Aon’s 2021 Global Risk Management Survey. Meanwhile, the increasing complexity of business interruption insurance is also contributing to respondents’ concerns about the wider issue. In the 2019 survey, global participants projected business interruption risk to only rank at number seven.
Respondents in Europe and the Asia Pacific region — where stricter COVID-19-related lockdowns have decimated small- and medium-sized businesses due to massive temporary factory and port closings and where natural disasters such as wildfires, flooding and typhoons have wreaked havoc — perceived business interruption as a number one risk.
It is not surprising that participants in the hospitality, travel and leisure industry also rated business interruption as a number one risk. This sector faced the biggest interruption issues because of continued travel restrictions and a precipitous drop in consumer demand. In a separate Aon study, “Reprioritizing Risk and Resilience for a Post COVID-19 Future,” 67 percent of participants in the hospitality sector have seen their business severely impacted and expect it will take significant time to recover — 63 percent expect the impact to their business to last over a year. According to Forbes, during the first 10 months of 2020 alone, the tourism industry lost $935 billion in revenue worldwide.
At the same time, the energy sector also perceives business interruption to be a number one risk because the pandemic choked demand. While electricity use was down significantly in many countries, the market for transport fuel shrank dramatically as planes were grounded and movement was restricted.
Business interruptions also posed a top threat for the life sciences sector, which had to cease its human research trials in regions that were in partial or complete lockdown.
While the risk perception of business interruption is mostly pandemic-driven, one needs to take into account other factors:
- Cyber attacks have become a growing business interruption threat. For example, hackers targeted the computer network of a major U.S. beef supplier in May 2021. As a consequence, meat plants across the U.S. and Australia were forced to shut down. The speed at which new technology has been implemented in enterprise-wide use may mean that full interdependencies and critical failure points have not yet been fully tested.
- Climate change is another factor in creating business interruptions. Natural disasters, such as record-breaking wildfires across Australia, flooding in Germany, typhoons in the Philippines, an earthquake in Turkey and hurricanes in the U.S. and Central America, caused severe business interruptions. A newly released Aon report shows that insured losses from natural disasters reached $42 billion in the first half of 2021, a figure that represents a 10-year high for insured losses over the opening six months of the year.
While business interruption is a traditional risk by name, its profile is evolving fast. Businesses need to improve their understanding of this new form of volatility and build market solutions to manage this risk. The COVID-19 pandemic serves as a reminder that risk management and business continuity management need to evolve further in order to help businesses prepare for, and survive, extreme events. In another Aon survey related to COVID-19 preparedness, only two in five companies said they have business continuity management (BCM) that addresses cyber-triggered business interruption. At the same time, about 69 percent stated that they will review and improve BCM as part of their normal business processes. This suggests that organizations understand the need to reevaluate their existing plans to apply the lessons learned from the pandemic.
For companies with complex business models, Aon recommends mixing, combining and aligning the following risk transfer options:
- Traditional business interruption coverage (loss of revenue or profit at affected location)
- Interdependency business interruption coverage (knock-on internal effects within the broader organization, both at the affected location and at other locations)
- Contingent business interruption coverage (revenue or profit impact for client resulting from a covered event at a third-party customer or supplier)
- Ancillary or additional coverage (increased costs, additional increased cost or denial of access)
At the same time, Aon believes that organizations will have to ready themselves for more frequent extreme scenarios caused by economic disruptions, health crises, business model disruptions, geopolitical tensions and technological failures.