Page 41 - Insurance Times July 2024

challenging to predict and quantify because they can
result from events that are difficult to anticipate. Unlike
direct physical damage events, which have clear and
objective indicators, the indicators of indirect non-
physical damages are subjective and thus difficult to
assess in terms of extent and duration of interruptions.
For creating coverage, both companies and insurers
must have a deep understanding of revenue streams,
cost structures, operational dependencies, and
potential risk sources to evaluate the financial losses
they could face from NDBI. They need to assess the
impact of business interruption on revenue loss and the
additional expenses required to restore operations to
design appropriate coverage. Even when the business various risks, including natural disasters, fires,
interruption is caused by a known peril, each industry equipment failures, cyberattacks, supply chain
and company may be impacted differently, disruptions, and pandemics. It is crucial to recognize
necessitating insurers to employ sophisticated risk that each of these risks can be influenced by multiple
assessment techniques and data analytics. perils, either individually or in combination. While it may
2. Dynamic and evolving: NDBI risks are constantly be beneficial to the businesses to include coverage for
evolving and to cover them insurers must continually all these perils in an NDBI policy to ensure
update their risk models, adapt their underwriting comprehensive protection, doing so could lead to
criteria, and revise their coverage offerings. Risk higher premiums that could make it unaffordable
triggers such as governmental and regulatory actions or economically infeasible for businesses.
can be challenging to model accurately. The changing Therefore, insurers and businesses must carefully
risk exposures of businesses present a significant evaluate and prioritize the most significant and likely
challenge for insurers to remain agile and adept in risks to determine appropriate coverage levels that
managing the latest risks. Any delay in responding to strike a balance between protection and affordability.
the evolving nature of NDBI risks could lead to 5. Complex policy wording and coverage determination:
underestimation of the impact, potentially resulting in Standard insurance policies often have limitations or
severe consequences for both insurers and exclusions that restrict coverage for NDBI events, such
policyholders. Therefore, it is crucial for insurers to stay as cyberattacks or pandemics. Defining the scope of
proactive and responsive to the dynamic landscape of coverage and policy terms for NDBI requires careful
NDBI risks to ensure effective risk management and analysis of a company's unique risk exposures and
coverage provision.
coverage needs. Insurers must meticulously draft policy
3. Lack of historical data: Insurers traditionally depend wording to ensure that coverage adequately addresses
heavily on historical loss data to establish risk coverage. the specific needs and exposures of policyholders.
While some NDBI risks have existed for years, they did Drafting clear and accurate policy wording presents a
not receive adequate market attention until recently. challenge, as the complexity related to NDBI could give
With growing demand, technological advancements, rise to silent risks when policy inclusions or exclusions
and the capacity to develop coverage, there is now are not clearly described. For instance, a business
renewed interest in NDBI coverage within the market. interruption event could be caused by a secondary event
However, the availability of limited data poses a that is not excluded in the policy wording, occurring
challenge for insurance companies to accurately model, sequentially to a primary event that is explicitly
assess, and price the risk associated with these types mentioned thus resulting in legal disputes.
of losses. This scarcity of data makes it difficult to fully Furthermore, the legal and regulatory landscape
understand the potential impacts and adequately surrounding NDBI coverage is still evolving, adding
mitigate NDBI risks. another layer of complexity for insurers and
4. Higher cost of insurance: NDBI can be triggered by policyholders alike.

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