Do you know how to protect you and your business if Sandy Storm hits Malaysia?

Fitch: Sandy floods may cause big business interruption losses

KUALA LUMPUR (Oct 31): Flooding from excessive rainfall and high storm surge will be a substantial component of damages from Sandy, in addition to damage from strong winds, according to Fitch Ratings.

In an endorsement policy statement Oct 30, Fitch said that it was important to note that homeowners’ policies cover wind losses, but generally did not cover flood losses.

“Conversely, many commercial policies cover both wind and flood losses, as do crop insurance policies,” it said.

The rating agency said that EQECAT, Inc.’s initial insured loss estimate is between US$5 billion-US$10 billion, with economic damages of approximately US$10 billion-US$20 billion.

“At the low end, losses from Hurricane Sandy would roughly equal losses generated by Hurricane Irene, which struck the East Coast in August 2011,” said Fitch.

However, due to the widespread nature of the storm, it will take some time for catastrophe modeling firms and local loss adjusters to accurately estimate insured losses, it said.

Fitch said that while many lines of insurance would be affected, including property and auto, there was the potential for significant business interruption (BI) and contingent business interruption (CBI) losses related to the flooding as the affected areas work to restore power and resume operations following the storm.

It said the massive storm was impacting a wide variety of businesses in densely populated areas, including retail, corporate offices, transportation, manufacturing, and energy plants.

“Extensive BI and CBI losses were experienced by the insurance industry last year in both the Japanese earthquake and tsunami and Thailand floods, as they accounted for a considerable portion of commercial and industrial losses.

“Fitch also notes that these events demonstrated the extent to which BI and CBI losses have been underestimated in the modeling and underwriting of risks,” it said.

The rating agency said that in order to incur a BI or CBI loss, an insured must suffer an actual loss of income from the suspension of operations.

In the case of BI, the interruption must be due to physical loss or damage to its own property as a result of a covered cause of loss, it said.

“A BI claim can also be triggered if the work location is not accessible due to a “civil authority” order telling people to stay out of an area.

“CBI provides an additional protection that covers loss of income when the insured’s operations are disrupted by a supplier and covers the same perils as the main policy of the insured. However, the majority of companies do not purchase CBI policies,” it said.

Fitch said coverage typically begins following a waiting period, most often 72 hours, and continues for the length of time it takes to repair, rebuild, or replace the damaged or destroyed property with reasonable speed and similar quality.

“Thus, the ultimate insured losses from BI and CBI will be partly predicated on the speed with which businesses resume operations,” it said.

Fitch said it was also important to note that the vast majority of BI and CBI coverage purchased in the U.S. was included as part of the insured’s property policy, and were thus included within the overall property policy’s coverage limits.

Source: Surin Murugiah of Wednesday, 31 October 2012

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