The Four Major Causes of Business Interruption

In Allianz’s annual Risk Barometer report, business interruption ranked number one for six consecutive years from 2012 to 2018, making it the most crucial business-related risk today. According to the aforementioned report, the financial losses resulting from business interruption typically tend to be significantly higher than the financial losses resulting from property damage.

More specifically, the average business interruption and property damage loss currently stand at about $3.6 million and $2.6 million, respectively, at a 33% difference. Even worse, business interruption losses are generally more volatile and tend to increase more rapidly.

The following are the four major causes of business interruption.

  1. Fire and Explosion

    When it comes to business interruption, fire and explosion constantly rank among the top business interruption factors, resulting in billions of dollars of business-related losses every year. Since the beginning of 2020, businesses in the U.S. West have suffered anywhere from $5 billion to $8 billion in insured losses, making 2020 the third-worst year for fire-related business interruption in the history of the country.

    Of course, the risk of fire and explosion varies from one business to another. In general, businesses that face the greatest risk of business interruption due to fire and explosion include, among others, a business that sells or handles electrical hazards, complex machinery, and flammable liquids, such as heating oil suppliers.

    Tips to Lower Risks

    • Keep all fire protection equipment (fire extinguishers, control panels, etc.) handy
    • Dispose of all flammable and combustible material carefully
    • Keep all flammable material in a dry, secure place
    • Keep your workplace neat and clutter-free
    • Train your employees on fire safety measures
  2. Cybersecurity Risk

    Although cybersecurity risk is a relatively new business interruption factor, it is also the fastest-growing one, thanks to the widespread adoption of information technology in the business space. As businesses increasingly interconnect their core operations by either digitizing such operations or moving them to the cloud, the risk of cyberattacks becomes even more significant. This is because hackers and other cybercriminals have become more proficient in identifying and exploiting vulnerabilities in information technology networks.

    The FBI’s Internet Crime Complaint Center (IC3) now receives up to 4,000 cybersecurity complaints every day as cybercriminals use various strategies to compromise computer networks. Examples of such strategies include:

    • Malicious code
    • Distributed denial of service (DDoS) attacks
    • Worms and viruses

    It is worth noting that a recent study by International Business Machines Corporation (IBM) found that business interruption accounts for nearly 40% of the costs of a data breach, averaging around $1.40 million per event.

    Tips to Lower Risks

    • Encrypt all important data stored in databases and on servers
    • Scan your security systems regularly and use the latest security patches
    • Never use the same password across all systems; instead, use multi-factor authentication (MFA) to prevent data breaches
    • Never store your credit card information online; instead, use third-party companies such as Paypal to handle your payments
  3. Natural Disasters

    Record-setting natural disasters, including devastating wildfires, floods, earthquakes, and hurricanes, are contributing to rising business interruption costs across the U.S.

    Data from Munich Re shows that natural disasters caused more than $25 billion in insured losses in 2019 alone, with tropical cyclones, cold waves, and winter storms, each accounting for around $2 billion in insured losses. In essence, a devastating natural disaster could cause you to shut your business operations for an extended period. For example, a hurricane can paralyze major traffic arteries in your area, making it almost impossible for your customers and suppliers to reach you.

    Tips to Mitigate Damage

    • Create a disaster preparedness plan for your property ahead of time
    • Keep all important information on the cloud to ensure quick recovery
    • Check your insurance coverage and make sure you have adequate flood or earthquake insurance in place
  4. Regulatory or Legal Changes

    Whether local or international, regulatory or legal changes can significantly impact your business operations. A good example is the ongoing economic conflict between the U.S. and China that has seen some Chinese companies banned, albeit temporary, from conducting business in the U.S. and vice versa. Hence, an uncertain political climate is a huge business interruption factor.

These are the four major business interruption factors that can impact your operations for an uncertain period. Thus, to protect your business from the effects of interruption, you must have adequate insurance cover in place. To know more about business interruption coverage, contact the experts at Pittman Insurance Group, LLC. Our dedicated team is eager to assist with all your insurance questions and needs.

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