Each year in preparation for its annual meeting in Davos, Switzerland, the World Economic Forum (WEF) polls more than 10,000 business leaders from around the world on their perceptions of the top global risks for doing business.
The WEF’s Regional Risks for Doing Business report ranks responses to its Executive Opinion Survey conducted between January and July of this year. For North America, the report identifies the top risks facing businesses (in order) as:
- Cyber attacks
- Spread of infectious diseases
- Data fraud or theft
- Natural catastrophes
- Asset bubble
- Profound social instability
- Misuse of technologies
- Failure of critical infrastructure
- Fiscal crises
- Terrorist attacks
The attached presentation maps the business interruption coverages purchased by a restaurant owner with four locations in Durham, North Carolina (okay, its North State Deli, which has been in the news as the first policyholder to win a COVID-19 business interruption claim in court). This analysis shows a wide variability in the amount of business interruption coverage available to small businesses to help them manage these self-identified “top risks”.
If a North State Deli location suffered damage from a hurricane or wildfire, the insurance policy would cover its payroll, rent, utilities and other continuing expenses (as well as lost profits) for up to 12 months with no dollar amount limitation. Business interruption caused by a flood or an earthquake? Nothing.
The policy limits business interruption coverage for a cyberattack to $25,000 but would have provided a mere $2500 if North State Deli had not purchased the upgrade package.
If the electrical grid goes down, the business interruption limit is $75,000 (taking into account North State Deli’s decision to upgrade from $25,000) but only if there has been physical damage to the electrical company’s transformer, power station or transmission line. If the electrical grid, internet or water supply just goes dead? Nothing.
If social instability leads to riots causing damage to an insured location, the business interruption limit is back up to 12 months. If a location is shut down by the police because of nearby rioting the limit drops to 30 days. If the police order a shutdown as a precaution against a possible riot, coverage drops to zero.
It may be perfectly appropriate for small business insurance policies to exclude or limit many of the most significant risks facing small businesses. The problem is that we make lists of these risks, share them on LinkedIn (or for the select few, discuss them on a panel in the Swiss Alps) yet find ourselves somehow surprised and disappointed when one of these “top risks” becomes a top reality that is not covered.
“Global Pandemics” was identified as a top risk in the WEF’s inaugural 2006 Global Risks Report. Somehow, we (e.g., business, insurers, policymakers) seemed not to have had an effective conversation about pandemics and business interruption coverage back then. As a result, banks have been tasked to deliver COVID-19 business disruption benefits through the Paycheck Protection Program while the insurance industry’s attention is diverted to managing thousands of business interruption claims that increasingly mature into business interruption lawsuits.
The WEF risk reports and the many other list of risks should be causing policyholders, insurers, intermediaries, policymakers, academics and others to ask:
So, what is covered if one of these risks happens?
If we do not like the answer, then we should have that conversation now and not after the next top risk becomes real.