In the late 1600’s, at the height of a lucrative slave trade, a group of ship owners and merchants got together at Lloyd’s Coffee House in London to negotiate the first forms of insurance agreement. The merchants promised to use their private funds to pay the ship owners if the ships were attacked by pirates or damaged and sunk by weather. If the ships completed their voyage without any fires or pirate attacks, the merchants kept the fee paid by the ship owners to insure the voyage. The coffee house meetings seemed to make good business sense and a global insurance market was born. The world has changed a lot since the slave trading days, but the coffee house concepts of insurance had not changed much until recently.

Over 300 catastrophic events were recorded in 2011 costing the insurance industry a record breaking $116 billion. Japan’s earthquake, Thailand’s floods and New Zealand’s earthquake ravaged the supply chain of many sectors of the global economies forcing the insurance industry to reconsider those original coffee house concepts.

For example, the mining insurance market was not only hit by $2.7 billion in natural catastrophe losses, but over 60 operational losses totaling $835 million. The $3.5 billion total estimate of losses facing mining insurers has prompted a 30 percent withdrawal in insurance capacity since the start of 2012, which caused an automatic premium hike in the mining insurance market.

As a result, the underwriting evaluations in contingent business income coverage have changed dramatically. For an in depth discussion of how the 2011 catastrophes turned the industry upside down, take a look at Insurance Industry Shifts The Blame – Understanding Business Interruption Claims and Lloyd’s Market Association Reviews its Contingent Business Income Products and Claim Exposure.

A recent article in the Insurance Journal titled Global Mining Insurance Market Capacity Down 30% After Losses, advocates for risk management and business continuity plans to cope with the insurance industry’s recent risk aversion:

Andrew Wheeler, Willis mining practice leader, said that even though the insurance market is still reeling from the losses in 2011, well risk-managed mining programs will still be able to get favorable terms and conditions this year if they can demonstrate “a clear understanding and ability to mitigate the effects of contingent business interruption exposures, a pro-active approach to minimizing the effect of weather-related events to their operations, and that sound risk engineering and innovative risk avoidance measures form an integral and core part of their business.

In a previous blog, Understanding Supply Chain Exposures – Understanding Business Interruption Claims, I also noted the importance of risk management in dealing with not only the insurance industry’s growing fears, but also the changes in our world economy:

Risk managers should not stop at acquiring the best coverage available for a dependent businesses or service. They should also have a good back up plan to keep the supply chain running through a first party coverage claim.

As global economies of scale become more and more attractive, it is important for businesses to understand their critical supply chain risks and exposures. Businesses should also obtain adequate insurance and establish reliable business continuity plans that rely less on insurance protection and more on resilient response planning. While many feel that risk management is an unnecessary expense, it is actually an investment on market competitive advantage that guarantees higher profits, even in a futuristic dystopian world.