The complexity of business interruption insurance – and why innovation is lagging behind

The Covid-19 pandemic brought the insurance industry under intense scrutiny, particularly when it came to business interruption (BI) claims.

During the pandemic, companies across the globe faced unprecedented operational disruptions. Many turned to their insurance providers for support during this time, but instead often encountered a complex, lengthy claims process that simply took too long to resolve – even without the added complication of the FCA instigating a test case to better determine claim outcomes.

Unlike a straightforward property loss, where a fire or theft presents an obvious claim, business interruption involves estimating lost revenues – a process that requires both historical data analysis and forward-looking forecasts.

“BI claims are complicated, they’re emotive and they’re rational,” explained Onda business development director Richard Hodson. “Processing BI claims is slow and can take a long time to get back, especially when you’ve got forensic accountants trying to look at [the] rate of loss.”

These claims are further complicated by the difference between how business interruption losses are calculated by accountants and the insurance industry.

“There’s accounting BI and then there’s insurance BI – and often, the insurance BI ends up being a smaller figure than the accounting BI because of insurable elements,” Hudson noted. “You try and work it out but, especially when dealing with a white collar business, it can be quite difficult.”

These difficulties and nuances mean that innovation has often been slower in the BI arena compared with other areas of the insurance claims market – something Hodson attributed to an industry-wide predisposition to focus on “low-hanging fruit”.

“[BI claims are] high-hanging fruit because it’s complicated, it’s difficult,” he said. “It’s not a property loss where you turn around and say ‘yeah, I can see that’s burnt down’. BI claims are complicated, they are slightly subjective and they’re not black and white.”

AI impact

The rise of artificial intelligence (AI) and machine learning is making innovation around “high-hanging fruit” lines of business more obtainable, however, and Hodson is confident that these technological developments can yield great results for the BI claims industry.

“AI coupled with machine learning and all the data we have in the world now means we should be able to speed up this process,” he said. “We should be able to take away a lot of the grunt work and not make it a sausage machine, but take away a lot of the work that these forensic accountants are doing.”

One company that is already making waves here is advisory, tax and assurance firm Baker Tilly. Its Quantum claims engine is already being used to automate and speed up the process of calculating the losses that result from a business interruption event.

Baker Tilly principal and head of forensic technology Bernard Regan told Insurance Times that the idea for Quantum came about just before the Covid-19 pandemic, when the business “decided that we needed something to help with the automation of smaller BI losses” – something that was particularly prevalent in US natural catastrophe claims.

“What we initially built was a model-based BI calculator, specifically for these types of losses,” Regan said. “If you had a two-day outage, a five-day outage, or a seven-day outage, it was very easy to input the data into this model, run the calculations and get a number.

“It might not have been the most robust or a complete investigatory, forensic approach, but it was a number to help those insureds get some money very quickly to help them start rebuilding their businesses.”

When the pandemic hit in 2020, Baker Tilly was instructed to deal with 1,000 BI claims. Regan said the firm soon realised there was a missing element from their proposition.

This missing element was the “claims management piece”, as Regan puts it, so Baker Tilly went about creating a tool that provided “full visibility” of the claims process as it developed.

One key innovation Baker Tilly implemented was that the insured could begin the claims process themselves once set up in the firm’s system, thereby driving the speed and progress of documentation submission.

This moved the Quantum tool away from the traditional reliance on email and telephone calls – methods that often led to fragmented correspondence chains and often created confusion among various stakeholders involved in the BI claim.

“Once the insured provides the necessary information, the system automatically takes that data to perform the BI calculation,” Regan explained. “We then quality check it with a human, [so have shifted] from a fully manual approach to having 80% to 90% handled by the machine.”

Calculating claims

Regan told Insurance Times that Quantum has decreased the time taken to process a BI claim from weeks to just a few days.

He continued: “We can do a claim in a day, it’s really not a long process at all. Once we have all the financial information, the calculations are done, we check it and we’re on to the next.

“It speeds things up dramatically, but it does depend on everyone being a willing participant.”

Having an automated BI calculation has also helped to remove subjectivity from the process, meaning that Baker Tilly now sees an impressive 66% of Quantum’s initial loss calculations being accepted by the insured without any need for negotiation with the insurer.

In turn, reducing this administrative burden means that insurers’ claims handlers can be freed up to work on bigger cases, allowing them to add more value to their role. This is particularly beneficial in surge events, such as the Covid-19 pandemic or a large scale cyber attack, where claims handlers could be faced with hundreds or even thousands of claims.

Regan said: “The way we look at it is could we have done this job without Quantum? Sometimes the answer is no. The person power needed to handle, say, 400 claims is huge.

“Quantum has taken all of that institutional knowledge from the manual process and built a system that, in most cases, gets it done on the first pass and just increases the speed of the overall process.”

So, while the BI claims market may still be lagging behind other sectors of the insurance industry when it comes to technology, there are certainly strides already being made.

And, with the increased uptake of AI across the insurance industry, it is surely only a matter of time before market participants start seeing even more innovation in this incredibly important part of the market.