Managing BI risk in universities

  • Zurich Municipal insures many of the UK’s leading research universities
  • In recent years, we have handled a number of large claims where the business interruption (BI) portion of the loss has been particularly significant – sometimes exceeding the material damage element
  • We discuss how we can work with universities to help them better manage their BI exposures

Business interruption (BI) has become an increasingly important factor in large property claims.

Zurich global claims data shows the BI element of large property losses nearly doubled between 2002 and 2014.

This trend can clearly be seen in higher education. For example, for large property losses involving laboratories (including universities, but also commercial facilities), the BI element of the loss is now on average higher than the material damage portion.

There are a number of explanations for this – one is simply that a large amount of valuable research is at stake at these institutions.

The research contracts that individual departments enter into with charities, government departments, commercial partners and other bodies can be worth tens of millions of pounds each year. Any major loss that causes this research to be delayed, or abandoned, can have a significant impact on a university’s revenue and its ability to deliver cutting edge research.

The changing nature of university research

But, in recent years, the way this research is carried out has also changed.

Ralph de Mesquita, Principal Risk Analyst, Zurich Risk Engineering, says: “The equipment used in laboratories and other research facilities is getting smaller and more complex, as well as more expensive to replace.

“Whereas in the past, you might have had one major piece of equipment in an individual lab, now you commonly find multiple items of complex research equipment in labs that tend to be more open plan. Any loss here can impact multiple research contracts.”

The factors that can increase the BI portion of a loss include:

  • The time it can take to repair or replace specialist machinery
  • The difficulty in finding suitable alternative facilities to resume research quickly
  • The increased cost of working – e.g. recruiting additional laboratory staff to replace lost samples

The challenge of quantifying BI claims

In a number of significant claims that we have received in recent years, it has been difficult to quantify the BI element of the loss. University risk and insurance managers could benefit from a clearer understanding of the value of research that is being undertaken in each building and department.

“What often happens is that while the finance department will know the financial value of each research contract, there isn’t always that connection with academics around the criticality and importance of the revenue streams, nor a connection with the risk/insurance manager,” says Joseph White, Senior Strategic Risk Consultant.

“In those circumstances, it’s difficult for universities to properly understand and quantify their broader value chain – i.e. which departments, which buildings and which research projects they derive the most value from, and which would cause the most impact if disrupted.”

This, inevitably, affects how risk management resources are allocated.

“If organisations don’t understand where their golden eggs are kept, they will face significant challenges in directing and targeting risk and resilience resources to where they are most needed,” says Joseph.

Get a better understanding of BI exposures

Ensuring that your risk managers have a breakdown of research income by department is a sensible starting point in order to better understand your value chain, so you can manage your exposures accordingly.

“Once you have a clear understanding of where you derive the greatest value, you then need to consider the consequences of a major loss,” says Joseph. “How long might your research be delayed, for example?

“The final part is to consider what arrangements you have in place to mitigate the impact of such a loss, and ensure those arrangements are robust and tested.”

We are encouraging customers to provide us with as much information as possible about their current and future research projects, including plans for new research facilities.

Joseph says: “Our key message to organisations is ‘work with us so that we can better understand the risk you represent’. That way, we can support you to build more resilience into your organisation, enhance your business resilience arrangements, and provide specific risk mitigation guidance where appropriate.”

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