PC360-NU: Have the naturalcatastrophes of the past few years impacted Zurich's appetite forlimits or the way you underwrite Contingent Business Interruptioncoverage?

Conrad: It has impacted the CBI market, notonly for Zurich but for all insurers. The drive came from ourreinsurers who said, “We'll give you 18 months to start gettingmore transparency into locations, or else we won't be giving youblanket limits anymore.” So it's not just Zurich, it's the wholemarket. We needed to gather more information.

For example, we're asking for [more detail on] the “made-in” and“shipped-from” locations so we can geo-code them. Which of thefactories that are scheduled are goods made from? And which onesare they shipped to?

We've developed tools to help brokers keep the limits andpricing that their clients need. The more info we can bring to the[reinsurance] table, the more we can put those limits out. It alsoallows us to get information for supplemental cover that onlyZurich offers, such as supply-chain insurance that covers All Risk,not just named physical perils.

PC360-NU: Tell us more about toolsyou've developed to more effectively gather CBI data.

We use software that helps model the manufacturing chain withthe goal of stopping companies from simply picking a number out ofa hat without knowing the total exposure.

We've developed a CBI worksheet that is similar to a BIworksheet. We also have a risk assessment of suppliers that we dothat helps us look into specific exposures, includingnatural-catastrophe perils.

We've maintained a database of causes and durations ofsupply-chain disruption. What we found was that physical damage wasnot in the Top 5 causes of disruption. IT outages accounted for 52percent [of incidents]—the number 1 cause. Companies need a broaderAll Risk policy. Interestingly, if you look at Japan the physicaldisruption [from the earthquake and tsunami] was in the north, butthe supplier disruption was in the south due to labor andtransportation disruptions. So CBI losses can arise from labor,strikes, transportation—and marine comes into play, too: The boatsinks, there's cover [for the property loss] but not for the costof the delay.

Is the kind of information you're looking for readilyavailable when clients come to market or at renewal?

It depends on the customer. Some companies may have had issuesand are better prepared and are already asking questions. In othercases, it's the first time they've been asked.

Nobody wants to go through [a BI or CBI loss], and the firsttime is the worst time. There is always some element companieslearn by going through the process that they hadn't learned before:They realize when they actually map the supply chain, the impact ofa supplier is not $1 million, it's $10 million. You don't want tolearn that after the fact.

One [data-gathering area] we do see that's harder than others iscompanies getting information about tier 2 and tier 3 suppliers, soto help, our policy covers all the way down the tier. So thatrelieves a little bit of the burden. We find that 40 percent ofdisruption comes from sub-tier suppliers.

What's the equation between the quality and quantity ofsupply-chain information a client supplies and lower rates andhigher limits?

Obviously if we don't know anything about a supplier, we have toassume the worst; with small mom-and pop-shops in China, we have tomake assumption about financials, if we are covering financialinsolvency.

But in general the rate is tied to the actual risk at thatsupplier. So we go supplier by supplier and go through 23 areas ofrisk that companies have control over and ones they don't. Eachsupplier gets a grade and will require potentially differentlimits: $100 million per supplier is our maximumcapacity.

Because we do all this analysis, it's essentially like forensicclaim accounting. But we are able to do a lot of that up front andoffer a pre-agreed claims methodology, so you come up with aprobable maximum loss for each supplier, and we can agree on whatthe claim will cost. That provides great financial security tocompanies and CFOs.