Business Interruption Insurance: When Circularity Pays Off
How do circular practices enable better risk management and what’s that means for insurance premiums?
Nadin-Shirin Zimmermann from Nexarus breaks down the business logic of insurance products and where circularity changes the equation. Before founding Nexarus, she spent years as a corporate underwriter at Allianz and XL Capital.
What you’ll hear in this episode:
- How business interruption insurance actually works and what drives the premium.
- Why climate liability is a growing risk and how circular design reduces exposure.
- What 10 years of research show about ESG-driven companies outperforming their peers.
Listen now to understand why staying linear may be the largest uninsurable risk a company faces.
This is the last episode in the series Enabling Circularity Through Insurance.
Video Impression
People
Nadin-Shirin Zimmermann, Circular Business Activator at Nexarus
https://www.linkedin.com/in/nadinzimmermann/
Patrick Hypscher, Circular Business Strategist, PaaS Expert
https://www.linkedin.com/in/hypscher/
Chapters
0:00 Intro
0:40 The Role of Insurers in Enabling Business Transformation
11:50 Climate Liability – What’s Affected by Circular Practices
15:16 Link Between Circularity and Risk Management
16:35 Understanding BI – Business Interruption Premium
17:22 Risk Management and Lower Premiums
20:17 Accumulated Risks Within the Supply Chain
24:40 ESG Role in Business Performance & 5 Reasons for Circular Practices
36:13 Outro
About
Nexarus is a German circular-economy and strategy consultancy focused on the Mittelstand. It aims to help mid sized companies grow through circular business models, responsible value creation and decisions that strengthen long term competitiveness.
Its approach is built around connecting business reality with circular value creation and working alongside client teams rather than only advising from the outside. Nexarus also works with a network of partners across innovation, sustainability, compliance and circular economy, and stays in exchange with research and innovation ecosystems.
Further Links
Get to know more about Nadin’s work:
https://nexarus.de/
Transcript
[00:00:00] Intro
Nadin Zimmermann: Risk management is a crucial part for your business, and this is the decisive factor, whether you will stay in business or not, because as we understand, it’s a market risk.
Patrick Hypscher: My name is Patrick Hypscher and this is Circularity.fm, the podcast about understanding, building and managing circular business models.
Welcome to the last episode in our series, enabling Circularity Through Insurance. Last week, Ervan from Tryg revealed how they increase the repair share in their claims handling. Today we will learn from Nadin Zimmermann, managing Director of Nexarus, how circular strategies de-risk a company’s operation, and if this actually means lower insurance premiums.
If you want to get the key learnings from this conversation, sign up for the Circularity.fm newsletter. You can find it at www dot Circularity.fm.
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Do you want to get a first overview about circularity? Then check out the starter course. Do you want to know more and apply the knowledge in your daily business? Then the Circular Economy Explorer is perfect for you. You are a sustainability manager, consultant, or trainer. Then the Circular Economy Pioneer Course gives you the comprehensive know-how you need to succeed in your role.
And here is the best part, circularity.fm listeners get 25% off with our code, circularityfm25. visit Endlich.co/academy and add circularityfm25 as the discount code. This is circularityfm25 in one word. You’ll find the link to the Endlich Academy in the show notes.
[00:00:40] The Role of Insurers in Enabling Business Transformation
Patrick Hypscher: With a degree in business management from Mannheim University, she started her career in the insurance industry as a senior and corporate underwriter for Allianz Munich and Tokyo Marine in London, and later as Deputy Head International Product Management at XL Capital. She did shape the offering of multiple insurance companies.
Now she turned to the circular economy at Nexarus, she helps companies to build circular businesses. Welcome, Nadin.
Nadin Zimmermann: Thanks Patrick for the invitation. I’m very happy to be here.
Patrick Hypscher: Yeah. It’s always great to talk to a fellow podcaster or someone with podcast, experience, on the personal side. Nadin, we want to talk about insurance as part of the, series, about circularity and insurance. and as usual in, our podcast, I start with a personal question. in that case, what is one of the insurances you personally do not want to miss.
Nadin Zimmermann: Okay. That’s a tough one. Um, I think it’s property insurance because I’ve been in property insurance for all the time and we just had a water damage, so I was so happy. Not only that they paid now for it, but also that they helped. Because when you call them up and say you have this problem, they already know the experts who can handle that.
And within 24 hours, we had someone drying up our home and just now the painters are here. So hopefully this weekend, my home feels like home again.
Patrick Hypscher: Okay, nice so the insurance company delivered. Now let’s turn to the business side of, things and there is this common narrative these days about de-risking your business with circular business practices and me as a naive circular economy, expert, interested in all kinds circular thought.
Okay. If circular practices are able to derisk my business, do companies then pay lower insurance premiums? And you who’ve seen so many perspectives of the insurance industry and knows what circular business is about, I wonder what’s your take uh, on that? Does it actually lower the insurance premium? If I go circular.
Nadin Zimmermann: It’s a very interesting question, Patrick, and I’m not only happy that you ask it because I’ve been so many years in the industry and it’s still dear to me, also I truly believe insurers have the potential to be the enabler of the circular transformation. So it’s a very relevant perspective and no one comes and says, oh, let’s talk about insurance.
It’s always the last topic you think about and you want to think about, but it is core to your business and it’s core to your doing business. And when we look back how insurance developed. It gives us an understanding of why insurance is so important. It started when we began shipping goods from one end to the world, to the other end of the world, the ship owner took all the risk.
They owned the risk, and they bought all the goods in hope they could trade it at a higher price at another place.
Patrick Hypscher: Mm-hmm
Nadin Zimmermann: and this was an individual business risk too high for a single ship owner. So what they did is various ship owners shared their risks through syndicates. This is how Lloyd’s developed and how the insurance industry started. this example shows that the economic role of an insurer truly is to enable business transformation. So I hope going forward they will turn back and say, well, we are really risk takers back then, let’s do it now with the circular business. Um, unfortunately to your question, the answer is no. You don’t pay less premium because you have a circular business model or you, um, apply circular mindset and practices.
And I, elaborate on that a bit more later on, but why is it not reflected in the pricing yet? I see three main reasons.
The one is the most obvious one. When you look at the climate risk, it rises. So for your property, if you insured against flooding, against fire, against wildfire, all these things, they occur more often. And the damage is much more severe. So obviously the risk increases. What happens with the premiums? Obviously the premiums rise also on the liability side, when your site burnt down. 10 years ago, you just threw away the waste and you clean it up either into the sewage or maybe the river close by. Nowadays you need to consider what’s in the water from extinguishing the fire. Um, and this is more costly, so on both sides. On the risk side, also on the cost sides, we see increases due to climate awareness. The second biggest point is that the prices rise. Uh, the prices rise everywhere. So when you look at the global price commodity index, it’s um, net of tax and inflation. It shows a dramatic increase. Since the two thousands, we have seen a rise, a price rise that has never occurred before. Not in any of the oil crisis we had before, not in any of the financial crisis we have seen, nor at the World War ii. So obviously when the prices for goods rise, the replacement costs for the insurers also rise, and what will they do?, They just increase the premium.
So the third point, especially when we look at it from a property perspective, is the most crucial part for a business is time to market. It’s when you set it up newly. As a startup, you’ve always been told time to market, get ready, don’t miss the opportunity. But the same holds true when you are an established company and your site burns down. And there was an example, there are many examples, but the latest one was a Novelis. an aluminum production company, and obviously they deliver their aluminum to car manufacturers. And here you can see how important is time to market because one of the car manufacturers had not thought about this scenario before and they had to cut production by half and suffered 1 billion loss because they only relied on this single supplier. Another car manufacturer had much better risk management. They were able to shift facilities, they were able to add on new suppliers much quicker, and they didn’t suffer as much as the other car manufacturer. So risk management is a crucial part for your business, and this is the decisive factor, whether you will stay in business or not, because as we understand, it’s a market risk. Competitors will take over. They’re very happy when your side burns down because they will take your customers, customers will not come back. You suffer brand image losses, all these things. So time to market is crucial. And here is the first aspect where circular can be of advantage because circular means you are not so dependent on that linear approach, but you are more of a system thinker. And this. Will then lead to be quicker back into the market. Does that automatically reflect to the bi uh, business interruption premium? Unfortunately not. You could argue that the indemnity period could be reduced. So yeah, there are and I see in the future that this will be much more relevant, but we need more data to prove the case I was just describing.
Patrick Hypscher: Okay. Nice. you already mentioned the business interruption, and or the BI as one product that is related to circular practices. Before we dive deeper into that one, is this the only product or are there other products kind of related, insurance products related to. Circular practices still when it’s, it stay on the level of the business model.
Yeah. I guess most of the even, yeah, car claims, mortgage claims and, and things, they’re somehow related. But when we talk about business models, so in your examples with the, automotive industry, this is, I would consider this more on the organizational business model level. So what kind of insurance products are relevant to circular practices.
[00:11:50] Climate Liability – What’s Affected by Circular Practices
Nadin Zimmermann: Yeah, as you rightly mentioned, Patrick, um, for property insurance, your business model is irrelevant. So what is relevant is the value of your property, raw material, your inventory, your machines, your building, and your finished kits. On the business interruption, it’s your turnover and your fixed costs, so that’s the value. However, when you come to the liability aspect of it, so are you legally responsible for it? Then circular becomes a different angle to it, because when you are responsible for climate liability. So climate liability is a, is a is a cover though. You have the general liability, you have the private liability, you have a marine liability, you have all kinds of liability.
And when we focus on climate liability, we realize that this is a increasing liability that customers, be it B2C or B2B, they have a higher awareness and they want you to take responsibility for your products, be it original product or after they are damaged, to us humans and to the climate. So here, when you apply circular business practices, you exclude toxicity in your products. You allow repair, you have less pollution. Uh, you produce less waste because you are able to have a modular product design and can replace certain things. This all reduces your climate liability and this will then have an impact on your premium. The difficulty is when you now say, okay, the circular businesses are doing much better than the linear ones, it’s not yet that far. First of all, circular business practices are not yet systemically established as they need to be to take full effect of our, of what I was just describing, but also the ESG measures that the linear business apply still also pays into the argument I was just giving. So it’s very difficult to differentiate, oh, it’s a linear, doing good at ESG, whether it’s a truly circular, just regarding the liability and the costs related to that. However, so far we all know that the true climate costs are still externalized. So the individual in the business is not responsible for paying it, and if this starts to change, so if these external and externalities are given back to the cause of the threat and the risk, then story completely changed because then there is a clear differentiator between a circular business product and a linear, um, product. And this will then fully, um, reflect on the business premium side.
[00:15:16] Link Between Circularity and Risk Management
Patrick Hypscher: Just to make sure I understand it correctly, let’s take the climate liability. I think it’s super interesting and also new to me. What you’re basically saying is that, let’s say I as a OEM, as a brand, I changed my product to comply with, let’s say Cradle to Cradle principles.
Which automatically means, um, no toxicity or much less, substantially less. And what you’re then saying is, this is technically a risk management measure because this change to these principles reduces my climate liability in five to 10 years from now. So that the likelihood of being sued for some damages to the environment or to the health of people is basically reduced.
Nadin Zimmermann: Absolutely. Yeah. So the, the risk of being sued as well as the compensation you are asked to pay.
Patrick Hypscher: Yep.
Nadin Zimmermann: To for example, your employers. It also affects workers’ compensation in the US. Um, or if you claim that because you wear that t-shirt all the time, at least microplastic into your body and now you have cancer. And once, um, research will prove that this is the true cause. I will see the fashion industry, they will definitely change their, um, practices very quickly, I assume.
[00:16:35] Understanding BI – Business Interruption Premium
Patrick Hypscher: Yeah. Okay. Yeah. Cool. This is, this is a great instrument also for circular and sustainable professionals and such corporations to win allies, to argue for more circular practices. And if we now switch back from a product to a business model. Level then I understood it’s more like about business interruption, business continuity, where I have to think about how can circular practices help me to de-risk the operations, and if so, is this something that affects my business interruption, uh, product and maybe even lower the premium there? So I’m still looking for, for, for, for that? Yeah.
[00:17:22] Risk Management and Lower Premiums
Nadin Zimmermann: you don’t give up on the premium Yeah, yeah. Yeah. that. So, um, to that, you need to understand how the BI premium is calculated
Patrick Hypscher: Mm-hmm.
Nadin Zimmermann: So business interruption always is an add-on to your property insurance. You can’t have it standalone. There are various ways of connecting these two, but they are all, they always come together. And on the business interruption, you have three main decisive parameters for your premium. One is the sum insured. sum insured is the profit you’re making because if your site is down, you cannot produce. You still want to have your profit because obviously, um, the second is your fixed costs. Because even if the site is down, you have to pay your employers, you have to pay the insurance premium. Don’t forget that. And, and there are obviously the building and the rent, whatever. And the third element of your sums insured are the extra expenses. Because when your site is down, you want the employers to work as much as possible. Though you pay overtime, maybe you rent machines that help you continuing your business, um, even if it’s not the machine you normally use. So these three aspects are the key decisive factor for the level of your premium. And as you already see, it has nothing to do with your occupation, nothing with your business model. It’s completely irrelevant. It’s just value. The second, um, parameter is your occupation So what are you doing.
Patrick Hypscher: Mm-hmm.
Nadin Zimmermann: So for example, if you a repair shop, then as insurance industries work. They use previous data so all these mathematicians, they only feel comfortable if they have a lot of historic data. Unfortunately, not yet much available, so far we don’t see in the statistics a differentiation, whether it’s a garage as you know it. So you bring the, your car there and they repair it, or whether it’s in a repair shop, in even in a garage, that applies circular practices. So if they replace your, um, cockpit with biodegradable plastic standard plastic, it probably doesn’t change the way the occupation from a claims perspective changes. That means also, unfortunately, no effect on the BI premium. The third parameter now, now there comes the slight chance. The third parameter is discounts. So discounts are granted for obviously fire extinguishers, sprinkler, um, instrumentation,
Patrick Hypscher: Mm-hmm.
[00:20:17] Accumulated Risks Within the Supply Chain
Nadin Zimmermann: All that helps preventing fire or doing good, preventing flat, all these things. Um, but the other is the risk management. And this is what we already touched upon. The risk management is the crucial part. And when you do good risk management, which you do, when you apply circular mindset, you have a systemic thinking. Coming back to the example we just, um, discussed with Novelis you are not. relying on one single supplier. You look at various suppliers, you look also where these suppliers are located. You have it more locally, you can switch and move on. And when you think into the future a bit more, there might be a whole infrastructure of repair services. So when you run a business and you are open, to not just get the machinery new, but take a repaired one or a refurbished one. You are much quicker back into the business and this can then help you on the discount. But there’s also one parameter that is, um, driving your premium. That is the, um, indemnity period. The indemnity period tells you, I believe I’m back in business after 12 months. Or no, I have these very specialized machine. If I need that from this company, it takes me at least 18 months or 36 months. Um, sometimes this obviously increases the insurance premium, and if you set up in your mindset and in your operations to quickly replace it. Then you can shorten that period and you will have a lower premium.
Patrick Hypscher: Okay, so to, to me, that sounds like. I should, uh, have a weekly Jour fixe. So me as a head of circularity or sustainability with the risk management colleagues and, uh, go through, let’s say their thinking and how circular practices can lower the risk. And. Sometimes it just lowers the risk. Um, and sometimes there will be a secondary effect that it will result in certain benefits, from insurance products, so to say, be it discounts or, or the premium itself. Yeah.
Nadin Zimmermann: That’s a good weekly and I would add R&D and Design, but the research and development department also, uh, into your team and also design people because when you have a modular design of your products, it’s so much easier to be back into the market very quickly. Um, or to replace it, just assume there’s an earthquake. All these Chinese supplier are in that high risk earthquake zone, and the earthquake happens and you don’t have any supply. If you have a modular approach and you just need this specific part and you can take it from somewhere else or for some woman else, that will be your business advantage and you will outperform all your competitors. Not that I wish the earthquake to happen but.
Patrick Hypscher: Yeah. Yeah. It’s a risk.
Nadin Zimmermann: Yeah. And it’s a business advantage if you handle it correctly and you, if you apply that system thinking, that collaboration approach that is intrinsic to circular, you are in a much better position.
Patrick Hypscher: Insurance companies help to mitigate risks, so do circular practices. If you want to build your circular economy knowledge and de-risk your company’s business, check out our partner and the academy. The start course gives a first overview. The Explorer course provides helpful knowledge to switch from linear to circular practices, and the pioneer course provides academic content. 70 case studies in more than 100 infographics. Circularity.fm listeners get a 25% discount with the code circularityfm25 Endlich.co/academy and add circularityfm25 as the discount code. This is circularityfm25 in one word. You will find the link to the Endlich Academy in these show notes.
I want to come back to the aspect of supply chain. So, . In the last three, four years since the war um, from Russia and Ukraine, now recently the, the oil crisis. We talk a lot about resilient supply chains, and I understand that let’s say the business interruption risk is more or less, these are my own properties.
Is there something that even let’s say from an insurance point of view, spans across my suppliers and supply chain? Is this also integrated into the business interruption, perspective? Or is it just like legally bound on the legal entities that are part of my company?
[00:24:40] ESG Role in Business Performance & 5 Reasons for Circular Practices
Nadin Zimmermann: It’s, um, a very relevant question and it’s a high risk. As you described, as we learned, in all these crisis, we’ve now been through that the much higher risk is not the individual risk, but the accumulated risks.
And, um, yes, there is an extension that you can buy to your business interruption policy that is called um, suppliers extension. And for that supply extensions you have a variety of coverage coverages. You can only ensure a fire at your supplier site. You could also ensure the earthquake that I was just referring to or a flooding event. Um, and then is the question, is it only does it only span from your side to the next supplier or even to the supplier, to the office supplier and then the supplier, da da da da.
So is it first tier, second tier? Is it all tiers? Obviously from a customer perspective, I want all tiers. I want all the risks, and I want this to be globally because I understand that my product only runs if this Chinese supplier far away there through at least five to seven other suppliers will end up in my product.
However, when I look at it from an insurance perspective, it accumulates. Because we know that this individual Chinese supplier not only provides material or components to this business, but to all my business. So I, as an insurer have to evaluate the accumulated risk of all of
And now with the product, um, with the digital product pass, we will in a position. To have enough data to qualify it. As of now, we only have very limited information that allows the insurer on a portfolio level quantify these risks. Obviously, through AI and through research, it’s, it has evolved, but we are not yet there to explicitly add it up. then break it down again for this individual company.
So what the insurer can do is set limits. That’s all they can do because they can’t access the risk fully. So what they do is we limit it, and then I easily add up all the limits I provided for all the companies, and then I have my total
So that’s how they handle it at the moment. But with. The digital product path and where it all originates from. Plus ai, we have enough data, we have sufficient as a good quality data, and we have the analysis opportunity to map it and then hopefully de-risk and price it correctly.
Patrick Hypscher: Mm-hmm. Okay. Nadin I understood now way the business interruption risk, works and the current narrative, nevertheless, is that circular practices help you to de-risk your business. However, if we are honest, we are just replacing one kind of supply chain or way of operating with another one and replacing one risk with another risk. Is circular a circular setup necessarily lower in risk than a linear one?
Nadin Zimmermann: I think it’s hard to say whether the one way of doing business is riskier the other from a business operation, or from a business model perspective, what we can say is that there was research on publicly traded companies. They looked back at data for 10 years and they could prove that companies that took ESG risk measures were when the stock prices fell. Were able to outperform all their peers on the same timespan We couldn’t prove that they also outperform on the uplift. So we couldn’t say an ESG run company, um, is performing better than their peers. But it was proven that on the downsides. We were better at de-risking, the main reason is because we anticipated certain risks before they happened. And by just thinking it through, having a plan to execute upon is a big advantage for your business. And this is for me, the crucial part. So I don’t believe that. Reduced insurance premiums is a motivator, or that business interruption is the lever to bring your up to running when you had an incident. It is that systemic risk management thinking, and circular is applying this much better than any linear operation. And why I believe it’s increasing resilience. To me, it’s five big reasons. The first is rising prices, we already discussed that on the price commodity index, it’s proven. You can’t argue against that prices are rising, second resources are rare, so any product we produce nowadays. Depends on the chemical element. And these chemical elements run from 10 to 50 sometimes when you’re lucky to 100 years at current extraction rates, we run out of these chemical elements quite quickly, and when we look at the road to net zero, we need four times more plastic. We need 300 more times concrete. So if you apply these gross ratios, which we normally like to hear, but this gross rate, I don’t want to hear. Um, then we understand that these elements become even more rare. I didn’t even talk about Earth we all understand that rare earth is even under higher pressure than standard elements. The third big, big reasons why circular practices increase your resilience is because you are not dependent on geographical politics. So as we understand that some of our core raw materials that we need for all this green transformation we are talking about comes from China. And they already pulled the plug back 20, uh, 2011. They increased prices over 600% because they know they have a monopoly. And even Mr. Trump had to learn how monopolies work and it adjusted his politics. So I think each businessman listening to our podcast understands the effects on his individual business. Then obviously there’s a cross limit. We understand the planetary boundaries are real, and out of the nine planetary boundaries, we are out of the safe operating zone in seven of them, and that means nature is deciding the speed of that escalation. It’s not, we are driving it. The nature is driving the speed. And the fifth is the cost for climate damage. That’s what we already touched upon. When litigation changes, when externalities are pushed back to the companies causing it, um, then this whole financial aspect to that will rise. Um, I even dare say that even an insurance cover will not be able to cover that. Because we see that terrorist attacks, we have pooling, um, arrangements because this is such a severe and accumulated risk that an individual insurer doesn’t want to insure. So I believe that for this, the insurance industry needs to look into pooling, um, solutions like we do for earthquake and flood. So I think there are five really big reasons why an individual business owner should move circular business practices, understanding that this transformation is multilevel and multidimensional, making it so difficult. And back to your question, I think this is the inherent risk, the complexity, but not the doing itself.
Patrick Hypscher: Hmm. And, uh, in the end there is a high risk of staying linear.
Nadin Zimmermann: Absolutely. It’s the biggest risk we face and no insurance will cover you against it.
Patrick Hypscher: Well, yeah, we’re at least at a very high price, up to a point where they’re not willing to, to cover it anymore, sure. Um, Nadin, uh, this was a exciting journey. Thanks for unwrapping the inner logic of, um, insurance products and uh, uh, risk management.
Nadin Zimmermann: You are welcome. Um, I hope you enjoyed it and I hope all the listeners enjoyed it. And whenever you have questions just come back to me. I think Patrick will share everything. In the show notes, I’m open to any further discussions, and also if you need help transforming your business, we are the ones.
Patrick Hypscher: Wonderful. Yeah, we’ll add contact details to the show notes. Um, thanks again, Nadin and, um, let’s see where we will have this conversations in, in five years from now.
Nadin Zimmermann: and then I will say yes, the premium will be lower. So we definitely have to repeat that. Yeah. Cool. Thank you. Thank you, Patrick.
[00:36:13] Outro
Patrick Hypscher: This was the last episode in our series, enabling Circularity Through Insurance. You can find the key learnings from this conversation and an overview of upcoming circularity events around the world in our newsletter. Just sign up for it at www dot Circularity.fm. In the next series, we will learn what happens when many circular strategies fail and we need to handle the remaining waste.
The focus of the next year will be on waste incineration. How does waste incineration plan work? Where does it sit in the circular economy and what are related innovations? And until then, I wish you all the best in driving a profitable circular economy. And please don’t forget, the most abundant renewable resource is your imagination.
My name is Patrick Hypscher And this is Circularity.fm, the podcast about understanding, building and managing circular business models.