Catastrophe Lurks: Are You Insured & Ready?

Tech companies are increasingly worried about supply chain risk. In its insurance market outlook for 2012, Marsh Inc. estimated that insured catastrophe-related losses in 2011 hit a record, exceeding $105 billion. Some 88 percent of tech companies polled by BDO cited concerns over their global distribution chains. It was the third straight year that the percentage of companies citing supply chain concerns increased, up from 86 percent in 2011 and 75 percent in 2010.

Even the US government is worried. In January, President Barack Obama launched an effort to create a national strategy for global supply chain security.

But how can you measure the risks to your supply chain? That's not so easy. Both the insurance industry and its customers are struggling to figure out how to identify and quantify supply chain risk.

That struggle shows up in a survey conducted by insurance consultant Dempsey Partners LLC. In the survey, which polled 67 corporate risk management and finance executives, 61 percent said they experienced a supply chain disruption in the last five years that led to loss of earnings, but only 30 percent said they recovered insurance claims related to those losses. More than half (55 percent) thought the insurance industry needed to develop new products to address supply chain risks.

One of the big problems seems to be a lack of standards and clear language on both sides: the insured and the insurer. Only 69 percent felt their supply-chain risks had been adequately described to insurers, even though 85 percent thought their company had identified its key supply-chain risks. And on the flip side, 46 percent of the managers thought their insurer did not clearly articulate and explain the kind of information it needs to underwrite supply chain risks.

John Dempsey, managing partner of Dempsey Partners, notes that the insurance industry has yet to develop standards for reporting business interruption and supply-chain exposures. That means that corporate risk managers "are not in the position to provide additional information because they don't know what to provide."

Add to that the fact that risk cascades from one supplier to the next in a supply chain, which makes it nearly impossible to identify and quantify risks at any given point in the chain. In fact, business continuity insurance usually covers only damages to your own manufacturing facility, but may not cover losses you suffer because of damages to a supplier's facility.

Some insurers have consulting arms that assess and, presumably, customize insurance packages for your specific supply chain. For example, Marsh's supply chain risk management practice reviews a client's exposures, then assesses and maps the supply chain risks. One UK insurance broker, Perkins-Slade, claims to offer a risk assessment service and insurance policy that covers "all risks" and is not limited to property damage.

But as the need to cover supply chain risk increases, I don't see the insurance industry offering many solid solutions. It's a tough problem, and insurance companies don't want to be left holding the bag. "Insurance companies are petrified of an earthquake... hitting multiple clients at the same time -- one event triggering business interruption coverage and property damage coverage on a plethora of policies all at once," an insurance broker told BusinessInsurance.com.

What insurance do you have on your supply chain? Have you found adequate coverage for any particular insurance company? Share your ideas and information by posting your commenting here.