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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.

5 comments on “Catastrophe Lurks: Are You Insured & Ready?

  1. Barbara Jorgensen
    July 18, 2012

    Sounds like a real Catch-22 here: we can't build a product unless you tell us what you need but what you need varies so much it's hard to quantify. The point about cascading is true also. I would imagine a lot of finger-pointing goes on if one partner (say raw materials) causes another partner to miss a production deadline. Still, sounds like a big opportunity for any insurer that wants to tackle it.

  2. bolaji ojo
    July 18, 2012

    Insurance payments can help a company recover quicker from a disaster but it can't replace the essential functions of making sure you have recovery plans in place for when disaster strikes. Insurance companies can help a company get full coverage and ensure all loose ends are covered but the greater service they can provide is to help companies understand their risk profile, implement redundancies and plug holes that could result in severe supply chain disruptions.

  3. Barbara Jorgensen
    July 18, 2012

    I don't know why I can't get beyond this, but I keep thinking about the chain reaction here. Insurance benefits the company that buys it for protection. I get that. But in the supply chain, the damage can be so extensive…you can alienate a lot of suppliers and customers. So maybe it requires the kind of insurance you take out if you damage someone's else's property…I don't know. Any thoughts fro the experts out there?

  4. FLYINGSCOT
    July 19, 2012

    It must be very difficult to quantify the total loss associated with supply chain disruption. For example, how does one quantifu loss of goodwill and future earnings.  This will probably lead to super expensive policies or insurers that don't pay out.  

  5. bolaji ojo
    July 19, 2012

    As I found out recently, it's good to have insurance but it's better to not be involved in any accidents that would result in having to go through repairs, etc. My car was hit by somebody in a parking lot and, though I wasn't at fault, I had to go and get estimates, drop off the car at a body shop, rent a replacement and so on. To rub insult to injury, even after the car was repaired, I was informed it's now “damaged goods” because the CarFax report will always show it had been involved in an accident. So, I can't get premium price for it!

    The flooding last year in Thailand is one such example. The companies that were affected probably had insurance on the properties and might have received some compensations even for lost sales, and other missed opportunities, but goodwill is difficult to evaluate and, therefore, more difficult for an insurance company to cover.

    Also, months after the incident, the repercussions are still reverberating throughout the supply chain. There are companies that were not directly impacted by the flooding but which supply components to the affected customers. They lost sales but their insurance probably didn't cover losses like this.

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