Insurance buyers are looking beyond traditional supply chain insurance for a coverage that encompasses nonphysical damage-related events that may disrupt their supply chain.

While interest among risk managers has increased and supply chain exposures top the list for many C-suite executives, takeup of supply chain insurance that can be triggered by an event that is not limited to physical damage or loss is quite slow, brokers and insurers said.

Types of supply chain events covered in nonphysical damage-related policies include pandemic, political risks and regulatory action, among others.

Traditional business interruption and contingent business interruption policies typically are triggered by an event that causes physical damage or loss to a company's supplier.

“If you're a company examining your supply chain, it doesn't really matter why your supply chain is broken. The important thing is that it is,” said Michael Kerner, CEO of Zurich Global Corporate in North America in New York.

Many circumstances arise that traditional supply chain insurance would not cover, Mr. Kerner said, citing the eruption of Iceland's Eyjafjallajökull volcano in April 2010, which grounded flights at numerous airports across Europe due to volcanic ash.

Under traditional supply chain insurance, business interruption from volcanic ash “typically would not be covered,” he said.

Mr. Kerner also noted that exclusions in an organization's underlying property program would apply to its contingent business interruption policy. For example, if a company doesn't have earthquake coverage in its traditional property program, then that coverage would be lacking in the contingent business interruption policy.

According to Aon Corp.'s 2011 Global Risk Management Survey, business interruption was fifth and disruption or supply chain failure 12th in risk rank among global risk managers and chief financial officers.

Tom Teixeira, supply chain practice leader at Willis Group Holdings P.L.C. in London, said a majority of companies—mid-market companies with revenues between $10 million and $1 billion and the companies with revenues of at least $1 billion—are very interested in supply chain risks, the size of the risks and what they can do to minimize those risks.

The earthquake and tsunami in Japan highlighted that “the exposures were actually...bigger than let's say the risks managers had originally assumed they'd be,” he said. “The next thing clearly showed that just an extension to your (property damage business interruption) policy is not enough.”

“I think Japan has refocused people's attention on some of the gaps in the physical damage coverage around supply chains,” Ben Tucker, senior vp and leader of the property specialized risk group at Marsh Inc. in New York.

But buyers of nonphysical damage-related supply chain coverage need to undergo a high level of risk analysis and assessment, “which is critical to the risk transfer because the underwriters need to be able to understand what the supply chain issue is,” he said. “The buyers have been, I think, struggling with that process.”

Insurance carriers want to know the level of business interruption exposure companies are subject to, where the pinch points are in the supply chain, and who are the critical suppliers, Mr. Teixeira said.

“If they get that information, then they are prepared to put up the right capacity,” he said.

Mr. Teixeira noted that while many companies understand the risks associated with their Tier 1 supplier, they are challenged to understand their exposure further along the supply chain to tiers 2, 3 and 4.

While the insurance markets are ready to write nonphysical damage-related risks, the buying community has been quite small and takeup has been quite limited, experts say.

A difficult economic period for insurance budgets, the high costs of the coverage and the challenging risk-assessment process has stemmed buyers for now, experts say.

Johnston, R.I.-based Factory Mutual Insurance Co., which does business as FM Global, offers supply chain insurance, but not tied to a nonphysical damage trigger.

“When you move in to nonphysical damage, you will see a very quick shrinking of products that are available. The reason would be simply because it's difficult to gauge the threshold between the business risk and a fortuitous risk that can be insured,” said Jeffrey Beauman, vp of all risk underwriting at FM Global.

“We absolutely are looking at it now,” Mr. Beauman said regarding nonphysical damage-related coverage.

“New coverages are a bit slow getting out of the gate at this point,” Mr. Kerner of Zurich said. “We're certainly prepared to offer substantial capacity ourselves and we're very interested in building partnerships with other carriers and reinsurers to build more capacity as we go forward and as demand manifests itself,” Mr. Kerner said.

Zurich offers a maximum limit of $50 million dollars aggregate, with 3% to 5% rate on line, according to Mr. Tucker of Marsh.

Mr. Tucker said other insurance markets offering nonphysical damage-related coverage include Lexington Insurance Co., with $25 million aggregate limit and 2% to 5% rate on line; Berkshire Hathaway Inc. has provided quotes up to $250 million limit and 2% to 4% per named supplier; and Munich-American RiskPartners Inc., a division of Munich Reinsurance Co., with a $150 million dollar limit and rate on line determined by the risk presented.

Still, the emphasis from brokers and insurers remains on the risk assessment and analysis of supply chain risks.

“The one part of this that is quite important is that the insurance products are structured around the risk assessment,” Mr. Tucker said. “No amount of mitigation at the Tier 1 level will actually help you. You need to go further through the supply chain.”