NEW YORK—Supply chain risks are increasingly not being covered by organizations' contingent business interruption coverage, said a speaker at Business Insurance's third annual Risk Management Summit® in New York.
The Iceland volcano, for instance, which disrupted European air travel in 2010, would not have been covered because it did not cause physical damage of the type that would have been insured either through direct business interruption coverage or the contingent coverage that covers suppliers, said John D. Dempsey, managing partner at Wilton, Conn.-based Dempsey Partners L.L.C..
Mr. Dempsey was among speakers on a panel on supply chain risk management at the Risk Management Summit this earlier month.
Similarly, an insect infestation that caused damage to crops in California's Central Valley probably would not trigger coverage because the destruction would not be considered physical damage, said Mr. Dempsey.
“One of the limitations of coverage” today is policy exclusions, Mr. Dempsey said. For instance, the Japanese quake last March “didn't cause that much damage” to the Fukushima nuclear power plant. But the subsequent tsunami caused a lot of damage to the facility. “What if a company in the affected region had quake damage, but not flood coverage?” he asked. There is a question of whether losses would be covered.
Furthermore, what if the flood caused a fire and explosion? “Is that covered?” he asked. There also is the question of coverage for disruption caused by roads damaged in the catastrophe.
Another issue that arises with respect to coverage is who is a customer and who is a supplier. While that may seem a simple question, in fact it has become a focus of litigation in the U.S., and in the “real world” there is “disagreement about that,” said Mr. Dempsey. Words defining “supplier” and “customer” often are modified in a policy. Some policies also will apply only to the first-tier supplier, but not further down the chain. Others, though, have language that would provide this coverage, he said.
Another coverage issue is that of a supplier who is not damaged but is not producing because a supplier of one of its components is not delivering. “Where does that fit into the policies as they're constructed today?” asked Mr. Dempsey. “Read your policies,” he said, and if the language applicable to your supply chain is narrow and could be broadened, “I recommend you do it,” he said.
While some contingent business interruption endorsements have the broadest coverage, others have “absolutely terrible, narrow” coverage, he said. “Read what you have,” he said.
Mr. Dempsey said many companies are offering stand-alone supply chain coverage. “That's a good thing,” he said. Furthermore, he said, some London syndicates are offering trade disruption insurance, which does not require physical damage, just a trade disruption to trigger coverage, for example, when the Mississippi River rises and is closed to barge traffic.
Mr. Dempsey said there has been a lot of talk in the past few months about data, and the amount of data risk managers provide to underwriters. “The carriers are now indicating in order to provide sufficient limits to make it meaningful, they're going to need more data or they're going to get out. We don't know if that's going to happen—if it's an idle threat, or if they're serious about it,” he said.
Mr. Dempsey said given the “breadth and complexity of our supply chain risks, we should carefully examine the triggering events” that could lead to a significant profit loss. Risk managers should take a “serious look” at extending or supplementing coverage for the supply chain risk, he said.
Patrice M. Knight, vp of operations global supply for IBM Corp. in Hopewell Junction, N.Y., presented a case study at the supply chain session. It is a “very complex business problem,” she said. One of the things that is different from 15 years ago is a greater awareness by supply chain professionals as to how factors can affect the supply chain. When you do business in as many countries as does IBM, you need to think about factors including political stability, labor issues and natural catastrophes, she said.
“It is in the sight of the C-suite for any large organization,” said Ms. Knight.
“A supply chain can be shut down in an instant,” said Ms. Knight. “You can't eliminate all risk. What you have to do is put the systems and processes in place...so that you are aware of the potential of it as early as possible,” focus on the highest-risk items, “and mitigate it faster than anyone else can.”
Think about reducing risk and how it helps a company act profitably, she said. Adding money when there is a disruption “can't be the way to solve it.” Think about time to recover and how to improve the supply chain's overall performance, she said
“The whole area of event management is really a growth opportunity” that can help monitor disruptions and see them earlier, she said.
Speaking during the panel, David J. Closs, a professor in the Department of Supply Chain Management at the Eli Broad Graduate School of Management at Michigan State University in East Lansing, Mich., said companies historically looked at supply and demand in considering supply chain management. That is no longer good enough, and companies must focus more on balancing the dimensions of risk and security as well, Mr. Closs said.
He said there are many instances where one small component coming into the food supply chain can kill animals and even people.
Some say they are safe because they work with big suppliers, not realizing that in fact they are a conglomeration of small suppliers. “How do we make sure with reasonable confidence that each part of the supply chain works well?” he asked.
Mr. Closs said firms are looking for more of a balance between scale and reliability. Infrastructure congestion is becoming increasingly problematic, while increased energy costs will shift supply chain design and increase the importance of “quantifying the value proposition.” He pointed to the damage caused by the tsunami in Japan, where there was centralized production because of economies of scale.
Panelist Edward D. Erickson, vp of product and business development at Intrapoint AS, said that the supply chain is critical to most organizations, but the key is for supply chain leaders to build bridges with other parts of the organization and “lead by example.” Mr. Erickson, who previously served as director of global safety, security and business resiliency for Cisco Systems Inc., explained that such a holistic approach to risk is crucial to ensuring business resiliency.
Also speaking was Anita Househam, policy and legal adviser, issue manager-supply chain sustainability at the United Nations Global Compact Office in New York. Ms. Househam discussed the goals of that project and how it is aiding organizations that are working to embed sustainability principles into their supply chains, in part to address risk factors.