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Insurance solutions for supply chain risks needed: Survey

Posted On: Mar. 2, 2012 12:00 AM CST

Recent natural disasters that caused significant supply chain disruptions around the world highlight the need for new insurance solutions to address business interruption and supply chain exposures, according to a survey of risk managers and financial executives conducted by Dempsey Partners L.L.C.

John Dempsey, managing partner of Wilton, Conn.-based Dempsey Partners, this week unveiled and discussed some of the survey's findings at Business Insurance's third annual Risk Management Summit® in New York.

The survey, conducted in February by the claims and risks management consulting firm, included responses from 67 corporate risk management and financial executives.

More than half of those surveyed—55%—agreed that the insurance industry needs to develop new products to help organizations address supply chain risks. Among those surveyed, 61% said they had experienced a supply chain disruption in the last five years that led to a loss of earnings, and 30% said they recovered insurance claims related those loses.

Mr. Dempsey said there was a great deal of inconsistency in the responses received in the survey. “It goes to the complexity of supply chain risks. It is really seen as an enormous exposure to evaluate,” he said.

Among the results, 54% of the respondents said their property insurer clearly articulates and explains business interruption value reporting requirements, while 42% disagreed.

Conversely, 43% said their property insurer clearly articulates and explains the kind of information needed to underwrite supply chain risks, while 46% of the respondents disagreed, according to the survey.

“The dichotomy that I think is borne out is that the insurance industry has not itself developed standards for reporting business interruption and supply chain risks and exposures,” Mr. Dempsey said. “Therefore, the risk managers are not in the position to provide additional information because they don't know what to provide.”

While 85% of the respondents agree that their organizations have identified key supply chain risks, only 69% feel those risks were adequately conveyed to insurers.

A lack of underwriting experience and communication between buyers and insurers points to some of the contradictions within responses, Mr. Dempsey said.

“Other than a very basic instruction on business interruption values, I don't see any guidance coming from the insurance industry as to additional details that they would need to properly underwrite a business interruption or supply chain risk,” he said.

When it came to their property insurance program, 61% of the respondents agreed that accurate business interruption values and better exposure data would help them structure better insurance programs.

“That gets to the nub of it,” Mr. Dempsey said. “When an individual account is presented to the markets in terms of risk exposure, that level of differentiation provides real benefits in terms of scope of coverage, limits and cost. We often see premiums decrease because the exposure is actually much better than had been assumed, or there are more mitigation plans in place that will reduce the exposure.”

Of the companies surveyed 89% had annual revenues of $1 billion or more, and 23% have annual revenues above $10 billion. Manufacturers accounted for the largest number of respondents, followed by technology firms, finance firms, and retail and wholesale companies.

A series of natural disasters in Japan, New Zealand, Thailand and the United States that disrupted supply chains around the world in the past year have shown that business interruption and supply chain exposures are an ongoing risk for manufacturers.