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Failing to connect dots on world events can create unforeseen exposures

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unforeseen exposures

Supply chain integrity and performance can be hurt by events that may at first seem unrelated but can have profound consequences for end users. 

“This is not an isolated function. Nothing is compartmentalized,” said Michael Pignataro, U.S. contractor builders risk leader for Marsh LLC in New York. 

For example, a user of mechanical or electrical equipment has an indirect exposure to markets for copper, a key raw material in wiring. “If there are major price fluctuations in copper or logistical problems around copper, even though I am not a direct purchaser of copper, those issues or problems are reflected in my end product,” Mr. Pignataro said. 

Chile, by far the world’s largest producer of copper, has had three earthquakes of magnitude 6.0 or greater and has experienced political unrest since 2019. 

“You can’t just look at it as an end user,” Mr. Pignataro said. “You must focus not only on your suppliers but your suppliers’ suppliers,” and so on up the chain, he said. 

Dallas-based Cheri Hanes, who heads the subcontractor default insurance risk engineering team at Axa XL, a unit of Axa SA, said the political unrest in Papua New Guinea during September 2021 roiled aluminum markets because the nation is the world’s third leading producer of bauxite, a key raw material for aluminum. 

A seemingly isolated event “can ripple through the supply chain because we are so connected,” Ms. Hanes said. Other geopolitical events such as the conflict in Ukraine affect supplies and markets for food and fuel, she added. 

The production of materials in Europe has been hit by utilities outages stemming from the Russia-Ukraine war and Russia’s control over energy supplies in the region, said Andrea Blair, Nashville-based director of business resilience and continuity management services at Zurich Resilience Solutions, part of Zurich North America. 

Mr. Pignataro said the conflict in Ukraine has increased interest in contract frustration insurance, which can cover losses related to the failure of delivery of contracted goods.

“While these products have always existed, the requests are starting to come from many more first-time buyers and there is a lot more curiosity” about the product, he said.