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Thailand floods disrupt supply chains

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BANGKOK—The worst flooding in Thailand in more than 50 years left nearly 400 dead late last week and caused widespread supply chain disruptions as floodwaters threatened to inundate central Bangkok at Saturday's high tide.

The Thai Finance Ministry estimated the total economic cost of flood damage could exceed $6 billion, with an analysis by Guy Carpenter & Co. L.L.C. noting last week that the catastrophe had resulted in $3.3 billion in insurance claims thus far.

Floodwaters affected 61 of Thailand's 77 provinces, according to Guy Carpenter, leaving numerous manufacturing facilities flooded and forcing closure of several industrial parks, with a supply chain impact that seemed to take many by surprise.

“I think it's going to be surprising to people what a big deal this is,” said John Ellison, a partner at law firm Reed Smith L.L.P. in New York and Philadelphia. “We're already kind of working behind the scenes with clients. Supply chain issues arising out of this, I think, are going to be gigantic.”

“The thing that's interesting about Thailand, it's a midsized country—about 65 million people—-but it's really outsized in terms of its importance to the supply chain,” said Linda Conrad, director of strategic business risk management at Zurich Financial Services Ltd. in New York.

“I'm hearing some crazy numbers. Things like 1,500 industrial facilities are actually flooded,” said Mr. Ellison. “And these aren't mom-and-pop businesses.”

Companies such as Honda Motor Co. Ltd., Nissan Motor Co. Ltd. and Toyota Motor Corp. announced that they expect Thai facilities to be closed for more than a month.

Electronics and high tech firms also were hit hard. Toshiba Corp. announced that the flooding forced it to halt production at nine Thai plants, with production not expected to resume before January. Flooding closed two Western Digital Corp. plants in Thailand responsible for approximately 60% of the company's hard drive production.

Sony Corp. closed two of three facilities in Thailand, forcing it to delay the launch of some new models, while Nikon Corp. said it's unsure when it will be able to reopen a facility reported to account for 90% of the company's single-lens reflex camera production.

Canon Inc. closed production at two Thai facilities, and was considering relocating its inkjet printer production to Vietnam, according to reports.

While the impact of the March earthquake and tsunami that hit Japan has heightened businesses' awareness of supply chain exposures, concerns being voiced about the impact of the Thai flooding seemed greater than those after the Japan event, experts said.

“I'm finding there's a lot more noise around this particular situation in Thailand than there was after the situation in Japan,” said Gary S. Lynch, managing director at Marsh Risk Consulting in Morristown, N.J.

“As concerned as everybody was about what happened in Japan, I think what's happening in Thailand has the potential to be an even greater economic hit for a wider range of businesses,” said Mr. Ellison.

As affected companies sort out potential insurance coverage for their supply chain interruptions, “we're going to see some of the same sort of recurring issues that are coming out of the Japan claims,” Mr. Ellison said. One is the scope of contingent business interruption coverage for suppliers' production being interrupted, raising the question of “What is the proof required to establish loss in a causation chain?” he said.

There also might be territorial scope-of-coverage questions, he said, such as whether a U.S. company's insurance clearly states that it covers losses arising from a supplier's interruption in Thailand. “That issue is actually surfacing a lot in Japan, so I'm sure it's going to come up in some of the Thailand claims,” Mr. Ellison said.

Policyholders also may face issues from “bucketing” claims—determining where they fit under policy sublimits. “Where you bucket the claim can often have a substantial impact on what your recoveries are,” Mr. Ellison said.

The fact that many of the flooded Thai facilities represent “middle-of-the-chain” suppliers also can have an impact as businesses seek coverage for supply chain interruptions, Mr. Lynch said, with those suppliers often unnamed in coverages. As a result, going forward, “I think one of the things you're going to see is a great deal more diligence around the coverages.”

Zurich's Ms. Conrad said her company's data shows more than 50% of supply chain losses are caused by “sub-tier” suppliers, and that businesses tend to underestimate the length and frequency of disruptions.

She agreed that this latest supply chain disruption should further companies' interest in evaluating and managing their supply chain risks.

“Japan was a bit of a wake-up call, and I think what we're seeing is people are really interested in taking a deeper look at some of the risks in their supply chain,” she said. “There's increased interest in doing supply chain analysis and perhaps insuring part of it,” she said. “Doing a broader analysis to see where you're exposures lie is really important, because it's not just natural disasters that can take you down.”

PLUS: View the Business Insurance photo gallery on the flooding in Thailand.