Insurance: The Supply Chain Disappointment

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Recent natural catastrophes have highlighted the need to insure supply chain risks, however, risk managers have said they want better products. Jane Bernstein finds out what more the insurance industry can do.

A recent study Ferma, Federation of European Risk Management Associations, shows that commercial insurance buyers generally want better insurance products to cover their supply chain risks. So is there a gap in the market and should insurers be looking to fill it with more innovative products?

A number of factors have combined to shine a spotlight on supply chain risks in recent years,  commentators point, in particular, to the global nature of supply chains as well as the fact that businesses are increasingly using suppliers on a ‘just-in-time' basis.

Streamlining Supply
Tom Teixeira, life sciences practice leader at Willis Global Markets International, explains that over the last few years, companies have tried to reduce costs by streamlining their supply chains, implementing international sourcing strategies, and adopting just-in-time strategies to maintain stocks at minimal levels.  This, he says, has resulted in a greater dependency on smaller numbers of suppliers, with many suppliers operating in countries that experience high levels of geopolitical risk, or due to current economic conditions, are financially fragile. 

Teixeira adds: "The level of business interruption risk from the loss of key suppliers due to both property damage and non-property events has greatly increased.  Recent catastrophic events in Japan and Thailand have brought to light the size of these supply chain risks and financial distress companies face as a result of interrupted operations."

Recent Losses
Stefano Tranquillo, operations manager for Northern Europe at FM Global, emphasises that recent losses caused by an increase in natural catastrophe activity have brought the issue of supply chain resilience into greater focus. He goes on to explain: "The risks of the complex, interconnected and globalised marketplace are often underestimated, and a fracture in a supply chain can leave a business paralysed." 

Given the significance of natural catastrophes, have there been any lessons for insurers and businesses in recent catastrophic events? Nick Wildgoose, global supply chain product manager for Zurich, emphasises: "Insurers, like the customers they serve, have realised they need to understand the supply chains they cover in more detail. They all need to ask themselves whether they understand the financial impact of a key supplier failing? Although this is an interconnected world, many customers just focus on their direct suppliers but issues can arise lower down the supply chain."

Additional Pressure
An uncertain economic environment has brought additional pressure to bear on businesses. Marie-Gemma Dequae is a former president and board member of Ferma and risk manager for the Partena companies. She explains: "Globalisation has extended these supply chains all over the world, but the global economic downturn we experienced in 2008 and 2009 and the new financial crisis have forced many companies to pay special attention to their supply chains, as cost cutting is back during these periods of economic crisis. In this prolonged global downturn, a resilient supply-chain strategy is important to gain important competitive advantage."

Asked about other factors that might be fuelling discontent among customers Tim Cracknell, a partner for risk consulting in the Global risk solutions team at JLT Specialty, observes: "The customers' discontent derives from premium increases and cover restrictions, whether a reality as renewals have come around or in expectation in light of commentary by carriers in this regard."

Required Information
Cracknell says discontent will also arise from the additional workload that risk management and insurance departments might then encounter to gather the required information.  "This will have to come from sources that are often not easily accessed.  And if there are say 25 or 50 key suppliers, then the scale of the exercise becomes somewhat daunting," he observes. 

As supply chain risks rise up the agenda for businesses, there is clearly an opportunity for insurers to step in with up-to-the-minute solutions that respond to new challenges. Dequae believes while the risks have changed, "the insurance solutions have not really adapted to the changes in the supply chains". She points, in particular, to the need for innovation when it comes to "more coverage and capacity", as well as broader conditions and "coverage at acceptable prices".

Growing Recognition
The good news is that there is a growing recognition among the insurance industry of the need for solutions to continue to evolve. Wildgoose asserts: "In order to remain relevant to their customers, insurers need to reflect the changing risk models they have today and will have tomorrow. There are many ways in terms of risk understanding and transfer that insurers can help customers."

But there have been developments among insurers and brokers in going beyond the more traditional products. Cracknell, for example, cites JLT's non-damage business interruption product called earning and product integrity cover.

Enhancing Cover
While Tranquillo is keen to emphasise that: "We are constantly looking for ways to enhance our policy cover." He goes on to explain: "For instance, we recently expanded our offering to include cover for the entire length of the supply chain. Companies often have multiple tiers of suppliers but the standard offering across the market only covers first-tier supply. The industry traditionally provides cover only for clients and their direct suppliers but our policy changes have moved towards multi-tier coverage where the whole supply chain is insured."

There are also opportunities here for insurers and brokers to really add value. As Wildgoose observes: "The interconnected nature of supply chains and the social importance they carry in areas such as food and pharmaceutical supply chains means this is a key area where the insurance industry can add value."

A Complete Solution
In fact, there is a view that simply offering insurance is not enough. Tranquillo observes: "A complete solution requires a combination of accurate information, risk management solutions coupled with a tailored insurance solution. It is only through a combination of these components that an effective sustainable solution can be implemented."

The Ferma survey clearly highlights disappointment among risk managers regarding cover for supply chain risks. But is there a sense that customer expectations are unrealistic and if so, is it partly up to brokers to manage those expectations? Wildgoose responds: "The first point to make here is that it is very important brokers make their clients aware of the various supply chain coverages that are available. Regarding customer expectations, it is right they should have high expectations but they in turn need to be willing to work with their insurance partners, recognising the supply chain insurance process itself adds significant value in helping to protect a company's profitability."

Teixeira concludes: "Brokers need to manage expectations, but they can also be pro-active in two areas: supporting and facilitating the risk assessment process for their clients, and working with carriers to improve the wordings of their products to ensure they are flexible and effective."

This article by Jane Bernstein was originally published at www.insuranceinsight.eu Insurance Insight is a business web site offering insurance and risk management professionals the latest news, views and comment from across Europe.

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