As supply chains stretch out longer and longer, they seem to besnapping more often. And while companies generally insure againstsuch risks, the standard insurance product, contingent businessinterruption coverage, has some shortcomings.

A survey of more than 550 companies worldwide found 85% hadexperienced at least one supply chain interruption in the lastyear, up from 72% in 2010 and 74% in 2009. The survey, which wasconducted by the Business Continuity Institute and sponsored byZurich and DHL, also showed that 29% of the companies reported morethan one supply chain disruption, up from 20% in 2010.

“That shows it's really a systemic problem,” says Linda Conrad,director of strategic business risk at Zurich.

Companies cited weather as the main cause for 51% of thedisruptions in the last year. Al Tobin, national property practiceleader at Aon Risk Solutions, points to the floods in Thailand andJapan's earthquake and tsunami as weather events that causedsignificant disruptions this year for the automotive andelectronics industries. “A lot of manufacturing is done in thoseregions for component parts for U.S. products,” Tobin says.

The survey also shows problems can occur at various points in acompany's chain of suppliers. While 61% of the disruptions startedwith companies' direct suppliers, 30% originated with tier twosuppliers—the companies that supply their suppliers—and 9% withtier three or lower suppliers.

Companies should take a thorough look at their supply chain,Tobin says. “People need to peel back the onion and look at thesecond or third level of suppliers,” he says, and adds that suchscrutiny needs to occur regularly. “There are suppliers you havetoday, you could have different suppliers next year. It's not aproject you do once.”

Conrad says the procurement department can often list all of acompany's suppliers by the amount of money spent with each of them,but that amount isn't necessarily a good measure of the company'ssupply chain risk. “If you were a hospital, you might spend themost on drugs or major equipment like an MRI,” she says. “But ifyou don't have rubber gloves, you're not allowed to open yourdoors. Supply chain risk assessment requires a broad analysis tounderstand which multiple suppliers would cause an impact on yourend value chain.”

Collecting the information companies need about their suppliersis a challenge, says John Dempsey, managing partner at DempseyPartners, a forensic accounting firm that works with largecompanies to quantify and recover property and businessinterruption insurance claims. “It's hard enough to identify amongthe hundreds of vendors that any large corporation will do businesswith which are the key suppliers and which are the suppliers thatare nonessential or could be easily replaced,” Dempsey says. “We'relooking for that supplier who is the sole source of the mostvaluable part that goes into your widget. If you can find thatsupplier, you can take steps to mitigate your risk.

“If it's hard to pick out suppliers who are key to are operationand profit, how do we go to the next level and find the supplierswho are key to our suppliers' getting the goods and services to usin a timely way?” he adds.

Most companies try to offset risks to their supply chain bybuying contingent business interruption insurance, which extendsthe coverage for interruptions to the company's own business tothose of its suppliers and customers. But given this year's stringof catastrophes, companies may find such insurance costlier orharder to obtain.

“There are pricing increases for this coverage,” Aon's Tobinsays. “The market's been hit and they want more money. They wantmore money for earthquake, they want more money for flood, and theywant more money for contingent business interruption.”

“What we're starting to see is the insurers are not willing tooffer as much coverage for contingent business interruption and arestarting to put in restrictions,” Dempsey says, adding thatinsurers may have more questions about companies' supply chains. “Ithink the carriers are starting to believe that they don't haveenough information to maintain the same capacity, the same pricing,the same terms and conditions for contingent businessinterruption,” he says.

Dempsey notes that there are some problems with contingentbusiness interruption coverage, starting with the fact that it'straditionally triggered by physical damage to property. So when thevolcanic eruption in Iceland halted air traffic in the fall of2010, for example, airlines lost a lot of money, but the fact thatthere was no physical damage to their insured property meantcontingent business interruption coverage didn't come intoplay.

Conrad says the fact that contingent business interruptionusually covers the perils the company has selected for its ownbusiness interruption coverage can also raise issues. “If you're inan area that doesn't have earthquakes, you wouldn't purchaseearthquake peril,” she says. “But many suppliers are in anearthquake zone. If you're relying on the same perils to beextended to your suppliers, you may miss something.”

Zurich rolled out a new policy, supply chain insurance, a fewyears ago, that covers all risks and does not require physicaldamage to property to trigger coverage.

But experts say a thorough investigation of a company's supplychain may also point to risk management measures that can make adifference.

“If I were doing business in Thailand now, I would be focusingon who I'm doing business with, doing a thoughtful analysis of whatcould happen within reason and is there anything I could do aboutit,” Dempsey says. “If insurance risk transfer is my best solution,I'm going to be sure I have adequate limits. On the other hand, itmay be that I can encourage my largest supplier to build afour-meter flood wall around his factory, and that might make anequally important reduction in the risk.”

For an earlier look at innovations in supply chain finance,see BestFriends Forever.