Supply Chain Insurance Woes

Executives report difficulties in recovering losses.

As supply chains grow longer and the risks increase, some companies are finding available insurance solutions wanting. According to a recent survey, 61% of executives at big companies have experienced a supply chain interruption in the last five years that led to a loss, but only 30% had recovered losses or extra expenses from their insurers. More than half (52%) of the executives say they have never recovered on a claim related to a supply chain or operational loss.

The survey of 67 executives, most of them risk managers, was conducted by Dempsey Partners, a forensic accounting, claims management and risk consulting company in New York City.

John Dempsey, the firm’s managing partner, says companies’ limited recovery reflects “a combination of some losses simply not being covered and then also the application of deductibles, retentions and things.”

In terms of losses that aren’t covered by insurance, Dempsey cites the example of a company whose supply chain suffers as a result of the earthquake in Japan, but whose property insurance doesn’t include earthquake coverage. (Business interruption coverage is usually a component of a company’s property insurance.)

More generally, Dempsey says, the market for business interruption coverage and contingent business interruption insurance—the type of insurance that covers a company’s supply chain—lacks the modern reporting standards that exist for other types of commercial insurance.

According to the survey, a little more than half (54%) of the executives surveyed said their insurer explained its business interruption reporting requirements clearly, while 42% disagreed. Just 43% of the executives said their insurance company made clear the information needed to insure supply chain risks, while 46% disagreed. And only about a quarter (26%) said their insurers’ risk modeling provided accurate data on the company’s exposure to business interruption, while 51% disagreed.

Dempsey notes that the property market accumulates vast amounts of information about insured structures, using a framework that includes data on construction, how buildings are used, what protection they have against fire and what environmental hazards they face.

The information that’s compiled related to business interruption (BI) is paltry by comparison, he says. Companies provide insurers with a BI value, which is basically their annual revenue minus costs such as raw materials, supplies and third-party contracts, and divide that value among their locations.

“A BI worksheet doesn’t tell you much about the risk,” Dempsey says. Information that could help underwriters includes the length of time it would take to rebuild a facility, what the company could do to mitigate its loss during that time, whether the company has a business continuity plan and whether it has a safety stock of inventory for key products, he says.

Better information could also be positive for insurance customers, Dempsey says. Companies “that really do have great [business continuity planning) and super management that has thought about mitigation and a good sense of what they would in the case of a catastrophe, they really do have a good story to tell and the underwriters don’t hear that story very often,” he says. “I think all insureds would benefit from quantifying their business interruption risks. Many will stand to benefit financially by conveying and differentiating their risks to their underwriters.”

More than half (55%) of the executives surveyed expressed interest in new insurance products to deal with supply chain risks.

Dempsey notes that Zurich now offers supply chain insurance and says he expects to see other insurance products come to market that target supply chain risks. In fact, he says, supply chain risks may eventually be covered by a standalone insurance product, just like the evolution in cyber insurance and terrorism insurance.

 

For an earlier look at supply chains and insurance coverage, see Supply Chains Stressed in 2011.

 

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