Supply chain awareness gap is proving costly for businesses

Despite the ever-changing business landscape, business interruption including supply chain risk remains one of the top three risks for the seventh year in a row, according to the 2019 Allianz Risk Barometer. Most businesses operate within a complex supply chain web and a break in any part of that structure can cause tremendous financial loss.

Traditional property damage/business interruption (PD/BI) policies are not tailored to cope with the extent and nature of a supply chain interruption. Businesses must therefore look beyond the traditional PD/BI polices to transfer their supply chain risks.

PD/BI policies have many limitations when providing indemnity coverage to the insured for named/unnamed suppliers in the event of a gross profit loss resulting from physical damage at the direct (tier one) supplier’s premises. Furthermore, according to a report issued by Zurich Business Continuity Institute (BCI) in 2018, only 52% of the businesses surveyed suffered a loss at a tier one supplier with the remaining losses being from tier two suppliers and beyond.

It is therefore important for businesses to thoroughly understand their supply chain risks to ensure appropriate insurance solutions are obtained to cover their risks. The top causes of disruption include:

• information technology outages;
• adverse weather;
• cyber-attacks;
• loss of talent/skills;
• transportation network disruption;
• new laws or regulations.

It is unlikely that the causes above will trigger a loss under the PD/BI policies unless there is actual physical damage involved. In most instances, supply chain interruptions are due to non-damage triggers including the causes listed above, which will not be covered by the traditional PD/BI polices. Businesses surveyed by the BCI confirmed that 47% of the supply chain losses were not insured.

With Brexit in motion, the Chartered Institute of Procurement and Supply estimates that almost two thirds (63%) of European Union businesses that work with suppliers located in the UK expect to move some part of their supply chains out of the UK. Maintaining relationships with suppliers post Brexit will become the biggest challenge and more of a reason to re-visit the supply chain risk exposures closely. New laws and regulations that are likely to come in force will dramatically slow down the flow of goods and reduce visibility and control in and out of the EU and UK. It is likely there will be potential changes to regulations on grants and incentive, customs and tariffs, and legal contracts to name a few.

Businesses should therefore make every effort to maintain a resilient supply chain. The table below outlines some of the coverage options available in the market.

The non-damage supply chain policies available in the market are thought to cover most non-damage perils other than war, terrorism and nuclear reaction, and radioactive contamination. However, the cost of obtaining such coverage may be more expensive than traditional PD/BI policies.

Recent surveys confirm that the primary reason businesses purchase inappropriate coverage is due to the challenges involved in understanding their supply chain and not because it is thought to be expensive or because insurers’ requests for information are too onerous. This reveals an awareness gap that can be rather costly. By undertaking a thorough review of supply chain risks, businesses can better identify the exposures they face.

Below are some recommendations for businesses:

• Develop value chain mapping to identify and quantify the impact of losing key suppliers; quantified monetary consequences are a powerful tool to rouse a board of directors into action;
• Determine the accumulation of risk beyond tier one suppliers and understand the single point of failure;
• Review the insured’s business continuity plans as well as the suppliers’ business continuity plans to ensure mitigation measures are in place at all levels;
• Maintain strong communication links to promote transparency, accountability and faster responses in a crisis;
• Understand intercompany dependency as well as reliance on other parts of the business in the external supply source;
• Understand the current insurance policy/risk transfer options in place, and tailor existing coverage to suit your requirement or obtain necessary standalone policies.

Commitment from senior management is essential to make informed decisions on purchasing tailored insurance for supply chain risks and untangle the maze.

Jo Suppiah is partner, forensic advisory services, UK at Sedgwick