Supply Chain Risk - Impact on Business Interruption
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Transcript of Supply Chain Risk - Impact on Business Interruption
Most manufacturers use third-party suppliers (contract manufacturers or subcontractors), often providing critical parts or services, to reduce the cost of doing business.
These global supply chains can help manufacturers increase competitiveness and efficiency, but they also increase risk.
The global electronics contract manufacturing industry reached $360B in 2011, and is expected to reach $426B by 2015.”– Center for American Progress
Thai floods batter global electronics, auto supply chains
The result? Losses in the hundreds of millions of dollars for well-known electronics, computer and auto manufacturers.
In 2011 the floods in Thailand and tsunami in Japan highlighted the prevalence of outsourcing and the extent of interruption that can occur even in industries expected to have superior business continuity plans and redundancy.
Most businesses have supply chain exposure.
Supply chains are not just vulnerable to natural catastrophes.
It is often not sufficiently planned for.
Image: 3M LED Lighting
THE OLD REALITY THE NEW REALITY
Image: 3M LED Lighting
Filament
Glass bulb
Threaded connector
Leads
Globe Driver
Light guide
Threaded connector
LEDpanel
LED
THE OLD REALITY THE NEW REALITY
Products are “assembled”using components
that are often outsourced.
Products were “manufactured”at a single location.
WHO
EXPOSUREWHEREWHAT
IS THE
The “supplier” may be providing a key ingredient or making a necessary component for your insured.
SupplierInsured
Supplier
Physical loss occurs here
Insured
Supply chain interruption is the risk.
Financial loss to Insured
Supplier
Physical loss occurs here
InsuredContingent Time Element (CTE) is the insurance product that deals with this risk.
There are many types of CTE coverage, and the terms and extent of coverage can vary greatly. Know your form.
Because CTE is typically triggered by a physical loss at a non-owned location, insurers are often at an informational disadvantage regarding both the physical and monetary aspects of the exposure.
Supplier
Physical loss occurs here
Insurer
HON HAI FOXCONNLOSS EXAMPLE:
One of the world’s biggest contract assembler and manufacturer of electronic components…
Image: Foxconn Pardubice by Nadkachna / CC BY-SA 3.0.
HON HAI FOXCONN
Image: Bloomberg Business
Image: Canale di Micgadget
Supplier’s location was reported as electronics assembly.
It suffered a metal dust explosion and fire following.
This was an unexpected special hazard.
LOSS EXAMPLE:
DO YOU KNOWTHE PHYSICAL EXPOSURES?
• Is the supplier located in a developing country?
• What do you know about special hazards, local fire departments and water supply?
• Are you pricing for the unknowns?LESS INFORMATION = LESS CERTAINTY
WHAT ISTHE MONETARY EXPOSURE?
• Every business should know which of its products depends on a supplier and how much revenue is derived from each particular supplier.
• But 90% of businesses surveyed said they did not formally quantify supply chain risk when outsourcing production!
IssueInsureds with a coverage need and an insurance market reluctant to put up large limits with limited underwriting information
Solutions– Better information
about key suppliers and the annual revenue associated with them
– More robust supply chain management by the insured
– Greater willingness for companies to allow insurers to inspect and ask questions at non-owned locations
– Realistic pricing expectations that address the unknowns inherent to CTE coverage
IssueInsureds with a coverage need and an insurance market reluctant to put up large limits with limited underwriting information
REINSURANCE SOLUTIONS
CTE coverage reimburses a company for lost profits and extra expenses due to a covered cause of loss that occurs at the premises of one of their suppliers or customers.
REINSURANCE SOLUTIONS
The contingent property may be specifically named, or coverage may be blanket over all suppliers and customers.
CTE coverage is also commonly referred to as Dependent Properties Coverage or Suppliers and Customers Extension.
REINSURANCE SOLUTIONS
CTE should NOT be thought of as a “throw-in” or “window dressing” type of coverage.
WORKING COVERAGEIT IS
PETER HAKENEN
IN /in/peterhakenen
T @peterhakenen
Contact your local Gen Re representative for more insight into supply chain risk and to discuss reinsurance solutions.
© 2015 General Re Corporation | This presentation is intended to provide background information to our clients and professional staff. It is time sensitive and may need to be revised and updated periodically.
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