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Insuring Supply-Chain Risk and the Art of Business Interruption Insurance

From natural disasters to transportation issues, it's crucial for businesses to have a robust plan to protect themselves against unexpected circumstances. But all too often, companies have a piecemeal perspective of risk.
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insuring supply chain risk and the art of business interruption insurance

Whether it's a natural disaster, a transportation issue or a supplier failure, it's crucial for businesses to have a robust plan to protect themselves against unexpected circumstances that could lead to business disruptions and create financial risk.

There are a variety of steps a business can take to help safeguard revenue and plan for continuous operations in the face of disruption. It's important to understand and map out the supply chain—from components to raw materials—for each stage of operations and to understand suppliers and dependencies.

Although global expansion can create substantial economic opportunity, it's not without its risks. Companies that operate globally must have backup plans and inventory in case there is an interruption. But all too often, companies have a piecemeal perspective of their risk as opposed to understanding the complex interplay between their operations and balance sheet.

Protect Against Supply-Chain Instability

The global supply chain continues to face instability, which places additional risk on businesses operating on an international scale.

During the coronavirus pandemic, vulnerabilities within “just-in-time" manufacturing came to light, highlighting society's dependence on reliable—yet expensive—air, land, sea and freight shipping. Long supply chains that require the movement of materials and components across the globe leave companies vulnerable, especially because trade restrictions can fluctuate.

Russia's invasion of Ukraine is an example of this. At first, European auto manufacturers virtually shut down because many of the wire harnessing systems for European-manufactured cars were made in Ukraine. As a single good, it's not a high-value product. But without access to wire harnessing systems, many European manufacturing plants came to a halt.

As a result, companies today are tasked with shortening supply chains to reduce vulnerabilities. One way to do that is to find clusters of countries where low-cost manufacturing can happen within a tighter radius.

The process can be challenging because as this shift is happening, countries are scrambling to bring ecosystems together. The growing demand in Vietnam, Indonesia, the Philippines, Cambodia, Mexico and Canada is one to note.

Create Multinational Resilience

Dwight D. Eisenhower said it best: “Plans are worthless, but planning is everything." For a company with a multi-country supply chain, it's crucial to have a thorough understanding of processes and dependencies with backup plans to reduce risk. 

Here are four key considerations that independent insurance agents can pass along to their clients to defend against business interruption:

1) Political risks. No one could have predicted many of the world events that have happened in the last 2 years. Performing desktop exercises for worst-case scenarios is a prudent part of an operator's playbook. If a business is considering expanding into a politically turbulent region, it is encouraged to research the business approach dealings, opportunities and challenges of companies already operating in that particular region.

2) Cyber risks. Companies can and should work with internal IT teams and third-party resources to have an incident response plan in place for the possibility of a cyberattack. Given the continued risk of cyber threats, the protocol around cyber protection should be explicit and in the hands of people who are collecting information and manipulating data for the company.

3) Regulatory risks. A global operator needs to follow the laws of every country it operates in, a formidable task for any organization. Three parties are required to put together an effective multinational insurance program: an experienced broker, a trusted advisor and a global insurer.

4) Financial and tax risks. For operators to understand their financial risk, they must know the values of their properties, including buildings and their replacement costs. Global businesses operating in different countries must also map out country-specific tax requirements and environmental regulations. Understanding the rules, the norms and the practice in an individual country is critical.

Ensure Adequate Coverage

Companies go through extraordinary efforts to expand globally. Yet, all too often they fall short on insurance. Make sure your insureds know that the same rigor that leadership runs a business with is applied to understanding their insurance program and how it interplays across various countries and geographies.

To that end, companies should be wary of buying insurance in individual countries. Global operations can benefit from an insurer who can take a comprehensive view of the business. A carrier must be able to offer a program structure that adequately addresses and responds to the active dynamic of a client's operations and the people and products in motion around the world. It is important to be certain that the insurance program can respond to a loss in the country where it occurs—and in any other country where it then experiences a negative financial impact because of that loss occurrence.

To do this, underwriters need to see a detailed plan that breaks down all the activities of each operation—from sourcing to packaging to distribution. This level of detail allows the insurer to perform an accurate forensic review of the operations and determine the potential extent of the loss, as well as the payments that are necessary at each step of the process to make the company operational as quickly as possible following a loss event.

Kevin Nolan is head of multinational at The Hartford

17876
Monday, August 26, 2024
Commercial Lines