Businesses Need Better Risk Management And Supply Chain Coverage, Says I.I.I.

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Sep 10, 2012, 10:38 ET

Hurricane Isaac a Reminder That Detecting Risk Events Early Is Critical to Curbing Costs

NEW YORK, Sept. 10, 2012 /PRNewswire-USNewswire/ -- Hurricane Isaac had the potential to disrupt many important business operations both in the Gulf, and in other parts of the country dependent on Gulf region businesses. The storm served as a reminder that businesses need better risk management, including the purchase of supply chain coverage, according to the Insurance Information Institute (I.I.I.).

The Gulf accounts for 30 percent of the nation's oil production and 20 percent of natural gas production. It also is a major trade and transportation hub where highways, rail lines, ports and Mississippi River barge traffic converge. When Hurricane Katrina struck on August 29, 2005, it impacted the U.S. economy significantly. Yet many businesses are not adequately prepared in terms of risk management and supply chain coverage.

Even for companies far from the eye of the storm, the impact of Isaac could have been significant, namely lost profits resulting from broken supply chains and absent business customers, as well as from the lengthy disruption of one of the country's largest commercial ports.

Insurance can help. Many businesses opt for contingent business interruption (CBI) coverage, which is designed to cover losses caused by damage to or destruction of the property of suppliers and customers of the policyholder. However, CBI alone is often not enough as it is limited to physical damage to, or at, a supplier's or customer's premises.

CBI does not protect for all perils; nor does it protect a business when roads are closed and employees cannot get to work or when products cannot be distributed or other suppliers are affected. Significant supply chain disruptions can reduce a company's revenue, cut into its market share, threaten production and distribution, inflate costs and ultimately affect a company's bottom line. Global corporations and even small businesses need the proper insurance coverage to protect against supply chain failure.

Today, more and more businesses operate from a global perspective and are therefore susceptible to greater risks. Causes of supply chain disruptions can include: natural disasters; industrial accidents; labor issues (such as strikes, shortages); production process problems; political upheaval, including war and civil strife; trade disputes; health and safety concerns; credit/cash flow problems; and supplier finances or solvency. It can take two years or more for a company to recover from a supply chain failure.

However, businesses can protect themselves against supply chain disruptions by purchasing supply chain insurance, an "all risks" business interruption coverage that is not restricted to property damage and focuses on incidents outside the insured's control. This form of insurance offers the insured protection against both physical and nonphysical interruptions to the business, such as strikes, riots, ingress/egress, pandemics and more. In fact any peril that interrupts a company's supply chain can be underwritten into the policy.

"While insurance is an important component to help protect companies, it is only part of the solution," said Loretta Worters, vice president with the I.I.I. "Businesses need to identify key supply chain risks and make sure to convey those risks to their insurer," she noted. "Sound loss prevention engineering can best help protect the supply chain from property loss, so that insurance becomes a last resort rather than a first line of defense."

Companies often have multiple tiers of suppliers, yet often only insure first-tier supply. A 2011 study by the Business Continuity Institute, a global industry group, found that 40 percent of disruptions originated below the first-tier supplier. As a result, more insurers are moving towards multi-tier coverage, in which the whole supply chain is insured. Some insurance companies are utilizing a broad Contingent Time Element Extended (CTEE) coverage, extending it to unlimited tiers up and down the supply chain and treating CTEE locations as insured locations for the purpose of certain time element extensions. Business owners should check whether their insurer offers this type of coverage. Companies can also name specific suppliers on their policies, especially in the second or third tier. While this can be time consuming, it is a risk that should not be overlooked.

Insurers can provide services to help mitigate risk such as a risk engineering assessment, which studies a company's supply chain to find ways to transfer risks. It is also important for companies to create contingency plans to ensure that risks are minimized by having backup production and distribution plans that include second and third tier materials sources, component vendors, substitute parts and transportation carriers.

An up-to-date business continuity plan that includes suppliers and their coverage allows business owners to make informed decisions about mitigation planning, risk transfer and levels of self-insurance.

Companies need to be vigilant in this often overlooked area of the business. In the event of a catastrophe, recovering from a loss will depend upon how well a business and its insurance broker have identified supply chain risks, assessed those risks and put adequate coverage in place.

RELATED LINKS
Presentation: How to Protect Your Supply Chain
Publication: Commercial Insurance

OTHER RESOURCES
IBHS: Open for Business Continuity Plan

THE I.I.I. IS A NONPROFIT, COMMUNICATIONS ORGANIZATION SUPPORTED BY THE INSURANCE INDUSTRY.

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SOURCE Insurance Information Institute