For globally connected companies, a disaster half way around the world can hit close to home
When the Tohoku earthquake struck Japan in March 2011, it not only caused an incredible amount of devastation in the area it hit, it also highlighted an emerging issue in the insurance industry: supply chain, or contingent business interruption (CBI), losses. Now that companies are globally connected, disasters like the Tohoku earthquake not only cause local damage, but also affect companies on the other side of the world that are relying on suppliers in the affected region.
Lorne Montgomery, international executive general adjuster with Crawford’s Global Technical Services®, notes “Most production operations now operate in a Just-in-time state with minimal inventories. That is because large inventories tie up cash assets, require greater storage capacity, and create a risk of over-supply.” The drawback to this system of course, is that if something goes wrong at a supplier’s factory, a lack of inventory means that the company is left without the components it need to continue operating. Getting the supply chain back up and running can be difficult for many reasons including:
- Inability of the adjuster to be involved in restoration activities of the affected supplier
- Difficulties in obtaining and confirming loss facts
- Limited access to supplier’s location
- A lack of a contingency plan on the part of the policy holder, leading to challenges in locating alternate suppliers on a timely basis
- Increased demand for alternate supplies if other companies relied on the same affected supplier
Bob Krywiak, international executive general adjuster for Crawford’s Global Technical Services, adds that a supply chain CBI loss does not always occur as the result of a large event. “A catastrophic earthquake, hurricane or flood is not necessary to seriously impact the supply chain,” Krywiak notes. “A manufacturing facility’s operation can be seriously exposed to a CBI claim by events such as a train derailment or a shutdown of production at a key Supplier’s facility due to fire or a mechanical/electrical breakdown of production equipment, machinery or transformer. This specialized equipment may have a lengthy lead time for sourcing a replacement.”
As issues with CBI losses continue to emerge, one thing that is clear is that businesses should conduct a thorough review of their supply chain management systems and be aware of the potential risks that exist within their supply chains.
For more information on supply chain risk, see the next issue of ProClaim, Crawford & Company (Canada) Inc.’s client newsletter, or contact email@example.com.