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Supply Chain Risk - Impact on Business Interruption


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Global supply chains help manufacturers increase competitiveness and reduce the cost of doing business. But they also increase risk. This Slideshare explores the challenges facing insurers as well as solutions for this rapidly growing industry.

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Published in: Economy & Finance
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Supply Chain Risk - Impact on Business Interruption

  1. 1. Most manufacturers use third-party suppliers (contract manufacturers or subcontractors), often providing critical parts or services, to reduce the cost of doing business.
  2. 2. These global supply chains can help manufacturers increase competitiveness and efficiency, but they also increase risk.
  3. 3. The global electronics contract manufacturing industry reached $360B in 2011, and is expected to reach $426B by 2015.” – Center for American Progress
  4. 4. Thai floods batter global electronics, auto supply chains
  5. 5. 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.
  6. 6. Most businesses have supply chain exposure. Supply chains are not just vulnerable to natural catastrophes. It is often not sufficiently planned for.
  8. 8. Image: 3M LED Lighting Filament Glass bulb Threaded connector Leads Globe Driver Light guide Threaded connector LED panel LED THE OLD REALITY THE NEW REALITY Products are “assembled” using components that are often outsourced. Products were “manufactured” at a single location.
  10. 10. The “supplier” may be providing a key ingredient or making a necessary component for your insured. SupplierInsured
  11. 11. Supplier Physical loss occurs here Insured Supply chain interruption is the risk.
  12. 12. Financial loss to Insured Supplier Physical loss occurs here Insured Contingent 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.
  13. 13. 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
  14. 14. HON HAI FOXCONN LOSS EXAMPLE: One of the world’s biggest contract assembler and manufacturer of electronic components… Image: Foxconn Pardubice by Nadkachna / CC BY-SA 3.0.
  15. 15. 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:
  16. 16. DO YOU KNOW THE 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
  17. 17. WHAT IS THE 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!
  18. 18. Issue Insureds with a coverage need and an insurance market reluctant to put up large limits with limited underwriting information
  19. 19. 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 Issue Insureds with a coverage need and an insurance market reluctant to put up large limits with limited underwriting information
  20. 20. 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.
  21. 21. 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.
  22. 22. REINSURANCE SOLUTIONS CTE should NOT be thought of as a “throw-in” or “window dressing” type of coverage. WORKING COVERAGE IT IS
  23. 23. PETER HAKENEN E 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. P +1 312 207 2249