Business urged to be proactive and reconsider supply chain risk following Sandy

Initial insured loss estimates for Sandy are between $7bn and $20bn, but industry players have stepped in to warn that the numbers remain highly speculative and that business interruption losses are the great unknown. "Commercial insured losses from Sandy will be substantial-especially among the public sector and service and transportation industries," said Duncan Ellis, US Property Practice Leader for Marsh. "Although physical property damage is extensive, an equal or perhaps larger amount of the losses will likely come from business interruption, extra expense, and contingent business interruption claims as a result of the widespread flooding, power outages and ingress and egress issues." "It is evident that Sandy's impacts are widespread and multiple, with mounting super-cat-like elements," commented Claire Souch, Vice President for Model Solutions at RMS. "The event is still live and several variables are yet to play out, consequently, it remains too early to provide a reliable estimate of the total insured losses."hide"In particular the speed of restoration of power, and pumping out of floodwaters from towns and transport systems remain major unknowns. Our experience shows that these key variables will play a significant part in the ultimate loss," she added. For businesses, material damage is only one element of the likely loss from Sandy, said Allianz Global Corporate & Specialty (AGCS) in a report this week. Financial losses following operational disruptions and production shutdowns can cause far more damage, it added. The knock-on effect of such an event will be far-reaching, continued AGCS, noting that business interruption and contingent business interruption typically account for 50 to 70 per cent of overall catastrophe losses in the corporate insurance segment. While insurance will provide cover for most of the financial losses that a business or key supplier suffers after a disruption, business interruption insurance can only partially offset the hit on companies' operating earnings, warned the insurer. Also, it cannot mitigate long-term effects that might undermine corporate performance, such as a decline in investor confidence. "Getting back to normal business and restarting production as soon as possible is the key priority for any company suffering a business interruption," explains Volker Muench, Global Head of Strategy and Development Property at AGCS. TT Club, the international transport and logistics insurance and risk managements services firm, added that it will be some weeks before the full extent of Hurricane Sandy can be assessed. There will be significant disruption to supply chains, either through damage to goods-often through flooding or consequential fire-or to infrastructure and equipment, it said. It advised clients to be alert to the potential hazards from damaged power services. If equipment or machinery has been affected by water, companies should take steps to dry out electrical systems and protect all parts against the development of corrosion, as well as securing buildings against further weather damage, it advised. Cargo management is also critical, advised TT Club. Cargo may need to be segregated, subject in some circumstances to customs agreement, and spillages cleared or contained. Any hazardous material spillages will require appropriate personnel protection, under guidance from experts or emergency services. Even before a surveyor arrives, companies should start making an inventory with any debris or damaged items photographed before moving to create a proper record. Transport and logistic firms should also keep their customers advised of developments. "Early and periodic communication with your customers is strongly advised, keeping them as fully apprised of the situation as possible. In the first instance, cargo interests should be told to invoke their cargo insurance, if they have taken it-policies written on Institute Clauses (as is the case with the TT Club's cargo product) will include cover in respect of storm and flood. Keep the customer informed about intentions to engage contractors to remove cargo, and to salvage what is possible or arrange to dispose of what cannot be salvaged. It may also be possible to work with your customers' assessors and decide on a joint basis what is salvageable," said TT Club. Firms should also assert the right to recover costs on a pro rata basis for this salvage work-unless the contract denies this. "Although trading conditions may not contemplate this type of clean up, you may be successful in recovering costs on a quantum meruit basis that your behaviour was responsible and reasonable, and you are entitled to be indemnified for what was incurred in the common good," it added. It also advised that customers are given the opportunity-though not for too long-to respond with their agreement to any proposals for cargo disposals. "Even for those who fail to respond, it will help in defending any future claims to evidence your actions as having been reasonable." To increase resiliency going forward companies should consider adding back some redundancy into increasingly streamlined supply chains, said AGCS. Paul Carter, Global Head of Risk Consulting at AGCS said: "The very flexibility that provides a modern supply chain with its cost advantages has also caused its inherent vulnerability. Today, companies are increasingly re-examining the trade-off between efficiency and operational redundancy. To improve supply chain resilience, companies should consider adding back some redundancy into lean supply chains, even if this reversal of widely used single-supplier sourcing incurs additional costs. Redundancy is expensive, but no redundancy plan can be even more expensive." AGCS recommends that companies identify and list critical suppliers, determine the location of their global production sites and then evaluate their susceptibility to natural disasters. "If the production facilities of a key supplier are located in regions of Asia which are prone to flooding or earthquakes, a company should look for a second alternative ideally in another region such as eastern Europe," Mr Carter explained. Another essential step to help mitigate disruptions is regular testing of business continuity plans. Furthermore, a company should not limit this contingency planning to its own operations and must also involve its key suppliers, advised AGCS. "Checking a supplier's own business continuity planning should be embedded in the selection process and ideally include even the suppliers of the primary suppliers," Mr Carter said. However, it seems that companies today are not routinely making these checks. According to the Business Continuity Institute's Supply Chain Resilience Survey in 2011, only 7% of respondents confirmed that their critical suppliers had business continuity plans in place. Insurance companies are also interested in receiving more information about their insureds' supply chain risk management as a way of better managing their own portfolio and pricing risk. They are particularly concerned about supplier clusters in the automotive and semiconductor industries. "A natural disaster could hit many of our policyholders so we have to make sure that we do not write coverage for an excessive number of suppliers within a geographical cluster," Mr Muench explained. "With global supply chains and production networks, assessing the accumulation of risk is a lot more complicated than it used to be."

Business urged to be proactive and reconsider supply chain risk following Sandy

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