French firms face dwindling supply chain insurance options as problems with NDBI spread to CBI

Transferring supply chain risks has become a much harder task for French firms as the insurance market hardening pushes underwriters to restrict coverages and increase prices. According to France’s risk management association AMRAE, contingent business interruption (CBI) coverages are now only available for better-managed risks linked to direct suppliers, while brokers say that non-physical damage business interruption (NDBI) extensions have become a rare commodity in the market. As a result, companies are urged to put more effort into managing supply chain risk. This entails collecting a growing volume of data from suppliers, implementing tools to crunch the information and coming up with effective risk mitigation measures to avoid interruption caused by disruptions at suppliers. A survey disclosed during the 28th Rencontres de l’AMRAE in Deauville in early February, shows how unhappy French risk managers are with the solutions for supply chain risks currently provided by the insurance market. Almost half of the risk managers surveyed said CBI coverages do not meet their needs. In the case of NDBI extensions, the mood is even gloomier. Two out of three risk managers said coverages do not meet their companies’ needs. “There is much demand for NDBI coverages linked to political violence and our challenge is to find an answer for that demand, as the market became more restrictive and more expensive,” said Sandrine Pierron-Loubens, practice leader of terrorism and political violence at Marsh France. The inability of the insurance market to meet the needs of buyers is particularly serious, given that supply chain coverages are increasingly in demand. In addition to natural catastrophes, cyberattacks and social turmoil present a growing threat to supply chains. And of course the coronavirus outbreak is hitting global supply chains. In France, the emergence of social protesters has frequently wreaked havoc in Paris and other parts of the country during the past year and a half. In late 2019, social tensions were also highlighted by protests at rail company SNCF and other organisations, triggered by efforts by the French government to reform the country’s pension system. AMRAE and large French insurance buyers have complained about a lack of effective NDBI coverage for some time, particularly since the risk was put under the spotlight following events such as the Fukushima tragedy in 2011, the Thai floods of the same year and the Icelandic volcano ash cloud of 2010. But the insurance market has shown little progress in developing viable coverages for the risk, requiring high retention levels from any clients wanting to add such extensions to their property programmes and underwriting NDBI mostly on a case-by-case, tailor-made, basis. This approach excludes all but the largest corporations from the market. But even for this group, insurance limits seem to be falling well below their needs. This situation is unlikely to change in the near future, according to Elisabeth Duboc, practice leader of property and NDBI at Marsh France. “Insurers are very much focused on the recovery of property insurance prices and have not put enough focus or energy on the development of NDBI coverages,” she said. “In the case of NDBI extensions to property contracts, they have been restricted even further,” the broker added. With a hardening P&C market firmly entrenched, difficulties have now spread to CBI coverages, noted AMRAE’s Mr Josset, who is also the director of insurance, prevention and real estate at Faurecia. “Today it is possible to find CBI coverage only for tier one providers, and only if you can show enough visibility to insurers. Otherwise, you can just forget about it. We are shifting to self-insurance in order to deal with indirect contingency,” he complained. The search for supply chain visibility has led Faurecia to invest in a programme to identify physical risks like fire and natural hazards at suppliers’ production sites. It aims to identify suppliers’ production sites based on geo coordinates, which, according to Mr Josset, is a complex task because a single supplier can have several different production plants. The plan is to then assess fire and safety risks exposures based on geo coordinates. Mr Josset is working on this project with a team that involves the company’s purchasing and risk management departments, as well as external advisers. “We have started collecting information on about 700 sites. Our final target is to have all the information gathered with our supply chain risk management process into our new buyers’ platform,” explained Mr Josset. The plan is to eventually invite carmakers and other big suppliers to try and share the costs and benefits of the system. When the system is in operation, an external partner will be brought in to consolidate all the information into a database and users will be able to purchase information about suppliers’ risk from this provider, rather than collect it by themselves. “We inform our insurers continuously and show them what we are doing to manage supply chain risks. Hopefully we will then be able to maintain our business contingency coverages at levels that are closer to what we want,” said Mr Josset. It should also enable companies to better mitigate risks and avoid supply chain disruption, added Laurent Giordano, a partner at consultancy KYU Associés. “Insurance is not the solution for supply chain risks, it is only part of the solution. Supply chains are too wide and too complex and need to be managed in a proper way,” he said. But Mr Giordano also noted that supply chain visibility remains a work in progress. A survey carried out by KYU among French companies last year found that 55% do not know the precise location of their suppliers’ production sites, and 70% do not know their tier two suppliers. Furthermore, 40% said that they do not evaluate their supply chain risks, with the ratio reaching 60% in the manufacturing and service sectors. “For most companies, we are still at the beginning of obtaining enough visibility about their supply chain risks,” said Mr Giordano.

French firms face dwindling supply chain insurance options as problems with NDBI spread to CBI

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