disruption

Major companies with extended global supply chains are increasingly looking to insure against disruption across those supply chains as the levels of risk escalate.

The Agility Emerging Markets index, released last month, showed an interesting divergence in the type of risk shippers see in different markets. For many multinationals, Asia remains the region with the highest proportion of attractive emerging markets, but they come with a high perceived risk of natural disasters, according to the research, followed by the threat of economic shocks, poor infrastructure and corruption.

That is in contrast with Latin America, where over 42% of respondents view corruption – which includes crime – as the greatest risk to their supply chains, followed by poor infrastructure and government instability.

In the Middle East and North Africa, following the Arab Spring and two years into a full-blown war in Syria, government instability tops the list for 35% of respondents – but only just, as 34.5% head their list with terrorism.

In sub-Saharan Africa, poor infrastructure was the number one threat, identified by 35% of respondents, followed by government instability and corruption.

While there are some common themes that link the risk profiles of different emerging markets, the spread of different types of risks globally has meant that it has been difficult for companies to effectively mitigate those risks – precisely because they come in different forms in different places.

However, it also appears that insurers are latching on to burgeoning demand for what can loosely be termed “supply chain disruption”.

Hassan Karim, global senior underwriter for supply chain insurance at Zurich, told The Loadstar that in 2013 enquiries for supply chain insurance cover increased 300% over the year before, as shippers began to realise that a product that addressed risk had been developed.

“For years, customers had been told that they couldn’t have this type of insurance, because of all the inherent unknowns – as an underwriter, I need to know what supply chains risk looks like, and as there has been more outsourcing, more risk has been created.”

Mr Karim said that one obstacle to the development of supply chain insurance had been the way that insurance products had traditionally been structured – previously, companies could insure against “named perils”, confusing, given the wide range of causes that could potentially disrupt a supply chain,

It was the 2010 Icelandic ash cloud – an event that couldn’t be foreseen – which focused the minds of supply chain executives and the boards they report to on the increasing potential for disruption, and made insurers look to develop alternative ways of protecting supply chains that have appeared to have become increasingly vulnerable over the past few years.

Zurich now insures companies’ supply chains against disruption to named suppliers – typically a list of between four and ten tier-one suppliers, although policies are also likely to cover disruptions to supply which involve tier-two and -three suppliers.

Trigger points to bring about a claim include when gross profit is hit by an event, or when shipments cease due to events such as port closures, labour strikes or adverse weather – the Thai floods and Japanese tsunami are obvious examples.

There are some exclusions – war and terrorism, pandemics and issues over the quality of products – which Mr Karim said should be covered in contracts between companies and their suppliers. Nonetheless, the growth in interest in protecting against risks downstream in the supply chain has come from board rooms, he added.

“This has moved from being an issue for the supply chain team and up to executive management,” he said. “With so much outsourcing, a lot of companies are now effectively a brand and the supply chain that supports it. Disruptions can have a major effect on profits and share prices.”

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