Covering Supply Chain Vulnerability

Extracted 26SEP2011 by Bill MDonough from http://www.lloyds.com/News-and-Insight/News-and-Features/Business-Risk/Busine...

An increasing demand for goods, together with 'just in time' production has made supply chains more important than ever... With organisations adopting “just-in-time” techniques and pressures to limit working capital there is a growing dependency on the perfect functioning of supply chains.

Insurers are responding to these increasingly small margins for error by developing products which transfer some of the risk of supply chain disruption...

Supply chain vulnerability was one of the topics discussed in last year’s Lloyd’s 360 Risk report on Globalisation and Risks for Business: Implications in an Increasingly Connected World.

“Globalisation has allowed businesses to expand across many countries and provided more choice of suppliers,” said the report, produced by Lloyd’s and The James Martin 21st Century School, University of Oxford. “However, as supply chains become more complex, additional layers of risk are added.”

Businesses may have less direct control over these tight and complex chains, noted the report, while small disruptions in one location can quickly cascade to production failure in another part of the chain.

It highlighted the potential for “cascade failure” in long and lean supply chains where a system-wide shutdown is caused by the failure of one or more critical elements. “Their causes are manifold and include operational and technological risks, social risks, natural hazards, economic variations and legal and political disruptions.”

Insurers have an important role to play in helping to mitigate supply chain risk, in addition to the preventative role of risk engineering, effective contingency planning and other risk management responses.

“Following the Japanese earthquake and problems in Libya and the Middle East you’re seeing a lot of coverage on supply chain disruption,” says Paul Culham, active underwriter at Kiln Syndicate 510. “Most business interruption insurance that you can conventionally get from the insurance market is triggered by physical damage to goods or named premises. What this policy is doing is it triggers when the goods are undamaged but you still physically can’t move the goods.”