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Global Scale by Coletta Kemper Chain Reaction

When a client’s supply chain breaks, there can be more to lose than meets the eye. Brokers must help clients put a sound risk management program in place to mitigate disruption if the chain snaps.

By  Coletta Kemper

Murphy’s Law tells us that if something can go wrong, then it probably will…at the worst possible time. Some think Murphy was an optimist.

We know that things don’t go wrong all the time. Sometimes things work just the way they are supposed to work. Of course, I’m always a little surprised when I hook up a new piece of technology and it actually works—the first time.

When it does work, it means that someone, somewhere, has spent the time to “think through” the process to make sure that the installation is as easy as steps one, two, three.

The same is true for businesses operating in today’s risky and unpredictable world. They have to think about what could go wrong and how they can protect themselves in case something does.

Supply chain management is a crucial part of business continuity management (BCM), which identifies, quantifies and qualifies the impact of a business loss, interruption or disruption of operations. John Eltham, head of North American broker business for Miller Insurance Services, a London-based specialty and reinsurance broker, thinks a lot about what can go wrong for business when the supply chain snaps. 

“In today’s interconnected world, the supply chain itself represents a significant and often critical exposure to many companies and can be financially catastrophic when it fails,” he says.

One problem is that traditional cargo or business interruption insurance does not necessarily address all the possible scenarios where things can go wrong. Transit losses are generally those caused by the physical loss or damage to cargo, ships, aircraft or other forms of transport.  When that happens, insureds are paid for the value of the cargo they own. Business interruption is restricted to events in which a policyholder’s property is damaged to trigger an insured loss.

So far, so good. The insured is covered for loss or damage to its insured goods and property, and its business interruption policy should kick in.

But, not so fast. The supply chain can be disrupted by events where no actual physical damage occurs but the client’s supply chain is cut off. What happens if the Suez Canal is blocked or there is an earthquake in Japan, a hurricane in New Orleans, floods, strikes, terrorism, war or political upheaval? Even a company bankruptcy can pose a real threat to the client’s supply chain, its financial viability and its reputation.

Here are some examples:

Hurricane Katrina in 2005 caused the shutdown of nine refineries in Louisiana and six in Mississippi along with various oil production and transfer facilities. Some 20% of U.S. domestic refining output was lost. A double whammy from Hurricane Rita closed refineries in Texas.

In November 2004, a tanker named Tulip Brilliant broke down and blocked the Suez Canal. Meanwhile, Sony was expecting delivery of its new Playstation 2, which it was launching for Christmas. The ship carrying the Playstations was stuck in the traffic jam. Sony reportedly chartered a plane to fly in a new supply in time for the holiday season. Sony had an alternative, but a costly one.

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