Your supply chain is the lifeline of your business, but it also can be a significant vulnerability during a hurricane or a natural catastrophe or other event such as a cyber-attack, strike or delay. With hurricane season underway, it might be a good time to review your supply chain to understand critical dependencies and identify alternate sources in the event of a failure.

Although this year’s forecast is for a below-average hurricane season, it only takes one major storm to significantly disrupt your suppliers and ultimately your operations.  Potential loss of revenue, market share and clients are some of the ways businesses are affected by a supply chain disruption. For example, during Hurricane Katrina, which hit 10 years ago this summer, wide swaths of critical infrastructure –including ports and harbor facilities –were severely damaged, disrupting many organizations’ supply chains, regardless of whether they were in the storm’s path, causing economic losses in the billions. More recently, Superstorm Sandy’s impact was far-reaching to both direct businesses and their supply chains. Many businesses found they were not adequately prepared or experienced operating in the storm’s aftermath.

Supply Chain Worrisome for Many Organizations

Profits lost due to damage to non-owned suppliers and owned locations are a major concern for companies globally. Such risks account for 50 percent to 70 percent of all insured property losses –as much as $26 billion (U.S.) a year, according to the Allianz Risk Barometer 2014. Contingent Business Interruption (CBI) under traditional property policies may only provide partial protection, typically only to direct suppliers tied to a covered trigger of physical loss. Dedicated supply chain products will cover beyond direct suppliers and do not have to be tied to a physical loss trigger.    

The World Economic Forum’s Global Risks 2015 report provides a view of the type of risks today’s businesses face in the global arena, and maps those risks in terms of likelihood and impact. The top perceived risks have shifted focus from traditional physical damage risks to non-damage triggers such as bankruptcies, port conflict, strikes, cyber-attacks and infectious diseases.

Protecting Your Enterprise

In many ways, the industry response to increasingly complex supply chain exposures has been commendable. Due to the expansion of coverage for supply chain risks under traditional and standalone insurance policies ushering in improved risk assessment tools and analytics, clients can better understand, manage and transfer supply chain risk, allowing for non-physical damage insurance to be offered by a small number of carriers providing cover for all, not just primary, suppliers. Property insurers remain vigilant in understanding and underwriting a client’s supply chain and continue to offer terms and conditions that reflect their assessment of the risk and understanding of the potential losses that could be incurred.

Many companies purchase coverage for primary and/or specified suppliers, but materially fewer do so for downstream or unspecified suppliers. Currently, the number of companies that purchase robust downstream suppliers coverage or bespoke non-physical damage supply chain policies is minimal, according to a recent report published by Marsh's Business Interruption Center of Excellence. To help assess whether your organization is adequately protected, take the following steps:

1. Know your exposures–Identify supplies and suppliers in the areas likely to be affected by closures, power outages or other service interruptions. Determine the extent of your reliance on these supplies and suppliers and the extent to which delays might affect you.
2. Know your suppliers–A thorough understanding of your supply chain’s resilience can help manage potential disruptions caused by significant storms and events. Take a closer look at your suppliers and your suppliers’ suppliers to evaluate their contingency plans.
3. Know your coverage– There is often a mismatch between the expectation of business interruption policies and the reality of the contract in place. Evaluate your policies for restrictions that may only compensate for insured perils at insured premises and determine if your coverage needs are being met.

By taking these steps you can help your organization make risk-informed decisions to lessen the impact of a supply chain disruption.

This information is not intended to be taken as advice regarding any individual situation or as legal, tax, or accounting advice and should not be relied upon as such.  You should contact your legal and other advisors regarding specific risk issues.  The information contained in this publication is based on sources we believe reliable but we make no representation or warranty as to its accuracy. All insurance coverage is subject to the terms, conditions, and exclusions of the applicable individual policies. Marsh cannot provide any assurance that insurance can be obtained for any particular client or for any particular risk. Marsh makes no representations or warranties, expressed or implied, concerning the application of policy wordings or of the financial condition or solvency of insurers or reinsurers.