“More than half of our insurance losses from the Japan disaster were the result of business and supply chain interruptions – that’s a new dimension,” says Andreas Shell, Global Head of Property Claims at Allianz Global Corporate & Specialty (AGCS), the industrial insurance division of the Allianz Group.
The underwriter said Japan had been hit by a triple disaster – an earthquake, a tsunami and a nuclear crisis that not only left the affected areas devastated, but also affected regions around the world. Production stoppages at Japanese suppliers and destroyed logistics infrastructure caused interruptions in global supply chains that were felt across the globe.
“Many companies’ supply chains have become more global in recent years,” said AGCS. “At the same time, inventories have been scaled back amid the focus on just-in-time deliveries. In addition, companies have outsourced larger shares of their operations and reduced the number of individual component suppliers in an increasing drive for competitiveness. The disasters in Japan and, even more so, the extensive flooding in Thailand late in 2011 showed companies and insurers just how vulnerable global supply chains are. The electronics and automotive industries, in particular, were faced with bottlenecks or even production outages around the world through so-called ‘contingent business interruptions’ where suppliers were unable to deliver as planned, impacting production in these industries directly.
The company carried out a survey that revealed many companies view disruptions in the supply chain and business interruptions as a major business risk. Many are undertaking systematic efforts to make their supply chain risks more transparent and limit their risks. “For cost reasons, many companies will still be forced to source their components from just a few suppliers or even a single one in the future. But risk awareness is growing,” added AGCS Risk Consultant Ralf Dumke. Companies are taking an increasingly professional approach to addressing specific risks by listing key suppliers and their production locations, running through catastrophe scenarios applying geocoding and developing business contingency plans. However, companies should not merely professionalize their own risk management, but also engage their suppliers in this process: “Even the suppliers’ suppliers must be involved,” he said.
“While we had to deal with a high claims burden as a result of the large number of natural disasters last year, we continue to provide sufficient cover for business and supply chain interruptions. But we expect companies to allow us insight into their risk management approach and also into their supplier structures, particularly when loss exposures are high,” explained Volker Muench, Head of Corporate Underwriting Property at AGCS.