Over the last ten years, supply chain risk management has certainly grown in importance. And it continues to grow in importance. Research (Travelers Business Risk Index) shows that in 2014, 22% of manufacturers surveyed reported they did not worry about supply chain issues; in 2015, only 9% reported this. The 2015 results are based on a survey of 1,200 business decision makers. As an understanding of risks grows, the importance of insuring against supply chain risks increases in importance
Travelers is an insurance company with $6.5 billion in middle market premiums. The company’s middle market division insures companies ranging in size from 50 to 1000 employees for workers compensation, automobile liability, general/product liability, umbrella liability, property / business interruption coverage and global coverage.
In some cases, these strategies overlap. For example, by doing better safety training you increase your chances of avoiding a workers compensation claim. According to a 2014 Travelers study, 28% of employees in the manufacturing industry are injured within their first year of employment. Larger companies tend to have formal employee onboarding practices in place. For example, many of these companies require a new employee to apprentice with an experienced worker. This helps the company avoid accidents; it also allows the insurer to offer lower worker’s compensation premiums. The way Scott Higgins, the President, Middle Market at Travelers, phrased this is that “insurance companies underwriting is, in large part, based upon management’s controls and attitudes.”
I also talked to Chris Kent, the Vice President of Risk Control at Travelers, in the same conversation. Both gentleman talked about using insurance as a way to control supply chain risks. Travelers has 700 risk consultant that make 70,000 visits to customers and potential customers per year. They report that companies are more and more concerned about business continuity and supply chain issues. However, while these concerns are increasing, their own research shows there is a long way to go. Of the businesses surveyed for the 2015 Travelers Business Risk Index, only 50% of companies reported having a written business continuity plan and only 41% have a recovery plan to help their business rebound after a major disaster.
Insurance companies can help to identify supply chain risks, which helps in putting together a business continuity plan. Scott described one client that was a manufacturer with a titanium cutting machine in their operations. The machine cost more than a million dollars. The company then spent a substantial amount of money modifying the machine. But worst of all from a continuity perspective, is that if the machine was damaged, it would take at least 50 weeks to get a replacement machine made. Travelers pointed out that this could create a significant bottleneck in the company’s operation. In short, the costs of replacing the machine, $2 million at this point in time, would be dwarfed by the lost business. In this instance, the manufacturer did not adequately insure this machine and within a year the machine was irreparably damaged.
But business interruptions can also be based upon what happens upstream from a company in their supply chain. This is a form of insurance known as “business interruption from dependent properties.”
For example, a manufacturer might be buying plastic pellets from China. If their supplier’s factory is damaged, and they can’t continue to get product from that company, it may be only a few weeks disruption to get product from a different supplier. This insurance would clearly be much less expensive than insuring against incidents whose duration would be substantially longer.
Product liability insurance can also have an extended supply chain component. Product liability could result because of poor quality control at the factory or a bad product design. But it could also be a result of where key components are sourced from. If a company has unwittingly sourced counterfeit components, those components will be far more likely to fail. Insurance companies often have good visibility to what countries, or even regions of a country, are most likely to be the source of counterfeit parts.
Once potential issues are identified, the insurance company, of course, will often be willing to insure against that risk. However, manufacturers can benefit even if they chose not to buy the insurance. These companies may be able to find ways to transfer, hedge, reduce, or even decide to self-insure. As Chris said, “having a holistic conversation about business continuity – along the extended supply chain – is about more than helping to defend a company against losses, it can be a competitive advantage.” As one example, if the industry as a whole is buying critical components from a small number of suppliers, the company with better business continuity planning may gain permanent market share if one of those supplier’s plants is destroyed in a natural disaster.