Contingent Business Income products are necessary, if not vital, in today’s global market. In Understanding Supply Chain Exposures – Business Interruption Claims, Part 76, I wrote:
Businesses develop and thrive on symbiotic relationships, in which the entities rely on the continued operational viability of each other,(or even exclusively beneficial relationships. Few businesses, however, consider the risk and exposure of losing that relationship due to an unexpected calamity.
[t]oday’s risk management professional cannot merely rely on his or her knowledge and understanding of the organization’s varied and unique suppliers and customers. They must understand the bottlenecks and supply chain problems that will likely occur in the midst of catastrophe and have a plan that will keep the chain moving.
“Just-in-time” business arrangements are widely used in global distribution markets. Under a “just-in-time” arrangement, the manufacturer or distributor promises to send a steady stream of goods or materials to each of its customer’s sites. Because the manufacturer has promised a steady and reliable supply, customers hold very little inventory at their own sites, and the manufacturer must hold sufficient inventory to ensure that it can fill customer orders 100 percent of the time. Scheduled repairs or maintenance disruptions are relatively easy to plan. Catastrophes, on the other hand, are trickier, and even the hardiest contingent business income coverage can fall short on maintaining the chain’s movement.
A recent News-Insurances press release reported that the 2011 catastrophes (Japan’s earthquake/tsunami, Thailand’s floods and New Zealand’s earthquake) triggered a review in the way in which the Lloyd’s market writes Contingent Business Interruption coverage. The review highlights the importance of properly understanding the complex supply chain elements inherent in their clients’ businesses and providing them with adequate coverage.
As contemporary supply chain models tend to be based on ‘just in time’ methodologies – timing deliveries precisely when needed rather than stockpiling goods – the knock-on effects of disruption to suppliers’ businesses can be greater and more complex than in previous decades. Additionally, supply chains have grown increasingly global in nature, meaning that a catastrophe in one part of the world can affect businesses in many other regions.
LMA’s Worldwide Property Panel has drawn up a model Suppliers and Customers Questionnaire. The questionnaire, which is designed to provide a practical document focusing on key aspects of supply chain management, consists of 12 questions to be completed by existing and prospective insureds.
The model questionnaire has been published under reference LMA9020 and is available from the LMA website www.lmalloyds.com and from the Lloyd’s Wordings Repository.
Understanding a business’ stock piling plans and just-in-time demand will help both consumers and industry markets in the selection of contingent business income products that adequately protect modern global markets.