SUPPLY CHAIN RISK BUSINESS INSURANCE WHITE PAPER

INTRODUCTION

R ecent events around the world have highlighted the critical—and often delicate—
nature of the supply chains many companies rely on to produce their products and
deliver them to customers. Among the natural and man-made occurrences in the last two
years that have risen as potential or real supply chain threats are:
■ the earthquake and resulting tsunami that hit Japan in March 2011
■ the surprising impact of flooding in Thailand later in the year
■ the volcanic eruption in Iceland that disrupted air travel to and from Europe in 2010
■ 2011’s “Arab Spring” political upheavals
■ and decisions in China to restrict the export of rare earth minerals.
Companies increasingly are centering operations on just-in-time inventory strategies and
also are outsourcing the manufacture of product components. Those factors, combined
with the rise of online communications and advances in worldwide delivery, mean supply
chain risks aren’t just the province of large businesses today. Smaller companies also are
tied into far-flung vendor networks or distribution systems. Complicating things further,
frequently the exposure doesn’t end at a company’s direct supplier but may well extend
further up the chain to suppliers of the supplier. CONTENTS
And the disruption might not come from an inability to receive the product for which a
company has contracted, but rather from discovering that that product is not to the
UNDERSTANDING NATURE
anticipated standards, as in recent cases that have resulted in massive recalls.
OF SUPPLY CHAIN RISKS 3
When supply chain disruptions do occur, insurance coverage issues can be complex in
determining not only the extent of coverage but also the extent of losses. These
complexities have proven to be the case with businesses and their insurers trying to sort out ASSESSING EXPOSURES
claims resulting from Japan’s March earthquake and tsunami, and with companies facing ACROSS GLOBAL CHAINS 6
losses as a result of Thai floods. Experts say that in both cases, supply chain losses stemming
from business disruption to suppliers of companies’ suppliers or from damage to PRODUCTS, POLITICS CREATE
transportation networks offer not only challenges in sorting out insurance coverage, but SUPPLY CHAIN RISKS 9
present additional burdens to companies as they look to recover from supply chain
disruptions. FILLING GAPS LEFT BY
Physical distance and language differences present additional struggles to companies TRADITIONAL INSURANCE 12
looking to address supply chain disruptions stemming from events such as the Japanese
earthquake and tsunami and the flooding in Thailand, and experts say these problems may CONCLUSION 14
well become a factor as companies consider supply chains going forward.
As companies have become increasingly aware of the exposures presented by their supply
chains, many of them have come to realize that addressing the exposure is a classic risk
management exercise involving identifying the exposures, mitigating them where possible,
transferring risk when needed and continually monitoring the risk management process to
ensure it’s functioning effectively and to make timely adjustments when necessary.
Often, the effort to manage supply chain risks must by necessity be approached on an
enterprisewide basis, as the best way to understand the supply chain risks facing an
organization is to look broadly across the organization and the exposures that might
threaten its viability. For risk managers, it can be an opportunity to take the lead in that
process, guiding the effort to look across the various aspects of an organization as it seeks
to identify areas of the business in which supply chain risks might reside.
This white paper will examine the recent rise to prominence of the issue of supply chain
risk, issues associated with the exposure and some of the solutions being advanced to
address the risk, both in terms of risk management and risk transfer.

Entire contents copyright © 2012 Crain Communications Inc. All rights reserved.
 SUPPLY CHAIN RISK
CHAPTER 1
Businesses must grasp supply chain risks
TAKE GLOBAL VIEW OF POTENTIALLY COSTLY DISRUPTIONS
I n addition to the widespread loss of life and
property damage in Japan, the earthquake and
tsunami that struck the country March 11, 2011,
caused supply chain disruptions around the world,
serving as a wake-up call for many companies about
supply chain risk management and issues
surrounding insurance coverage of supply chain
disruptions.
Soon after the catastrophe, it became clear that
the impact of the earthquake and tsunami—along
with the related catastrophe at the Fukushima-
Daiichi nuclear power plant—would have a global
impact in the resulting disruptions to worldwide
supply chains.
The disruptions pushed the issue of supply chain
risk well up the list of many companies’ risk
management priorities, even making its way into C-
suite offices. Companies suddenly found themselves
The March 2011 earthquake and tsunami in Japan caused extensive damage, including to the Fukushima
Daiichi nuclear power plant, and focused many companies’ attention on supply chain risks.
BUSINESS INSURANCE WHITE PAPER
spending much more time and energy examining
business resiliency and interdependency issues.
Japan is a major source of products and
components for the automotive components,
electronics and information technology industries,
among others. As 2011 went on, operations at
automotive plants in Japan ultimately returned to
normal more quickly than many had anticipated.
That quicker resiliency also was the case at some
technology companies, which exceeded many
observers’ expectations.
A prime example was General Motors Co., which
shortly after the 2011 Japan catastrophe gave its
insurers notice of a potential claim up to its full $1
billion limits, but later said the catastrophe’s impact
on its production was negligible. Much of that
demonstration of resilience was the result of GM’s
successful efforts to find alternative suppliers.
AP PHOTO
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 SUPPLY CHAIN RISK
The devastating earthquake and tsunami that struck Japan in 2011 caused extensive damage to
commercial facilities, creating significant disruptions to global supply chains.
If the impact of the March 2011 Japanese
earthquake and tsunami opened many eyes to the
issue of supply chain risk, the extent of the impact
of the worst floods to hit Thailand in more than 50
years took many by surprise as flooding shut down
industrial parks occupied by major electronics
companies and auto makers, among others.
Particularly surprising to many who saw their
supply chains disrupted was the realization of the
important position Thailand occupied in many
supply chains. The midsized country’s supply chain
prominence in industries such as electronics and
automobiles seemed disproportionate to many,
compared with its population of 65 million.
With the country responsible for an estimated
45% of the world’s hard drive production and
flooded plants affecting such manufacturers as
Seagate Technology Inc. and Western Digital Inc.,
technology industry analysts said the impact of
disruption to the hard drive supply was expected to
be felt through 2012.
Meanwhile, with auto makers such as Honda
Motor Co. Ltd., Nissan Motor Co. Ltd. and Toyota
Motor Corp. forced to close Thai facilities while the
floods receded and plants could be returned to
BUSINESS INSURANCE WHITE PAPER
AP PHOTO
service, estimates indicated the catastrophe would
cause lost production of 250,000 vehicles
worldwide.
Toshiba Corp., Sony Corp., Nikon Corp. and
Canon Inc. were among the other firms hard hit by
the Thai floods.
CAUSES OF SUPPLY CHAIN DISRUPTIONS
Given the reach of those events in global supply
chains, it’s not surprising that most companies
report having been affected by supply chain
disruptions. A large majority of companies—85%,
that responded to a survey conducted by Zurich
Financial Services Group and the U.K. Business
Continuity Institute that was released in November
2011—said they had suffered at least one supply
chain disruption during 2011. The survey of 559
companies from 62 countries across 14 industry
sectors showed that 40% of disruptions occurred
beyond the direct supplier.
Adverse weather was the most common cause of
supply chain disruption, cited by 51% of
respondents. Unplanned IT or telecommunications
outage was the second-most common cause of a
disruption, cited by 41% of respondents, while
4
 SUPPLY CHAIN RISK BUSINESS INSURANCE WHITE PAPER

21% cited transport network disruption, and

another 21% cited earthquake or tsunami as a MAJOR CAUSES OF DISRUPTIONS
cause of one of their supply chain disruptions. TO SUPPLY CHAINS
The study showed the leading sources of Adverse weather (windstorm/tornado, flooding, snow, etc.) 51%
disruption varied from sector to sector. For the
Unplanned outage of IT or telecommunications systems 41%
financial services sector, unplanned outage of IT or
telecom systems was the most common cause of Transport network disruption 21%
disruption, while for the manufacturing industry a Earthquake/tsunami 21%
product quality incident was the most frequent
Failure in service provision by an outsourcer 17%
cause of disruption.
Adverse weather was the most common cause of Loss of talent/skills 16%
a supply chain disruption for the retail and Product quality incident 15%
wholesale sectors, as well as for the IT and
Volcanic ash cloud 13%
communications, transport and storage, and
government sectors. Insolvency 11%

Civil unrest/conflict 10%

WHERE DISRUPTIONS OCCUR
Industrial dispute 9%
Survey participants were asked to detail where in
the supply chain disruptions originated, with 265 Fire 9%
respondents able to identify the supply chain tier in Cyber attack (e.g., malware, denial-of-service attack) 8%
which the disruption occurred in 327 incidents. Of Source: Supply Chain Resilience 2011, The Business Continuity Institute
those events, 61% originated at a Tier 1 supplier,
while 30% originated at a Tier 2 supplier and 9%
at a supplier in Tier 3 or even further up the supply
chain.
TALLYING SUPPLY CHAIN
THE COST OF DISRUPTION
INCIDENTS IN PAST
Respondents identified lost productivity as the 12 MONTHS
primary consequence of the supply chain disruptions
Number of incidents that caused disruption
they experienced, with 49% citing a disruption as a
to the organization
major effect. More than one-third of respondents,
38%, said supply chain disruptions had led to
increased cost of working, while 32% said a supply
chain event had led to loss of revenue, another
32% said disruptions led to customer complaints, 1 to 5
56%
and a further 32% reported that their service
outcome had been impaired by a supply chain 0
disruption. 15%

For most—83%—of the companies surveyed, the 6 to 10

16%
cost of a significant single disruption to their supply
chain in 2011 was less than €1 million ($1.4
million), while 14% said the cost was between €1
11 to 20
million and €10 million ($14.2 million) and for 2% 6%
the cost was between €51 million ($72.2 million) 21 to 50
51+
3%
and €100 million ($141.5 million). 4%

Only 1% of respondents said the cost of a single Source: Supply Chain Resilience 2011, The Business Continuity Institute
disruption reached more than €100 million.

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 SUPPLY CHAIN RISK BUSINESS INSURANCE WHITE PAPER

CHAPTER 2

Assess and address supply chain exposures

PRIORITIZE BY REVENUE EFFECT AND FACTOR INTO DECISIONS

W hen it comes to supply chain risk,

addressing the exposure comes back to risk
management fundamentals. Essentially, it’s an issue
of understanding why the company is entering into
the supply chain relationship, the benefits the
company expects to realize and the risks that might
be introduced because components or ingredients
are outsourced.
While enterprise risk management programs can
help an organization create a framework to identify,
monitor and report on supply chain risks, risk
managers still face questions about how to mitigate
or transfer those exposures.

IMPACT ON REVENUES AND MARGINS

To help answer those questions, companies must
pinpoint the supplies and components critical to
their revenues and margins and assess the supply
chains and the resources that support them. Once
the pinch points have been identified within that
supply chain, a risk manager can look for the actual
loss control and risk transfer solutions.
To make those decisions and to monitor changes
in supply chain exposures over time, companies
have to make sure they’re considering the right
factors. Simply focusing on the largest supplier or
the one with which a company spends the most
may not provide the best results in managing supply
chain risks.
To avoid “paralysis by analysis” in assessing these
exposures, companies need a process for prioritizing
supply chain risks, gauging them on the basis of
revenue and profit generation rather than supplier
spend to determine which supply chain risks are
truly the most critical.
The goal is to ultimately understand the potential
impact of the costliest supply chain disruptions.
Truly comprehending these risks requires a company
to look beyond on-site suppliers and go up the
supply chain stream to risks introduced by suppliers
of suppliers.
AP PHOTO
Flooding in parts of Thailand in 2011 created supply chain problems for
global companies such as Honda Motor Co. Ltd., whose factory in
Ayutthaya was hit hard.
RIPPLE EFFECT ON SUPPLIERS
Companies also need to make an effort to
understand their suppliers’ business models and the
drivers of their business behaviors. For example, a
risk management model should recognize that a
change, such as increasing the demand on a
supplier, will produce a corresponding change on
the supplier side as steps are taken to meet that
increased demand. Such changes can introduce new
supply chain risks or change the suppliers’ risk
profile.
While many companies are now looking to ensure
that their suppliers have continuity plans, it’s
important to realize a supplier’s margins might be so
thin that it is simply putting up a “veneer” of a
continuity plan to appear that potential problems
have been addressed.
Looking beyond first-tier suppliers can be difficult

6
 SUPPLY CHAIN RISK
and can demand more resources than many
companies have available to apply to that risk
assessment. At a minimum, a company must
understand the exposure presented by its first-tier
suppliers. Then, the company can meet with those
first-tier suppliers to learn about the exposures in
the second tier.
FACTOR IN BUSINESS DECISIONS
Supply chain risk can be exacerbated as
companies look to increase efficiency, reduce costs
and get lean. Those are legitimate business
considerations, but they should be made with an
awareness of their potential impact on supply-chain
risks. Again, the solution is one of making those
decisions within an enterprise risk management
framework, with risk management providing the
appropriate metrics to senior management to allow
them to make risk-based decisions.
One need only look to the pharmaceutical
industry for examples of companies which, in an
effort to accommodate rapid growth or cut costs,
outsourced manufacturing processes but later faced
halts in production when product quality from those
outsourced providers fell short of standards. While
there was no natural disaster or physical damage
behind the disruption, the impact of the supply
chain interruption was no less real.
INSURANCE FOR EXPOSURES
Some supply chain exposures may be insurable.
However, if an element of a supply chain might lend
itself to coverage such as contingent business
interruption, a company needs to understand its
exposure to ensure that the coverage limits are
adequate. The insurance buyer may need to
negotiate limits up from the standard limits if it
determines it is particularly vulnerable to losses at
that link in the supply chain.
ERM APPROACH
Again, an enterprise risk management approach
can play a key role in identifying and monitoring
supply chain exposures. While organizations are
often prone to look at risks on a business-unit-by-
business-unit basis or functional silo basis, to assess
global supply chain exposures it’s necessary to look
across those units and silos to identify
BUSINESS INSURANCE WHITE PAPER
TOP SUPPLY CHAIN RISK CONCERNS
Pricing risks 55%
Risks and delays with suppliers 50%
Risks with plants, warehouses, stores 41%
Logistics delays and disruptions 40%
Natural disasters 40%
Customer-facing risks (e.g. demand volatility) 36%
Brand reputation risks (product recalls, fair labor) 29%
IP theft (counterfeiting, gray market) 26%
Source: Marsh Inc.
interdependencies and resulting risk.
For far-flung operations, the approach can involve
some basic shoe leather—or frequent-flyer miles.
Such is the case for Decatur, Ill.-based agribusiness
company Archer Daniels Midland Co.
ADM has agribusiness operations in North
America, South America, Europe, Africa and Asia.
The company has processing facilities in those areas
and ships products around the world.
Efforts by the United States, European Union and
others to pressure former Ivory Coast President
Laurent Gbagbo to step down after losing 2010's
election by restricting the country's cocoa bean
trade—responsible for 40% of the world’s cocoa
bean supply—is one recent example of a supply
chain exposure that confronted the company.
With ADM one of the world’s largest shippers of
wheat to Egypt, political upheaval in Egypt during
2011’s “Arab Spring” created more supply-chain
exposures for ADM, though losses never
materialized.
To keep tabs on ADM’s worldwide exposures and
make the best decisions about managing them,
considerable travel is required for Michael Lusk,
ADM’s vp insurance and risk management, and
ADM’s risk management team.
RISK MODELING
To effectively manage supply chain risks,
companies also need to have some way of modeling
those exposures and how they change as the
company’s business or supplier relationships change.
The models should help a company determine how
7
 SUPPLY CHAIN RISK
Political and social volatility stemming from the Arab Spring of 2011 also presented supply chain
exposures for many organizations.
much of its profit is dependent on key suppliers for
which it has no alternatives, and how that exposure
changes over time. It’s easier to implement such
models and embed them in the business process
when a company is starting a new business line.
But even for an existing business, it’s a necessary,
worthwhile exercise to truly understand supply
chain exposures. Again, it’s an example of basic risk
management, identifying abnormal volatility and
determining the potential impact of that volatility
on the enterprise.
Some liken the fashion in which consideration of
supply chain risks is becoming embedded in
operations at some companies to the way a focus
on quality improvement has become a basic part of
business processes at many businesses.
Oak Brook, Ill.-based Ace Hardware Corp. is an
example of such a company. With considerable
sourcing of products from China and elsewhere in
Asia, the company recognizes its supply chain
exposures are only likely to grow, so it’s necessary to
identify and assess exposures and take steps to
manage them.
With the Thai floods raising awareness of the risk
of geographical concentrations of suppliers, many
companies are now looking to identify
concentrations of suppliers and industries that
BUSINESS INSURANCE WHITE PAPER
AP PHOTO
might affect their business. Going further, they’re
making backup supplier arrangements, diversifying
the locations of suppliers and arranging to use
different backup suppliers than their competitors.
Some companies are also beginning to do
scenario analysis of potential supply chain
disruptions, calculating the potential impact of
having to re-engineer processes if alternative
components or raw materials don’t match original
specifications.
In general, the recent supply chain disruptions are
leading many companies to embrace more of a
resiliency mindset, considering hypotheticals and
trying to determine responses to disruptions before
they face a crisis—and the accompanying costs.
With recent disruptions having also raised various
stakeholders’ expectations that companies will be
aware of and manage supply chain risks, many are
looking to such tools as predictive modeling, as well
as considering how to incorporate supply chain risk
management into the organization’s strategic plan
and its enterprise risk management process.
At the end of the day, managing supply chain risk
is a classic risk management process, trying to get a
glimpse into the future of events that might have
an impact on the organization and determining the
appropriate steps to address them.
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 SUPPLY CHAIN RISK
CHAPTER 3
Product quality, politics create risks
CONTRACT LANGUAGE, INSURANCE CAN MITIGATE EXPOSURES
N atural catastrophes aren’t the only events that
can cause problems along the supply chain.
Recent episodes of product liability or political
decisions that interrupt raw material supplies have
demonstrated that man-made factors must also be
considered in assessing supply-chain exposures.
Experts say that as manufacturers and builders
increasingly depend on materials and components
outsourced from suppliers around the world,
maintaining and protecting the safety of their
supply chain is challenging.
For example, Mattel Inc. in August 2007 recalled
about 20 million toys—including Sesame Street
characters, Dora the Explorer figures and Barbie doll
accessories—after learning that the paint used on
them by Chinese subcontractors contained lead.
SAFETY OF MATERIAL
Supply chain safety for material and components
Mattel Inc. recalled millions of toys in 2007 over concerns that the Chinese-made products were
dangerous because of the possible presence of lead-based paints.
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can plague even the most sophisticated risk
manager who has in-depth knowledge of an
organization's operations and risks.
The risk often is created as a company chooses to
move some sourcing into a lower-cost area. But, if
lower cost also means decreased safety regulations
and controls, the buyer must find a way to ensure
the quality of those lower-cost components or
ingredients.
CONTRACT LANGUAGE
Companies concerned about the safety of
materials and components from their suppliers must
stipulate in their contracts permission for direct
access to suppliers, including the right to make site
visits to ensure suppliers are meeting specified terms
and that those suppliers are passing those
requirements along to the next tier of suppliers.
More robust contracts mandate suppliers follow
AP PHOTO
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 SUPPLY CHAIN RISK
China in 2011 greatly reduced its exporting of rare earth elements, forcing manufacturers worldwide to
find new sources of the materials.
quality procedures and give the company access to
suppliers’ facilities to undertake necessary audits.
That level of effort may sometimes be costly, but it
can prove valuable in reducing risk, increasing
supplier transparency and providing a better
understanding of supply chain exposures.
SUPPLIERS’ INSURANCE
In some cases, companies obtain certificates of
insurance that establish that their suppliers have
purchased product recall coverage. And risk
managers are monitoring such certificates closely.
In some of those cases, if the outsourced supplier
doesn't have the money to put up the amount of
insurance the company wants per the contract, the
company buys an excess layer for their supplier and
passes the costs on to the supplier.
Willis Group Holdings P.L.C. has worked with ACE
Ltd. and Chartis Inc. to issue a product liability
policy to Chinese manufacturers that names the
American manufacturer as an additional insured.
The U.S. company’s excess policy would respond
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AP PHOTO
FINANCIAL COST OF SUPPLY CHAIN RISKS
Less than €1 million ($1.39 million) 83%
€1 million ($1.39 million) to €10 million ($13.39 million) 14%
€51 million ($71.0 million) to €100 million ($139.31 million) 2%
More than €100 million ($139.31 million) 1%
Source: Supply Chain Resilience 2011, The Business Continuity Institute
above that layer of coverage. The broker uses a
product liability matrix to help risk managers
understand which of their policies covers a loss,
depending on where the product is made, where it
is sold, where the occurrence takes place and where
a suit is brought.
Any Chinese supplier of Morristown, N.J.-based
Honeywell International Inc. is required to have
product liability insurance. The company has
experienced pushback from suppliers and
encountered many that don’t have coverage, but is
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 SUPPLY CHAIN RISK
trying to select the best suppliers it can that do have
coverage.
Honeywell also is developing a vehicle that can
provide product liability insurance to suppliers that
can’t get insurance. Among other approaches, it is
exploring the possibility of using its Bermuda captive
in the coverage, with Chinese suppliers paying
premiums to the captive.
QUALITY CONTROL
Rockford, Ill.-based Mega Fabrication Inc., a metal
fabrication manufacturer, buys components from
vendors all over the world, including China. The
company also pays a Chinese manufacturer to
assemble its smallest product line. A U.S. insurer
provides product liability coverage for Mega
Fabrication’s Chinese and U.S. operations.
Among other things, the company has found that
outsourcing to outside vendors has forced it to
document instructions fully and ensure the absolute
accuracy of blueprints. The effort has paid a
dividend in terms of receiving better parts from its
suppliers.
After its decision to outsource some
manufacturing to China, the company also took
steps to design new roles for two of its machine
shop employees, assigning them to new global
sourcing positions. Those individuals worked with
vendors as the company built strong support for its
supply chain, helping its suppliers to be successful.
In addition, quality control was formalized when
the company became an outsourcer. It recently
engaged a global engineering consulting firm that is
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able to discuss technical matters in Chinese with the
vendor and inspects components in China to make
sure they meet specifications before they leave the
factory.
POLITICAL RISKS
Supply chain disruptions can also have political or
national policy origins. In the summer of 2010, for
example, a political issue turned into an operational
and revenue challenge for manufacturers of
electronics, optics, rechargeable batteries and other
products that rely on rare earth elements such as
scandium, yttrium and lanthanum. That was
because China, which previously supplied nearly all
the world’s demand for such metals, decided to
dramatically scale back exports of the substances.
Chinese leaders decided to withhold rare earths
due to increasing demand among domestic
manufacturers. The move sent many manufacturers
elsewhere in the world scrambling to make up the
supply shortfall and meet the inevitably rising price
for rare earth metals.
Once again, addressing such issues involves
companies identifying potential exposures in
advance and identifying alternative sources of
necessary materials so that they can continue to
supply products to their customers.
An enterprise risk management approach is
necessary as risk management works with other
areas of the organization to identify potential
exposures, future product line requirements, the
impact of different materials or components on
production and the like.
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 SUPPLY CHAIN RISK
CHAPTER 4
Mind the gaps in your insurance program
SUPPLY CHAIN RISKS CREATE TRICKY COVERAGE QUESTIONS
M any claims for supply chain disruptions come
under contingent business interruption
coverage, a common element of most companies’
insurance portfolios.
Under most of those policies, though, where
coverage is sought because of damage to a third
party’s property or the inability to get supplies, the
supplier will have to have suffered a covered loss. In
the case of disruptions following the Japanese
earthquake and tsunami, for example, many of the
disruptions from Japanese suppliers stemmed from
damage their own suppliers had suffered or from
transportation issues. That situation was
problematic in many claims related to supply chain
disruptions that were filed under contingent
business interruption policies.
The disruptions caused by the Japanese
catastrophe were a wake-up call on another front,
as many companies that were relieved that their
facilities weren’t located in the hardest-hit areas of
northern Japan later learned they were still facing
disruptions caused by such factors as rolling
brownouts, not a covered peril under their CBI
policies.
BEYOND TRADITIONAL COVERAGE
Not surprisingly, with the Japan event raising
questions of applicable coverages and gaps in the
physical damage coverage around supply chains,
many insurance buyers are looking beyond
traditional supply chain insurance for a coverage
that encompasses nonphysical damage-related
events that may cause disruptions. Among the types
of supply chain events covered in nonphysical
damage-related policies are pandemic, political risks
and regulatory action.
But buyers of nonphysical damage-related supply-
chain coverage need to undergo a high level of risk
analysis and assessment. That analysis and
assessment is a critical element of the risk transfer
from insurers’ perspective, as underwriters are
looking to truly understand the nature of the supply
chain risk they’re assuming.
BUSINESS INSURANCE WHITE PAPER
HOW DO COMPANIES ASSESS
THEIR SUPPLY CHAIN PARTNERS’
BUSINESS CONTINUITY MANAGEMENT?
We ask for copies of supplier documentation. 48%
We provide them with a self-assessment questionnaire. 44%
We audit them. 37%
We check whether their program is relevant to the product 31%
or service we are buying.
We check whether the scope of their BCM program is appropriate. 29%
We check that they have a BCM program, 28%
not just a business continuity plan.
We ask for compliance with recognized good practice 27%
(e.g. BCI's Good Practice Guidelines).
We look for certification to a recognized standard. 26%
We check where responsibility for BCM is held in the organization 23%
(and involvement of senior management).
We don't ask for any information. 16%
We request an independent audit. 12%
We ask for the credentials of those who run the BCM program. 9%
Source: Supply Chain Resilience 2011, The Business Continuity Institute
INFORMATION REQUIREMENTS
Among other information, insurers want to know
the extent of business interruption exposures
customers might face, where the pinch points are in
their supply chains and who the critical suppliers
are. The better they feel about the information
they’re provided, the more capacity insurers are
likely to provide.
Some buyers have struggled to rise to that
needed level of risk assessment, however. While
many companies understand the risks associated
with tier 1 suppliers, they remain challenged by
efforts to understand their exposures further along
the supply chain.
Even risk managers who recognize the need to
clearly define and quantify their supply chain risks
for insurers in order to obtain better coverage and
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 SUPPLY CHAIN RISK
pricing can find doing so a difficult task.
That’s been the experience at Volkswagen Group
of America Inc. While the company tries to provide
a list of suppliers to insurers, there’s a feeling that
Volkswagen’s insurers try to hold it to that list, even
though the supplier situation can be a fluid one.
New Brunswick, N.J.-based Johnson & Johnson is
another company focusing increasing attention on
risks associated with its suppliers. The company is
addressing this challenge by working very closely
with its operating units to understand who and
where key suppliers are. Part of the process includes
working with its lead insurer to conduct on-site
supplier inspections and use any recommendations
from those inspections to mitigate risk, either
through physical improvements or contingency
planning,
Johnson & Johnson purchases contingent time
element extended coverage from unnamed multiple
insurers, which protects it from interruptions caused
by suppliers that cannot be easily identified down
the supply chain. The company believes that helping
its insurers better understand the risks they’re
writing leads to enhanced policy terms.
EXCLUSION-ZONE COVERAGE
Exposure information is also an essential element
of a particularly focused coverage offered last year
by Willis, an insurance product to cover business
disruptions resulting from exclusion zones
implemented to contain damage from incidents at
nuclear power plants.
The coverage was developed by the Willis Global
Markets International division in response to the
exclusion zone that Japanese officials established
around the Fukushima nuclear power plant as a
result of radiation leaks after the March 11
earthquake and tsunami.
The policy will respond to exclusion zones
imposed around nuclear plants as a result of natural
catastrophes or other events or failures at a nuclear
plant. It covers disruptions resulting because of
client locations in exclusion zones, and disruptions
that companies face because key suppliers or
customers are located in those areas.
Policies are custom-written, based on the
BUSINESS INSURANCE WHITE PAPER
particular circumstances and exposure of the client.
Every policy is different, and limits will vary by
customer. Willis starts by determining the client’s
needs, and then looks to see what sort of limits and
terms it can get from the underwriters with which it
is partnering on the exclusion-zone coverage.
THE ROLE OF CAPTIVES
Some companies have also brought their captive
insurance companies to bear in addressing supply
chain risks. Such was the case at Paris-based
pharmaceutical maker Sanofi-Aventis Groupe.
Because local rules often require that at least one
step of the pharmaceutical manufacturing process
be performed in a country where that product is
sold, and because its business is global, Sanofi-
Aventis has huge quantities of pharmaceuticals in
transit at any one time.
The company makes about 65,000 to 70,000
shipments annually, and covering the exposure can
present a challenge because the products can be
targeted by thieves. Breaks in the supply chain could
happen at any time, and a product liability claim
caused by a supply chain breakdown would damage
Sanofi-Aventis’ reputation.
Stock-in-transit coverage—or insurance that
covers damage to or the theft of goods in transit—
forms a vital part of the company’s overall risk
protection. While examining how incoming E.U.
regulatory regime Solvency II would affect the
captive, the company decided to run all stock-in-
transit risks through Sanofi-Aventis’ Dublin-based
captive, Carraig Insurance Ltd., which enabled the
company to better analyze claims patterns.
Since the frequency and average cost of stock-in-
transit claims have increased in recent years,
particularly in emerging markets, the company
worked to restructure its stock-in-transit program.
The result was obtaining broader coverage that is
adaptable to the differing needs of local operations.
In addition, the company’s risk management
department engaged logistics colleagues across the
group in risk management efforts. That result has
been a more than 50% reduction in Sanofi-Aventis’
stock-in-transit insurance costs and a significantly
improved loss ratio.
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CONCLUSION

W ith an increased spotlight on supply

chain risks has come increased
attention to the issue within organizations, as
well as in the insurance industry and within
academia.
Following recent events, the topic of supply
chain risk is not only of interest to business,
but also has moved front and center in many
business schools. In many cases, those schools
have seen many of the companies on which
they rely for grants looking for solutions to
supply chain exposures.
Interest in the exposure also is moving
higher in organizations, becoming a subject of
considerable interest to the CEO, the chief
financial officer and other executives.
What’s more, following the supply chain
impact of the 2011 Japan earthquake and
tsunami, many companies began to view
supply-chain disruptions as a potential
directors and officers exposure, leading them
to seek to demonstrate that they’ve done
everything possible to mitigate the risks.
The result is that for companies seriously
looking to address supply chain exposures,
there is an enterprisewide effort to understand
and reduce the risks.
Organizations are realizing the necessity of
breaking down silos if they’re going to identify
potential sources of supply chain risk, identify
geographic concentrations of their own or
their suppliers’ facilities, and address the need
for backup suppliers and plans to re-engineer
processes should a new source of components
or materials be required when a supply chain
is disrupted.
And the experience of 2011’s flooding in
Thailand will also continue to have an impact.
With many of the flooded facilities
representing “middle-of-the-chain” suppliers,
the event demonstrated that interruptions to
those upstream suppliers can have a

LEADING SOURCES OF SUPPLY CHAIN DISRUPTIONS VARY BY SECTOR

IT & Transport &

Financial services Retail & wholesale Manufacturing Government
communications storage

Unplanned outage Adverse weather Adverse weather Adverse weather Adverse weather
Product quality
1 of IT or telecom (windstorm,
incident
(windstorm, (windstorm, (windstorm,
systems flooding, snow, etc.) flooding, snow, etc.) flooding, snow, etc.) flooding, snow, etc.)

Adverse weather Unplanned outage Unplanned outage Unplanned outage

Transport network Earthquake/
2 (windstorm,
disruption tsunami
of IT or telecom of IT or telecom of IT or telecom
flooding, snow, etc.) systems systems systems

Cyber attack Adverse weather Failure in service

Earthquake/
3 (malware, denial Fire (windstorm,
tsunami
Industrial dispute provision by an
of service) flooding, snow, etc.) outsourcer

Source: Supply Chain Resilience 2011, The Business Continuity Institute

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significant impact on businesses seeking coverage

for supply chain interruptions, as those suppliers
further up the chain are often unnamed in
coverages. As a result, going forward, there’s likely
to be considerably more attention paid to those
exposures by companies seeking coverage and the
insurers providing it.
Overall, the events of 2011 proved to be a wake-
up call for many companies regarding the nature
and extent of potential supply chain exposures. For
companies responding to that call, the response is
taking the form of heightened efforts to identify
supply chain risks, enhanced supply chain risk
management, and a move to get the right insurance
in place for supply chain risks when necessary.

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