Global supply chains have become the lifeblood of many organizations as they strive to deliver value to their customers while gaining competitive advantage in the market. As supply chains increase in complexity, new exposures are created for both the buyer and the seller within the chain. Chartis has developed innovative risk management solutions for both.
While global sourcing, lean production, and just-in-time inventory systems have resulted in substantial savings, they have also led to increased vulnerability to the risk of supply chain disruption. Any disruption could lead to reduced profits, lower share price, and higher share price volatility.
Catastrophic disruptions can threaten the viability of the firm. Good corporate governance requires senior executives to forecast performance and protect shareholder value.
Catastrophic disruptions can threaten the viability of the firm. Good corporate governance requires senior executives to forecast performance and protect shareholder value.
Given the current economic environment and the increasing attention paid to some high profile global sourcing disruptions – including the contaminated heparin sourced in China in 2008, the west coast port strike in 2002, and the Phillips chip manufacturing facility fi re in 2000 to name just a few – executives are now starting to evaluate and mitigate the risks within their supply chain. As these executives work to mitigate risk, they may look to the insurance industry for risk transfer options.
Historically, the only coverage available came in three forms: contingent business interruption (CBI) coverage, inland and ocean marine coverage, and trade disruption insurance (TDI). This coverage, even in combination, still left some of the risks of concern to supply chain managers uncovered.
CBI is available through the standard property insurance market and provides relatively low limit coverage for interruptions resulting from direct physical loss or damage to supplier facilities.
Ocean marine cargo coverage protects against direct physical loss or damage to supply resulting from perils of the sea, fi re, assailing thieves, jettison, barratry of the master, explosion, defects in the ship that cause damage, and other perils. Ocean marine cargo coverage does not usually include business interruption coverage, although it can be extended for specific project-related cargo, subject to the same covered perils.
Historically, the only coverage available came in three forms: contingent business interruption (CBI) coverage, inland and ocean marine coverage, and trade disruption insurance (TDI). This coverage, even in combination, still left some of the risks of concern to supply chain managers uncovered.
CBI is available through the standard property insurance market and provides relatively low limit coverage for interruptions resulting from direct physical loss or damage to supplier facilities.
Ocean marine cargo coverage protects against direct physical loss or damage to supply resulting from perils of the sea, fi re, assailing thieves, jettison, barratry of the master, explosion, defects in the ship that cause damage, and other perils. Ocean marine cargo coverage does not usually include business interruption coverage, although it can be extended for specific project-related cargo, subject to the same covered perils.
Inland marine coverage also provides coverage for direct physical loss or damage to supply. Business interruption coverage, if extended at all, is typically sub-limited to a relatively low limit.
TDI is available for an ocean marine vessel transporting supply and covers disruption or delay of supply due to direct physical loss or damage to the vessel, negligence of the crew, war (except between the US, UK, France, Russia and China), strikes, political risk, infectious disease on board the vessel, and so forth. So what are the potential gaps in coverage? With the exception of the TDI coverage, only disruptions caused by direct physical loss or damage are covered – even where business interruption coverage has been extended. And while TDI might provide some coverage for strike or political risk, that coverage typically only extends to the marine vessel, which means that supplier locations and inland transportation exposures are generally left uncovered.
As a solution to these gaps in coverage Lexington Insurance Company has developed Global Supply Secure®, an "all risk” enhanced contingent business interruption coverage form for supply chain exposures. Coverage is extended for scheduled suppliers as well as any instrumentality of transportation used by the supplier to transport supply to a Global Supply Secure policyholder. Global Supply Secure is stand-alone coverage that is meant to be excess of any other valid contingent business interruption coverage. Coverage is extended for perils or events, such as the bankruptcy of a scheduled supplier, a strike, political risk, a pandemic, or a government-ordered recall or quarantine that result in economic loss – even in the absence of direct physical loss or damage. L
exington will provide coverage to domestic manufacturers, including their foreign subsidiaries. Select Chartis International companies will provide coverage to foreign manufacturers. The Global Supply Secure underwriting process starts with an evaluation of the manufacturer’s business continuity plan and its supply chain risk assessment. Particular attention is paid to the interrelationships and resource dependencies between all entities in the supply chain to identify and evaluate potential bottlenecks, geographic concentrations and single points of failure. Suppliers, supplier plants, logistics providers, ports of entry and egress, distribution centers, and final customers are all considered and evaluated.
TDI is available for an ocean marine vessel transporting supply and covers disruption or delay of supply due to direct physical loss or damage to the vessel, negligence of the crew, war (except between the US, UK, France, Russia and China), strikes, political risk, infectious disease on board the vessel, and so forth. So what are the potential gaps in coverage? With the exception of the TDI coverage, only disruptions caused by direct physical loss or damage are covered – even where business interruption coverage has been extended. And while TDI might provide some coverage for strike or political risk, that coverage typically only extends to the marine vessel, which means that supplier locations and inland transportation exposures are generally left uncovered.
As a solution to these gaps in coverage Lexington Insurance Company has developed Global Supply Secure®, an "all risk” enhanced contingent business interruption coverage form for supply chain exposures. Coverage is extended for scheduled suppliers as well as any instrumentality of transportation used by the supplier to transport supply to a Global Supply Secure policyholder. Global Supply Secure is stand-alone coverage that is meant to be excess of any other valid contingent business interruption coverage. Coverage is extended for perils or events, such as the bankruptcy of a scheduled supplier, a strike, political risk, a pandemic, or a government-ordered recall or quarantine that result in economic loss – even in the absence of direct physical loss or damage. L
exington will provide coverage to domestic manufacturers, including their foreign subsidiaries. Select Chartis International companies will provide coverage to foreign manufacturers. The Global Supply Secure underwriting process starts with an evaluation of the manufacturer’s business continuity plan and its supply chain risk assessment. Particular attention is paid to the interrelationships and resource dependencies between all entities in the supply chain to identify and evaluate potential bottlenecks, geographic concentrations and single points of failure. Suppliers, supplier plants, logistics providers, ports of entry and egress, distribution centers, and final customers are all considered and evaluated.
While selling to customers in a global marketplace has created substantial growth opportunities for many suppliers, it has also led to increased vulnerability to buyer default and adverse impact on the seller’s profitability and cash flow. The mechanisms employed to protect the financial interests of the seller have evolved from letters of credit to trade credit insurance in an eff ort to reduce the cost of supply chain financial risk management.
Letters of credit were often used historically to pay for goods traded internationally. The buyer would ask its bank to open a letter of credit in favour of the supplier, who could redeem it for cash on presentation of shipping documents confirming the goods had been delivered. While letters of credit are a very secure form of payment for both buyer and seller, they are expensive and difficult to administer, particularly if there are multiple steps in the supply chain or if there are any discrepancies in the shipping documents.
Open account trading supported by Trade Credit insurance policies has grown in response to these challenges. These policies typically cover all of a supplier’s sales to its buyers during a 12 month policy period. Coverage is triggered by the insolvency of the buyer, but can also respond to political risks such as a trade embargo or license cancellation. C
hartis offers a range of Trade Credit policies from 13 underwriting offices worldwide. Some policies are designed to cover suppliers with strong credit management discipline against the risk of a catastrophic loss or series of losses, while others provide credit vetting and collection services as part of the package. These policies are increasingly used by suppliers to secure financing on favourable terms from lenders who will provide working capital to purchase raw materials and create new supply. Often, the lender is a beneficiary or a Loss Payee on such policies.
As the world emerges from a global recession and companies seek new growth opportunities, prudent risk managers, logistics managers, and financial managers will focus on mitigating risks within their supply chain. Risk transfer to a global insurer with underwriting and claims handling experience will be part of their risk management strategy. Chartis, with its global footprint, financial strength, and comprehensive experience is positioned to be your trusted risk management partner and your client’s insurer.
Open account trading supported by Trade Credit insurance policies has grown in response to these challenges. These policies typically cover all of a supplier’s sales to its buyers during a 12 month policy period. Coverage is triggered by the insolvency of the buyer, but can also respond to political risks such as a trade embargo or license cancellation. C
hartis offers a range of Trade Credit policies from 13 underwriting offices worldwide. Some policies are designed to cover suppliers with strong credit management discipline against the risk of a catastrophic loss or series of losses, while others provide credit vetting and collection services as part of the package. These policies are increasingly used by suppliers to secure financing on favourable terms from lenders who will provide working capital to purchase raw materials and create new supply. Often, the lender is a beneficiary or a Loss Payee on such policies.
As the world emerges from a global recession and companies seek new growth opportunities, prudent risk managers, logistics managers, and financial managers will focus on mitigating risks within their supply chain. Risk transfer to a global insurer with underwriting and claims handling experience will be part of their risk management strategy. Chartis, with its global footprint, financial strength, and comprehensive experience is positioned to be your trusted risk management partner and your client’s insurer.
By Karen O’Reilly, Vice President and Chief Innovation Officer of Lexington Insurance Company e Ed Brittenham, Senior Vice President and Global Profit Center Manager of Trade Credit at Chartis.
