NEW YORK—The industry is certainly aware of, and gaining knowledge about, supply chains—but products are not necessarily keeping up with the risks.
“The industry is in a period of flux,” says Warren Meigs, deputy property executive for the U.S. and Canada at AIG Property Casualty, during Advisen's Property Insights Conference June 11. The exposure is “not well enough understood,” and contract wording is not uniform.
Gary Love, vice president and staff operations underwriting manager at FM Global, agrees. During a panel discussion on the topic of supply chain risk and contingent business interruption, Love says understanding the true risk of second-, third- and fourth-tier suppliers is a “daunting, daunting task,” and his feeling is the industry has not stepped up yet to provide products to cover the types of losses starkly revealed by recent events such as the earthquake and tsunami in Japan, flooding in Thailand, and Superstorm Sandy in the Northeast U.S.
“At the end of the day, underwriters are worried about aggregation,” he says. “They want assurance,” which isn't easy, considering the vast interdependencies of companies.
Jill Dalton, partner at consulting firm Dempsey Partners, says a confluence of factors—namely the economy, outsourcing, and weather and other types of loss events—have created a perfect storm to drive up risks associated with complex supply chains, as well as the need for products to cover them. Coverage is available, but inconsistent, she says, and limits are low. Losses are difficult to quantify: What happened at a supplier? What was the peril? Was the policy triggered?
The supply chain/CBI solutions in the marketplace are not being bought by clients, according to Duncan Ellis, managing director and U.S. property practice leader for Marsh. He calls the take-up rate “disastrous”—as in only a handful of contracts have been signed by one leading insurer, for example.
The panelists have several theories. Among the most interesting is one by David Shluger, strategic risk consultant at Zurich, who says the industry's current role as a strategic risk consultant is working, and clients are happy with assessments provided, outlining the risks along the supply chain and advising on matters such as locations of distributors. But potential clients take the plans on how to mitigate losses, and put them into action without buying a risk-transfer product.
Dalton adds supply-chain and CBI products are in an evolutionary state, just as employment practice liability was when it was first introduced to the marketplace. No one bought EPLI coverage at the start, but it is now popular. The future of supply chain products “will get better,” she adds.
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