Insuring Against Supply Risk – Call Your Broker

Supply risk is a topic that I've covered extensively on Spend Matters as well as in recent conference presentations (including ISM) from a software and content standpoint. You can also read about different software approaches and philosophies towards attacking and warding off supply risk in a recent Spend Matters Compass brief, The Intersection of Analytics and Supply Chain Risk Management -- Using Intelligence to Drive Early Intervention. But one high-level angle that I've only investigated around supply risk is insuring against different supply risk elements. In the above-linked Compass Research brief, we touch on the subject by noting that:

"Marsh, an insurance broker and risk advisory firm, has worked with AIG and Zurich among other insurers and re-insurers to create supply risk insurance products that enable companies to insure either named suppliers, name supplies (e.g., finished products, parts, components, services), or named services (e.g., logistics). To entice carriers to underwrite these products by understanding and quantifying underlying supply risk elements, Marsh worked with customers to create a measurement system for different supply chain hazards. In addition to looking at quantitative and systems data, the underwriting process also includes interviews with senior executives in charge of procurement, logistics, and supply chain inside companies as well as supply chain partners."

In a recent story (also linked above), Marsh suggests that thanks to the eruption of Iceland's Eyjafjallajökull volcano, it is seeing an increase in organizations interested in protecting themselves from "non-physical" supply chain damages (in contrast to "physical damages" in the supply chain that caused disruptions). The story notes that, "these disruptions highlight the potential losses organizations can suffer from 'non-damage business interruption,' especially in relation to loss of production or income and interruption to service provision." Marsh and the authors of the story suggest, "Supply chain insurance would provide cover for some of the business interruption losses suffered by companies when the volcanic ash cloud disrupted their supply chain." Such coverage could, in theory apply to supply chain disruptions "stemming from a wide range of perils, such as strikes, political risks, the outbreak of a pandemic, or delay in supply from a variety of causes."

Our own research suggests that finance and procurement organizations are increasingly becoming more deeply involved in supply risk management, forecasting and mitigation from a software and content standpoint. But might insurance products such as those sold through Marsh become just as critical of a supply risk management tool as predictive analytics and intelligence? I suppose only time will tell.

- Jason Busch

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