Certain natural catastrophes, such as the 2010 floods in Thailand and the 2011 Tohoku and 2016 Kumamoto earthquakes in Japan, have served as stark reminders that loss of life, property damage and direct business interruption are only part of the story when measuring the impacts of natural and manmade disasters. These events have also highlighted a more intractable risk that concerns insurers and insureds alike—contingent business interruption (CBI).

Executive Summary

Beyond loss of life and property damage, natural and manmade disasters also disrupt the supply chain, leading to contingent business interruption risks. Lack of visibility into the manufacturers that provide essential parts at each tier of the supply chain prevents insurers from having sufficient information to price and offer comprehensive supply chain insurance products. Here, AIR Worldwide's Aaron Michel discusses the need for new supply chain models that keep pace with increasingly complex global networks of products and provide actionable outputs for decision-makers to assess and manage risk.

Fragility and Lack of Visibility

CBI frequently emanates from upstream supply chains that are outside of a corporation’s direct control and often comprise networks of seemingly insignificant individual parts or materials. However, the absence of any one of these parts can have catastrophic impacts on manufacturers and can unexpectedly immobilize entire industries. Corporations either explicitly or implicitly rely on the “3Rs” to mitigate the potential consequences of CBI: reserves (excess supplies), redundancy (alternative suppliers or equivalent parts) and resilience (response planning, insurance, supplier relocation or facility retrofits).

Despite these well-known strategies, supply chains remain fragile, in part because of the inadequate application of the 3Rs, but also from a pervasive lack of visibility into the manufacturers that provide essential parts at each tier of the supply chain. Additionally, final product manufacturers often do not fully know how or where their suppliers and sub-suppliers manufacture certain parts due to purposeful obfuscation of the supply network by commodities manufacturers in order to protect trade secrets and remain cost-competitive. The absence of visibility also prevents insurers from having sufficient information to price and offer comprehensive supply chain insurance products.

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