Risk managers have alternatives to insurance to help mitigate such supply chain risks
Supply chain risks have risen in prominence in recent years, prompting risk managers to consider their options in advance of an event which could hit their business.
However, there is “no Bible for this,” noted Jorge Luzzi (pictured), executive president of Herco, a risk management consultancy, based in Portugal.
Luzzi, speaking at the recent Brokerslink conference in the run up to FERMA, pointed to 2011’s Thai floods as a catastrophe event that demonstrated the increased interconnectivity of global supply chains.
Supply chains were disrupted across borders, leading to business interruption and contingent business interruption (CBI) further up the supply chain links.
Some insurers have pushed CBI products but take up remains low. Luzzi noted that risk managers have alternatives to insurance to help mitigate such supply chain risks.
“Before making an agreement about supplying raw materials, some companies are trying to influence the insurance policies that their suppliers have in place [to compensate them in the case of their supplier failing to deliver],” said Luzzi.
“Some companies are looking to line up alternative supply chain arrangements in advance, for example for raw materials and commodities, to source a different supplier. You can mitigate potential for risk within one place.
“That means you have the chance to switch to another supplier in a different location well before you might make an insurance claim,” he said.
Failure to prepare such options can be expensive – in time and money – to rectify later.
“If you go to another supplier later, they will likely tell you that they will first look after their clients, creating delay and extra cost. It’s good risk management to establish that alternative supplier relationship in advance,” Luzzi added.