What Tohoku Taught Us About Supply Chain Risk

Japanese Tsunami Cargo Containers

Cargo containers scattered by a tsunami following an earthquake are seen in Aomori, northern Japan March 12, 2011. PHOTO CREDIT: REUTERS/KYODO Kyodo

A year on from the 2011 Tohoku earthquake/tsunami, there is a great deal to consider. Human tragedy aside, global businesses have suffered as a result of massive supply chain disruptions. According to the Insurance Information Institute (I.I.I.), the disasters caused an estimated $35 to $40 billion in insured losses and many businesses were not adequately protected both in terms of insurance and risk management.

Unanticipated Exposure

The disaster has created a wake-up call for the so-called “sophisticated” companies such as those in the automotive and electronics sectors. Many of the companies thought they had control and visibility over their supply chains, thought they understood their critical suppliers, where pinch points were and the level of business interruption (BI) they were exposed to.

This was not the case: They failed to identify the “real” key suppliers and therefore miscalculated the level of BI they were exposed to. The supplier extensions contingent business interruption (CBI) that were taken out against property damage business interruption policies were inadequate in terms of the level of cover that was required.

Moreover, there were a number of instances where supply chain interruption cover for non-property damage related perils would have been extremely useful. Many suppliers, while they did not suffer from property damage on their premises, did not receive utilities such as power and were therefore unable to get goods out of their premises.

What the Carriers Say

It is therefore interesting to note that Allianz recently revealed that more than half of the claims it received from the Japanese earthquake and tsunami, came as a result of supply chain disruption that was not caused by physical damage. And, only this week Allianz Global Corporate & Specialty (AGCS) said that it had decided to extend its supply chain coverage to include non damage business interruption (NDBI), albeit on a bespoke basis.

Given the sharp focus on supply chain risk since the Japanese earthquake and Thai floods it is no surprise that risk and insurance managers worldwide are calling on their insurers to deliver broader and deeper business interruption coverage, covering both property damage and non-property damage related perils.

Whilst related insurance coverages are becoming more restrictive, businesses at the same time clearly need to examine supply chain and BI risk with greater precision. A consensus needs to be agreed with leading commercial insurers and reinsurers on a sensible and logical approach to providing the required visibility and transparency. This in turn should lead to carriers offering more innovative and broader-based products.

The lessons learnt from last year’s disaster must be taken on-board—it is time for more action and less talk!

About Tom Teixeira

Tom is the London-based Practice Leader, Integrated Risk Management, where he focuses on aerospace, oil and gas, mi…
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