Location is Everything
Location isn’t only important in real estate. It is also critical to supply chain resilience. To be resilient, companies must understand where their suppliers are located. They must also understand the susceptibility of those locations to disruption.
Businesses often engage suppliers in regions with lower labor costs. That can backfire if not enough attention is paid to the location of these suppliers or to the adequacy of contingency plans in the case of business disruption. Large global companies with deep supply chains are often at greater risk given the potential for impact to on-time deliveries, supplier responsiveness and sustainability.
Your Suppliers’ Suppliers
Ask yourself: Do I know the locations of all the companies within the supply tiers that feed my final production and assembly? Some of your suppliers’ suppliers may be located in areas prone to power outages, landslides, political upheaval or labor unrest, which could shut down a critical facility for a significant period of time.
The devastating fire that killed more than 250 people at a garment factory in Pakistan stands as a stark reminder. Building codes were not enforced in that case.
While many companies have established standards to identify all suppliers in all tiers, these standards require ongoing analyses of each supplier’s financial stability and their regions’ economic and political stability. When it comes to suppliers’ suppliers, incorrect assumptions may be made about the resiliency of second- and third-tier suppliers.
Supplier location is important for another reason — the efficacy of building codes and other construction standards in a region. But those codes do no good without enforcement. The devastating fire that killed more than 250 people at a garment factory in Pakistan stands as a stark reminder. Building codes were not enforced in that case.
From a risk management standpoint, companies should insist their suppliers maintain the same quality and integrity in their facilities that they conform to themselves. For larger global entities, it is prudent to require tier one suppliers to conduct business only with suppliers that maintain high building construction standards. Absent this assurance, the onus is on companies to map out their supplier’s location, peruse local building codes and investigate compliance.
Relying on too many suppliers in the same region also can be problematic. Geographic clusters of Tier 1, Tier 2 and even Tier 3 suppliers are increasingly common, according to a recent report by Deloitte. And while capitalizing on groups of experienced workers in proximate facilities can streamline supply chains and pare costs, it only makes sense if the risk is gauged in relation to the opportunities.
More Than Meets the Eye
Where a company is located is a crucial determinant of supply chain risk. Certain countries are simply more resilient to supply chain disruption than others. Our research with Oxford Metrica bears this out, indicating that Norway, Switzerland and Ireland are highly resilient regions, whereas Venezuela, the Philippines, India and Bangladesh are much less so, subject to country-inherent risk stemming from such things as corruption, political instability or natural hazards.
Today, risk is no longer scrutinized in a vacuum. The sum of the whole is what makes a supply chain resilient.
Flood Modeling: A Key Property Market Challenge
Capacity awaits for when flood can be more adequately modeled.
As if putting a neat bow on all the major themes of the Advisen Property Insights Conference June 4 in New York, Robert Schimek, senior vice president and CEO Americas said that “within the next few weeks, AIG will announce a new risk management center of excellence in association with a major university that will be centered on engineering and technology.”
Although the event had its usual depth and breadth, each panel and speaker seemed to focus on different perspectives of the same essential concepts: Big data and third-party capital markets are forcing an industry that has historically sought more information and funding to restructure itself to be able to manage surpluses of both.
The AIG center is expected to provide insight on how to do that. No further details were available from the company at press time.
“There are billions of alternative-capital dollars on the sidelines just waiting to get in,” said Cory Anger, managing director of GC Securities and global head of ILS origination and structuring at Guy Carpenter.
“Just 1 percent of the pension funds is about the current size of the reinsurance market today. And that does not even count sovereign wealth funds and family offices.”
She also noted that this looming capital is becoming available at a time when several markets are in need of fresh capacity. The flood market in particular, Anger cited, “has a huge under-funded problem. We are at a very big turning point in how we deal with this. It is a sea shift as rate adequacy is moving up slowly. We are seeing increased privatization of risk that had been centralized.”
While that might seem like an unmitigated blessing, Advisen CEO Bill Keogh, moderator of the CEO panel that closed the conference, asked the panel if reinsurance was still viable in the face of burgeoning alternative capital, and if property catastrophe margins were gone forever. Both unintended consequences.
Byron Ehrhart, CEO of Aon Benfield Americas and chairman of Aon Securities, assured the packed room that “reinsurance is still viable and is becoming more competitive.”
And Anger, of GC Securities, offered hope that “prop cat margins can get to where baseline pricing is more reliable so it can be depended on as a source of revenue.”
As with big money, big data is both a boon and a burden. “Analytics is exciting stuff,” said Thomas Lawson, president and CEO of FM Global.
“But we have been collecting data for 180 years and we know that the strength of your model is only as good as your data. And your data is only as good as your premise.”
Lawson also made a point of addressing a concern that several large owners had raised throughout the conference: the reluctance of underwriters to pay property claims in cases when the damage could be traced to some type of cyber threat, or to write coverage for data and systems.
One reason for that reluctance is that cyber security remains difficult to evaluate in traditional underwriting. So just as a theft claim would not be honored if a door were left unlocked, some carriers have been unwilling to pay for cyber losses if proper safeguards were not in use.
“You can’t keep people out of your system. But you can know when they get in, and have ways to get them out.” — Thomas Lawson, president and CEO of FM Global
“We have known that data is property for some time,” said Lawson.
“A loss is a loss, loss of data, or denial of service. The same as if a gas turbine explodes because of a virus or because of a mechanical failure.”
On cyber security Lawson added, “the current mentality is that you can’t keep people out of your system. But you can know when they get in, and have ways to get them out.”
Taking an active role, Schimek said that AIG has been investing in new capabilities to provide insights on dark networks and insureds’ vendor networks.
“There is a real risk to physical property from a cyber attack.” Far from being a problem, he exhorted, “this is a great opportunity for the industry.”
The idea of a broader opportunity was another theme in the conference, established early by Paul VanderMarck, head of strategy and partner development for RMS, in his keynote address.
“Models make markets,” was the catchphrase of his remarks. He elaborated that the flood market in the United States “is a well known peril, but is nowhere near fully covered because it is one of the most complex perils to model. We have made much more progress in earthquake.”
Preparing for and Navigating the Claims Process
All of a sudden – it happens. The huge explosion in the plant. The executive scandal that leads the evening news. The discovery that one of your company’s leading products has led to multiple consumer deaths due to a previously undiscovered fault in its design. Your business and its reputation, along with your own, are on the line. You had hoped this day would never come, but it’s time to file a major claim.
Is your company ready? Do you know – for certain – how you would proceed, both internally with your own employees, and externally, with your insurance provider? What data will you need to provide, and how quickly can you pull it together? Do you know – and understand – the exacting wording of your policy? Are you sure you are covered for this type of incident? And even if you are a multinational with a global policy, how old is it, and is your coverage in concert with any recent changes in the laws of the country and local jurisdiction in which the incident occurred?
As should be clear from these few questions, if you organization is hit with a major event and you need to make a claim, just knowing that you are current with your premium payments is not enough. Preparation before the event ever occurs, strong relationships with your insurance team, and a thorough understanding of what needs to happen throughout the claims process are all essential to reaching a satisfactory claim settlement quickly, so that a long business disruption and further damage are avoided.
Get Ready before Disaster Strikes
The Boy Scout motto, “Be prepared,” applies equally well to organizations that may suddenly be faced with the need to navigate the complexities of the claim process – especially for large claims following a major crisis. Crises are by nature emotional events. Taking the following steps ahead of time, before disaster strikes, will help avoid the sense of paralysis and tunnel vision that often follows in their wake.
Open up a dialogue with your insurer – today.
For risk managers and others who will be called upon to interface with your insurer in the event of a crisis, establishing open and honest lines of communication now will save trouble and time in the claims process. Regular communication with your insurance team and keeping them up to date on recent developments in your organization, business and manufacturing processes, etc., will provide them with a better understanding of your risk profile and make it easier to explain what has happened, and why, in the event you ever have to file. It will also help in the process of updating and refining the wording in existing policies to reflect important changes that may impact a future claim.
Conduct pre-loss workshops to stress-test your readiness to handle a major loss.
Firefighters conduct frequent drills to ensure their teams know what to do when confronted with different types of emergencies. Commercial airline pilots do the same. Your organization should be no different. Thinking through potential loss scenarios and conducting workshops around them will help you identify where the gaps are – in personnel, reporting structures, contact lists, data maintenance, etc., before a real crisis occurs. If at all possible, you should include your insurance team and broker (if you have one) in these workshops. This will not only help cement important relationships, but it will also serve to further educate them about your organization and on what you will need from them in a crisis; and vice versa. The value to your organization can be significant, because your risk management team will not be starting from zero when you have to make a claim. Knowing what to do first, whom to call at your insurer, what data they will need to begin the claims process, etc. – all of this will save time and help get you on the road to a settlement much more quickly.
Know what your policy covers, before you need it.
This advice may sound obvious, but experience has shown that all too often, companies are not aware, in detail, of what their policies cover and don’t cover. As Noona Barlow, AIG head of financial lines claims Europe has noted, particularly in the case of small to mid-size organizations, “it is amazing how often directors and risk managers don’t actually know what their policy covers them for.” This can have dire consequences. In the case of D & O insurance, for example, even a “global” policy many not cover all situations, because in some countries, companies are not allowed to indemnify their directors. Obviously, these kinds of facts are important to know before rather than after an incident occurs. So it is important to have an insurer with both a broad and deep understanding of local laws and regulations wherever you have exposure, in addition to an understanding of the technical details of working through the claims process.
Make sure your data management policies are in order.
Successful risk management depends on having consistent, high-quality data on all of your risk-sensitive operations (manufacturing, procurement, shipping, etc.), so that you can quantify where the greatest risks sit in the organization and take steps to reduce them. Good data, complemented by strong analytics, will also help you to identify potential problems before they occur. It will also help you to maximize the effectiveness of your insurance purchasing decisions. Frequent, detailed conversations with your insurer will help you to identify any areas where additional data might be needed in the event of a crisis.
No one ever wants to find themselves in the midst of a crisis. But if and when such an event does strike, if you have taken the steps above you will be much better positioned to work through the claims process – and reach an effective resolution – as quickly and as smoothly as possible.
For more information, please visit the AIG Knowledge and Insights Center.