Risk Insider: Jonathan Hall

Out of Sight, Out of Mind

By: | February 10, 2015 • 2 min read
Jonathan W. Hall is chief operating officer at FM Global. He oversees FM Global’s insurance operations and insurance staff functions, as well as the FM Global Resilience Index, a data driven resource that ranks the business resilience of 130 countries and regions. He can be reached at riskletters@lrp.com.

“Out of sight, out of mind.” That phrase is a useful reminder of the vulnerabilities many organizations unknowingly face when it comes to their far-flung supply chains.

Following some quiet years where natural catastrophes and supply chain disruption issues aren’t front page news, management often turns to seemingly more pressing matters.

However, low risk quality at one’s key facilities, or that of their suppliers and customers, can leave unprepared organizations susceptible to business disruption. Two often overlooked aspects warrant consideration: The first is an organization’s exposure to natural hazards on a country-by-country basis, given that all nations have particular vulnerabilities to one or more perils like earthquake, windstorm or flood.

While mega-catastrophes often spring to mind as a major contributor to supply chain disruption, outwardly smaller weather events can wreak fiscal havoc too.

The second aspect is a country’s level of commitment to addressing natural hazards (i.e., whether local building codes and standards exist, are robust and enforced).

Yet, lower costs and higher productivity often entice businesses, with little consideration of the supply chains consequences, into less resilient countries — regions where economies are emerging, labor is cheap, facilities are built in natural hazard-prone locations and risk management practices are weaker than more developed nations.

While mega-catastrophes often spring to mind as a major contributor to supply chain disruption, outwardly smaller weather events can wreak fiscal havoc too.

Last year, in a poll of the U.S. workforce, more than one in four employees said their company had been hit financially as a result of the winter weather and didn’t have an emergency plan to keep business going during such scenarios.

All told, since 2000, the economic losses globally from natural disasters are estimated to be approximately $2.5 trillion, according to the United Nations Office for Disaster Risk Reduction.

When you can’t make savvy decisions about the resilience of your supply chain to disruption, the chance of it disentangling increases. Under such circumstances, it can take two years or more for companies to recover from a supply chain failure, research finds.

Yet, despite those statistics, 90 percent of companies still do not quantify supply chain risk when outsourcing production, according to a recent study by the Global Supply Chain Institute.

Certainly, the need to continually gauge Mother Nature is just as important as assessing ongoing macroeconomic and geopolitical factors within each country where one’s supply chain extends. For example, what if a key supplier is located in a region with robust building codes and standards that adequately address local natural hazards, but the region’s economy is destabilizing by political upheaval?

By factoring suppliers’ differing risk profiles on a country-by-country basis and which firms could most affect revenue growth and profitability, a buying organization can make sounder choices.

The most resilient companies take pains to identify, analyze, quantify and correlate these various physical threats with other key factors that can jeopardize the timely flow of supplies from across the world.

Only after a comprehensive analysis of such data can organizations be in a position to soundly prioritize supply chain and risk management efforts to ensure their business continuity, competitiveness and reputation.

Share this article:

Supply Chain Risks

Breaking the Chain

Reliance on supply chains has hiked the number of business interruption claims, which cost nearly one-third more than property claims.
By: | February 4, 2015 • 5 min read
Allianz Risk Barometer

The increasing interconnectivity between businesses and their customers and suppliers has resulted in a large rise in business interruption (BI) and supply chain claims, according to industry experts.

Advertisement




Combined with a greater frequency and severity of natural disasters and extreme weather globally, as well as growing geo-political instability and unrest, this has left companies more exposed than ever before.

The Allianz Risk Barometer 2015 survey released in January revealed that BI and supply chain risk is the No. 1 peril for the third year running, with 46 percent of respondents rating it one of the three highest risks for firms.

“But because no single party owns the whole supply chain process it makes it hard to establish where the risk lies and how to measure it, particularly in areas such as cyber where there are multiple layers of ownership.” — Gary Lynch, founder and CEO, The Risk Project

The study found that the average BI claim at $1.36 million is 32 percent higher than the average property damage claim at $1.03 million, with the subsequent disruption amounting to more than the initial physical damage.

Gary Lynch, founder and CEO, The Risk Project

Gary Lynch, founder and CEO, The Risk Project

Gary Lynch, founder and CEO of The Risk Project, a supply chain risk management specialist, said that complex supply chains shared by multiple parties with different business models “inherently” had a large degree of risk attached to them.

“One of the biggest challenges from a risk manager’s perspective is that not only do they have to understand a company’s operating model, but also the broader economic model and the models of their business partners,” he said.

“But because no single party owns the whole supply chain process it makes it hard to establish where the risk lies and how to measure it, particularly in areas such as cyber where there are multiple layers of ownership.

“There’s no doubt that this increased interconnectivity is resulting in greater claims.”

Outsourcing Increases Complexity

Brian Kirwan, head of market management at Allianz Global Corporate & Specialty (AGCS) Regional Unit London, said that supply chain risk had been exacerbated by the global trend toward outsourcing over the last few years, adding to its complexity.

“What we are seeing is that continued globalization is creating complexity in the supply chain, which is the biggest challenge for risk managers.” — Brian Kirwan, head of market management, Allianz Global Corporate & Specialty Regional Unit London

“What we are seeing is that continued globalization is creating complexity in the supply chain, which is the biggest challenge for risk managers,” he said.

In addition, he said that BI losses as a proportion of an overall claim were also on the increase, which, in turn, was having a significant impact on company revenue.

“The first key component to get to grips with this is understanding the critical pieces of the supply chain, including the suppliers, and what impacts them — not only the credit risks, but also the catastrophe and insurance risks, as well as the concentration of risks,” he said.

Paul Carter, global head of risk consulting at AGCS SE, added: “Businesses spend a lot of time assessing direct damage and looking at their own BI impact but more work needs to be done analyzing the risks associated with suppliers and customers.”

Perry Rotella, group executive, Verisk supply chain risk analytics business

Perry Rotella, group executive, Verisk supply chain risk analytics business

Perry Rotella, group executive of Verisk’s supply chain risk analytics business, said that the main problem is while companies may have visibility of their direct suppliers, often they don’t have the necessary oversight of how the supply chain fits together and the geographical areas their production sites are located, as with the Thai floods in 2011.

“This increase in complexity combined with a growing number of natural disasters, extreme weather and geo-political instability has increased the risk for companies,” he said.

He added that, further down the line, the slightest supply chain disruption can have a knock-on effect, causing a company’s share price to drop, on average, by 7 percent, and often taking months to recover its value.

Chris Fischer Hirs, CEO of AGCS SE, added: “The growing interdependency of many industries and processes means businesses are now exposed to an increasing number of disruptive scenarios.”

The company’s survey of more than 500 risk managers across 47 countries found that the causes of BI that companies feared most were fire/explosion (43 percent) and natural catastrophes (41 percent).

Second only to BI and supply chain risks were natural catastrophes (30 percent) and fire/explosion (27 percent), according to the report.

Cyber (17 percent) and political risks (11 percent) were the biggest movers. Cyber crime/IT failures moved into the top five business risk ranking for the first time and are now among the top three risks in the U.S.

Meanwhile, loss of reputation (61 percent) and BI (49 percent) were cited as the main causes of economic loss following an incident.

Advertisement




But despite the increased awareness of cyber risks, many companies still underestimated the different impacts of it on their business, according to 73 percent of respondents.

Political/social upheaval was also a much bigger concern for businesses, climbing nine places to ninth. It’s also the second biggest cause of supply chain disruption (53 percent) after natural catastrophes, said the report.

By sector, the survey found that natural catastrophes remain the main risk for the engineering and construction industry, while BI is the biggest threat for manufacturers, and legislative and regulatory changes are top of the agenda in financial services.

Long-term, climate change and natural catastrophes, as well as so-called “disruptive technologies” such as 3D-printing and nanotechnology remain the biggest threats to companies, the report concluded.

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at riskletters@lrp.com.
Share this article:

Sponsored: Lexington Insurance

What Is Insurance Innovation?

When it comes to E&S insurance, innovation is best defined as equal parts creativity and speed.
By: | March 2, 2015 • 4 min read

SponsoredContent_LexingtonTruly innovative insurance solutions are delivered in real time, as the needs of businesses change and the nature of risk evolves.

Lexington Insurance exemplifies this approach to innovation. Creative products driven by speed to market are at the core of the insurer’s culture, reputation and strategic direction, according to Matthew Power, executive vice president and head of strategic development at Lexington, an AIG Company and the leading U.S.-based surplus lines insurer.

“The excess and surplus lines sector is in a growth mode due, in no small part, to the speed at which our insureds’ underlying business models are changing,” Power said. “Tomorrow’s winning companies are those being built upon true breakthrough innovation, with a strong focus on agility and speed to market.”

To boost its innovation potential, for example, Lexington has launched a new crowdsourcing strategy. The company’s “Innovation Boot Camps” bring people together from the U.S., Canada, Bermuda and London in a series of engagements focused on identifying potential waves of change and market needs on the coverage horizon.

“Employees work in teams to determine how insurance can play a vital role in increasing the success odds of new markets and customers,” Power said. “That means anticipating needs and quickly delivering programs to meet them.”

An example: Working in tandem with the AIG Science team – another collaboration focused on innovation – Lexington is looking to offer an advanced high-tech seating system in the truck cabs of some of its long-haul trucking customers. The goal is to reduce driver injury and fatigue-based accidents.

SponsoredContent_Lexington“Our professionals serving the healthcare market average more than twenty years of industry experience. That includes attorneys and clinicians combining in a defense-oriented claims approach and collaborating with insureds in this fast-moving market segment. At Lexington, our relentless focus on innovation enables us to take on the risk so our clients can take on the opportunities.”
— Matthew Power, Executive Vice President and Head of Regional Development, Lexington Insurance Company

Power explained that exciting growth areas such as robotics, nanotechnology and driverless cars, among others, require highly customized commercial insurance solutions that often can be delivered only by excess and surplus lines underwriters.

“Being non-admitted, our freedom of rate and form allows us to be nimble, and that’s very important to our clients,” he said. “We have an established track record of reacting quickly to trends and market needs.”

Lexington is a leading provider of personal lines coverage for the excess and surplus lines industry and, as Power explains, the company’s suite of product offerings has continued to evolve in the wake of changing customer needs. “Our personal lines team has developed a robust product offering that considers issues like sustainable building, energy efficiency, and cyber liability.”

Most recently the company launched Evacuation Response, a specialty coverage designed to reimburse Lexington personal lines customers for costs associated with government mandated evacuations. “These evacuation scenarios have becoming increasingly commonplace in the wake of recent extreme weather events, and this coverage protects insured families against the associated costs of transportation and temporary housing.

The company also has followed the emerging cap and trade legislation in California, which has created an active carbon trading market throughout the state. “Our new Carbon ODS product provides real property protection for sequestered ozone depleting substances, while our CarbonCover Design Confirm product insures those engineering firms actively verifying and valuing active trades.” Lexington has also begun to insure new Carbon Registries as they are established in markets across the country.

Lexington has also developed a number of new product offerings within the Healthcare space. The Affordable Care Act has brought an increased focus on the continuum of care and clinical patient safety. In response, Lexington has created special programs for a wide range of entities, as the fast-changing healthcare industry includes a range of specialized services, including home healthcare, imaging centers (X-ray, MRI, PET–CT scans), EMT/ambulances, medical laboratories, outpatient primary care/urgent care centers, ambulatory surgery centers and Medical rehabilitation facilities.

“The excess and surplus lines sector is in growth mode due, in no small part, to the speed at which our insureds’ underlying business models are changing,” Power said.

Apart from its coverage flexibility, Lexington offers this segment monthly webcasts, bi-monthly conference calls and newsletters on key risk issues and educational topics. It also provides on-site risk consultation (for qualifying accounts), access to RiskTool, Lexington’s web-based healthcare risk management and patient safety resource, and a technical staff consisting of more than 60 members dedicated solely to healthcare-related claims.

“Our professionals serving the healthcare market average more than twenty years of industry experience,” Power said. “That includes attorneys and clinicians combining in a defense-oriented claims approach and collaborating with insureds in this fast-moving market segment.”

Power concluded, “At Lexington, our relentless focus on innovation enables us to take on the risk so our clients can take on the opportunities.”
SponsoredContent
BrandStudioLogo

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Lexington Insurance. The editorial staff of Risk & Insurance had no role in its preparation.




Lexington Insurance Company, an AIG Company, is the leading U.S.-based surplus lines insurer.
Share this article: