Last November, a global study of 3,000 small and mid-size enterprises (SMEs) found that only one in seven SMEs think their business would be significantly affected if they lost their main supplier.
Overall, 39 percent of SMEs consider themselves at risk from the loss of their main supplier, yet 55 percent believe it would not influence their day-to-day business.
Meanwhile, the “2015 Supply Chain Resilience Study” by Zurich and the Business Continuity Institute (BCI) found that while 74 percent of companies experienced at least one supply chain disruption in the last year, only half of those disruptions were known to originate from Tier 1 (immediate) suppliers, and 72 percent of respondents admitted they did not have full visibility into their supply chain.
“Supply chain risk is a blind spot for a lot of organizations.” — Karl Bryant, senior vice president at Marsh Risk Consulting
“This makes us believe that SMEs probably underestimate their supply chains risk exposure, and we urge them to reassess this,” said Nick Wildgoose, Zurich’s global supply chain product leader. He added that visibility and resilience along supply chains are major sources of competitive advantage.
BCI warned that organizations could be “driving blindfolded into a disaster.”
Companies at most risk are those reliant on “sole source” suppliers — one-of-a-kind manufacturers whose components are either of unique quality or are unavailable elsewhere in the market.
In today’s lean manufacturing era, fewer companies keep spare inventory, so if a critical component ceases to be available it can quickly prevent a company from producing its core product or service, leading to lost revenue, diminished service, dissatisfied customers and, in extreme cases, business closure.
Supply chain risk lurks in many forms. According to the BCI, IT and telecoms outages, adverse weather, and for the first time, cyber attacks/data breaches are
the top three causes of supply chain disruption. Another emerging risk is “business ethics,” which placed in the top 10 for first time.
“Supply chain risk is a blind spot for a lot of organizations,” said Karl Bryant, senior vice president at Marsh Risk Consulting.
Complacency that suppliers have everything under control can be a problem, said
Ken Katz, property risk control director at Travelers.
“When a risk exists outside your own four walls and you are focusing on your core business there is reduced visibility to the potential destruction it can cause,” Katz said.
To make matters worse for SMEs, smaller companies are likely to feel the effects of a supply shortage first as suppliers will invariably prioritize their biggest accounts if outflow is reduced.
“I’d love to see companies with six months’ supply, or matching supply against their expected downtime and their assets, but that’s a losing battle — no one wants inventory these days,” said Bryant.
Former RIMS President Rick Roberts, director of risk management and employee benefits at Ensign-Bickford Industries (EBI), said supply chain disruption is a “huge issue. People who’ve never had a problem often sit back and don’t pay much attention, but up-front work is critical because when a problem hits it can be major.”
Roberts, whose company is both a customer and supplier, said some of EBI’s customers require his company to keep a number of months’ worth of supply as inventory as part of their agreement. However, few SMEs have the leverage to wield this kind of influence.
To fully understand their supply chain exposures, Bryant suggested SMEs conduct a “value segmentation” exercise, identifying mission-critical areas of their
business, such as those that generate the highest margins or growth.
Then, Katz said, they should conduct a “business impact analysis,” simulating the repercussions of vital components being undeliverable.
It is also essential for SMEs to get to know their suppliers’ finances and quality of work as best they can, he said.
Bryant said that companies should compile a matrix of their supply chain in as much detail as possible, including suppliers of suppliers, and if possible, the exposure of suppliers’ plants and operations (as opposed to regional offices) to natural catastrophe such as flood or earthquake.
SMEs should ask all their suppliers what business continuity plans and insurance they have in place, and get clarity on exactly how they will be treated should the supplier run into problems.
However, warned Bryant: “It can take a lot of man hours to send out questionnaires, follow up on them and pull the information together in a meaningful way, and many smaller companies don’t have the resources to invest in that kind of process.”
Nevertheless, this is information that empowers risk managers to make informed continuity plans. This could include, for example, finding alternative single source suppliers or new methods of production in case a sole source supplier fails to deliver, or even potentially acquire that supplier to ensure it stays in business.
There must also be a communications strategy for dealing with clients and negotiating delays. “You need a good explanation that is more sophisticated than ‘we can’t help you, I’m sorry’,” said Bryant.
Continuity planning, he said, requires a coordinated approach between risk and operational departments to ensure that gathered data is optimally leveraged. According to the BCI, only 54 percent of SMEs currently have a business continuity plan, compared to 74 percent of large organizations.
It also found that nearly six in 10 SMEs don’t insure losses from supply chain disruption, even though contingent business interruption (CBI) insurance would compensate for lost revenues during a supply problem.
This usually applies only to an insured’s first tier of suppliers, and can only be acquired if the SME has business interruption coverage.
Roberts would like to see more insurers extend coverage to second tier suppliers. “It can be expensive, and you can’t always see the benefits of being proactive — but when you get hit with a loss you’ll wish you had been prepared.” &
Deficient Bridges Could Mean Supply Chain Woes
In its 2015 report on the nation’s bridges, the American Road & Transportation Builders Association (ARTBA) labeled 58,500 U.S. bridges — roughly 10 percent — as structurally deficient.
Nearly half of those — 27,486 — have some sort of load restriction. While a slight improvement over 2014, the issue still represents potentially serious supply chain risks for many businesses, and the problem will not be going away any time soon.
“The good news is that we’re definitely seeing a reduction in the number of structurally deficient bridges out there,” said Alison Black, ARTBA senior vice president, chief economist and author of the report. “[But] at this pace, it will be over 20 years before we solve this issue.”
Between 2014 and 2015, 7,200 structurally deficient bridges were removed from the list, but those repairs and replacements, while representing long-term progress, can mean even more acute restrictions or outright closures in the short term.
And meanwhile, another 4,625 bridges were added to the list.
Supply chain interruptions from bridge restrictions can affect a wide variety of businesses.
“Things that have to be refrigerated, such as dairy, those kinds of industries, [or] retailers that might have a large distribution facility where you have a lot of concentrated economic activity in a very narrow space, those may be the businesses more likely to be affected,” said Vince Morgan, a partner in the law firm of Pillsbury Winthrop Shaw Pittman LLP who specializes in insurance law and risk management.
Clark Schweers, the leader of BDO’s Forensic Insurance and Recovery practice, added that specialty manufacturers who use volatile chemical compounds that require special care could also be impacted.
“It really impacts all industries in one way or another,” he said.
Bridge restrictions can also force trucking companies to reduce load sizes.
“It may be that you used to get two truck deliveries a week of a particular commodity … and now, because of weight restrictions, you have to get four trucks that each have lower weight loads. That adds to your expense and can disrupt your supply chain system,” Morgan said.
Closures or restrictions can also interrupt business by impeding customer access.
The ARTBA report does not include the nation’s 77,000 railroad bridges. According to Black, a 2007 GAO report said there is “little information publicly available on the condition of railroad bridges and tunnels.”
While road bridge workarounds can cause delays and increase business costs, Schweers pointed out that railroad bridges are often “a single source supplying multiple facilities that are reliant on those railroads,” making workarounds more elusive and supply-chain interruptions more problematic.
According to Schweers, traditional supply chain studies do look at transportation logistics, “but there probably has not been enough focus on the transportation infrastructure.”
“It starts with your business continuity plan and building a resiliency around that,” said Morgan.
“If there is a vulnerability from a transportation standpoint then you need to identify it and look at avenues to mitigate it before it becomes a real problem.”
Businesses can check with their state departments of transportation for information about transportation restrictions that could impact them.
“The information is based on bridge inspection reports, which happen every two years, so definitely checking in with the state DOT is the best way to get information about specific bridges,” Black said.
Schweers and Morgan advised businesses to check for gaps in their coverage. A single word or syllable can mean the difference between a loss that is covered or not.
According to Schweers, “the ingress/egress area, whether you have the word ‘prohibit’ or the word ‘inhibit,’ that one word right there can have a vastly different scope or meaning in terms of potential recovery within your insurance policy.”
Policies covering ingress or egress that is prohibited but not inhibited would cover losses from bridge closures, but not losses from weight or other restrictions.
“If you’ve got impairment language in the ingress/egress or civil authority provisions of your policy, that is going to trigger coverage,” said Morgan. “If you have prohibition language, you might have a harder hill to climb to get a covered loss.”
Morgan said there are rare instances of policies manuscripted to exclude specific bridges.
“It tends to be a specific case where a business is very dependent on a particular bridge and [the insurer] may have questions about the soundness of it,” he said. “But those are the kinds of things you need to look at in your policy and find out before it rises to an actual problem for you.”
Schweers agreed. “Having those discussions with your carriers and with your brokers outside of an actual loss is really a best practice and something that we would recommend for all parties, to sit down and explain the risks to the business and try to determine whether or not the policy would be triggered in a given situation.”
Helping Investment Advisers Hurdle New “Customer First” Government Regulation
This spring, the Department of Labor (DOL) rolled out a set of rule changes likely to raise issues for advisers managing their customers’ retirement investment accounts. In an already challenging compliance environment, the new regulation will push financial advisory firms to adapt their business models to adhere to a higher standard while staying profitable.
The new proposal mandates a fiduciary standard that requires advisers to place a client’s best interests before their own when recommending investments, rather than adhering to a more lenient suitability standard. In addition to increasing compliance costs, this standard also ups the liability risk for advisers.
The rule changes will also disrupt the traditional broker-dealer model by pressuring firms to do away with commissions and move instead to fee-based compensation. Fee-based models remove the incentive to recommend high-cost investments to clients when less expensive, comparable options exist.
“Broker-dealers currently follow a sales distribution model, and the concern driving this shift in compensation structure is that IRAs have been suffering because of the commission factor,” said Richard Haran, who oversees the Financial Institutions book of business for Liberty International Underwriters. “Overall, the fiduciary standard is more difficult to comply with than a suitability standard, and the fee-based model could make it harder to do so in an economical way. Broker dealers may have to change the way they do business.”
As a consequence of the new DOL regulation, the Securities and Exchange Commission (SEC) will be forced to respond with its own fiduciary standard which will tighten up their regulations to even the playing field and create consistency for customers seeking investment management.
Because the SEC relies on securities law while the DOL takes guidance from ERISA, there will undoubtedly be nuances between the two new standards, creating compliance confusion for both Registered Investment Advisors (RIAs)and broker-dealers.
To ensure they adhere to the new structure, “we could see more broker-dealers become RIAs or get dually registered, since advisers already follow a fee-based compensation model,” Haran said. “The result is that there will be likely more RIAs after the regulation passes.”
But RIAs have their own set of challenges awaiting them. The SEC announced it would beef up oversight of investment advisors with more frequent examinations, which historically were few and far between.
“Examiners will focus on individual investments deemed very risky,” said Melanie Rivera, Financial Institutions Underwriter for LIU. “They’ll also be looking more closely at cyber security, as RIAs control private customer information like Social Security numbers and account numbers.”
Demand for Cover
In the face of regulatory uncertainty and increased scrutiny from the SEC, investment managers will need to be sure they have coverage to safeguard them from any oversight or failure to comply exactly with the new standards.
In collaboration with claims experts, underwriters, legal counsel and outside brokers, Liberty International Underwriters revamped older forms for investment adviser professional liability and condensed them into a single form that addresses emerging compliance needs.
The new form for investment management solutions pulls together seven coverages:
- Investment Adviser E&O, including a cyber sub-limit
- Investment Advisers D&O
- Mutual Funds D&O and E&O
- Hedge Fund D&O and E&O
- Employment Practices Liability
- Fiduciary Liability
- Service Providers D&O
“A comprehensive solution, like the revamped form provides, will help advisers navigate the new regulatory environment,” Rivera said. “It’s a one-stop shop, allowing clients to bind coverage more efficiently and provide peace of mind.”
Ahead of the Curve
The new form demonstrates how LIU’s best-in class expertise lends itself to the collaborative and innovative approach necessary to anticipate trends and address emerging needs in the marketplace.
“Seeing the pending regulation, we worked internally to assess what the effect would be on our adviser clients, and how we could respond to make the transition as easy as possible,” Haran said. “We believe the new form will not only meet the increased demand for coverage, but actually creates a better product with the introduction of cyber sublimits, which are built into the investment adviser E&O policy.”
The combined form also considers another potential need: cost of correction coverage. Complying with a fiduciary standard could increase the need for this type of cover, which is not currently offered on a consistent basis. LIU’s form will offer cost of correction coverage on a sublimited basis by endorsement.
“We’ve tried to cross product lines and not stay siloed,” Haran said. “Our clients are facing new risks, in a new regulatory environment, and they need a tailored approach. LIU’s history of collaboration and innovation demonstrates that we can provide unique solutions to meet their needs.”
For more information about Liberty International Underwriters’ products for investment managers, visit www.LIU-USA.com.
Liberty International Underwriters is the marketing name for the broker-distributed specialty lines business operations of Liberty Mutual Insurance. Certain coverage may be provided by a surplus lines insurer. Surplus lines insurers do not generally participate in state guaranty funds and insureds are therefore not protected by such funds. This literature is a summary only and does not include all terms, conditions, or exclusions of the coverage described. Please refer to the actual policy issued for complete details of coverage and exclusions.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty International Underwriters. The editorial staff of Risk & Insurance had no role in its preparation.