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.”
Commercial Auto Warning: Emerging Frequency and Severity Trends Threaten Policyholders
The slow but steady climb out of the Great Recession means businesses can finally transition out of survival mode and set their sights on growth and expansion.
The construction, retail and energy sectors in particular are enjoying an influx of business — but getting back on their feet doesn’t come free of challenges.
Increasingly, expensive commercial auto losses hamper the upward trend. From 2012 to 2015, auto loss costs increased a cumulative 20 percent, according to the Insurance Services Office.
“Since the recession ended, commercial auto losses have challenged businesses trying to grow,” said David Blessing, SVP and Chief Underwriting Officer for National Insurance Casualty at Liberty Mutual Insurance. “As the economy improves and businesses expand, it means there are more vehicles on the road covering more miles. That is pushing up the frequency of auto accidents.”
For companies with transportation exposure, costly auto losses can hinder continued growth. Buyers who partner closely with their insurance brokers and carriers to understand these risks – and the consultative support and tools available to manage them – are better positioned to protect their employees, fleets, and businesses.
Liberty Mutual’s David Blessing discusses key challenges in the commercial auto market.
“Since the recession ended, commercial auto losses have challenged businesses trying to grow. As the economy improves and businesses expand, it means there are more vehicles on the road covering more miles. That is pushing up the frequency of auto accidents.”
–David Blessing, SVP and Chief Underwriting Officer for National Insurance Casualty, Liberty Mutual Insurance
More Accidents, More Dollars
Rising claims costs typically stem from either increased frequency or severity — but in the case of commercial auto, it’s both. This presents risk managers with the unique challenge of blunting a double-edged sword.
Cumulative miles driven in February, 2016, were up 5.6 percent compared to February, 2015, Blessing said. Unfortunately, inexperienced drivers are at the helm for a good portion of those miles.
A severe shortage of experienced commercial drivers — nearing 50,000 by the end of 2015, according to the American Trucking Association — means a limited pool to choose from. Drivers completing unfamiliar routes or lacking practice behind the wheel translate into more accidents, but companies facing intense competition for experienced drivers with good driving records may be tempted to let risk management best practices slip, like proper driver screening and training.
Distracted driving, whether it’s as a result of using a phone, eating, or reading directions, is another factor contributing to the number of accidents on the road. Recent findings from the National Safety Council indicate that as much as 27% of crashes involved drivers talking or texting on cell phones.
The factors driving increased frequency in the commercial auto market.
In addition to increased frequency, a variety of other factors are driving up claim severity, resulting in higher payments for both bodily injury and property damage.
Treating those injured in a commercial auto accident is more expensive than ever as medical costs rise at a faster rate than the overall Consumer Price Index.
“Medical inflation continues to go up by about three percent, whereas the core CPI is closer to two percent,” Blessing said.
Changing physical medicine fee schedules in some states also drive up commercial auto claim costs. California, for example, increased the cost of physical medicine by 38 percent over the past two years and will increase it by a total of 64 percent by the end of 2017.
And then there is the cost of repairing and replacing damaged vehicles.
“There are a lot of new vehicles on the road, and those cost more to repair and replace,” Blessing said. “In the last few years, heavy truck sales have increased at double digit rates — 15 percent in 2014, followed by an additional 11 percent in 2015.”
The impact is seen in the industry-wide combined ratio for commercial auto coverage, which per Conning, increased from 103 in 2014 to 105 for 2015, and is forecast to grow to nearly 110 by 2018.
None of these trends show signs of slowing or reversing, especially as the advent of driverless technology introduces its own risks and makes new vehicles all the more valuable. Now is the time to reign in auto exposure, before the cost of claims balloons even further.
The factors driving up commercial auto claims severity.
Data Opens Window to Driver Behavior
To better manage the total cost of commercial auto insurance, Blessing believes risk management should focus on the driver, not just the vehicle. In this journey, fleet telematics data plays a key role, unlocking insight on the driver behavior that contributes to accidents.
“Roughly half of large fleets have telematics built into their trucks,” Blessing said. “Traditionally, they are used to improve business performance by managing maintenance and routing to better control fuel costs. But we see opportunity there to improve driver performance, and so do risk managers.”
Liberty Mutual’s Managing Vital Driver Performance tool helps clients parse through data provided by telematics vendors and apply it toward cultivating safer driving habits.
“Risk managers can get overwhelmed with all of the data coming out of telematics. They may not know how to set the right parameters, or they get too many alerts from the provider,” Blessing said.
“We can help take that data and turn it into a concrete plan of action the customer can use to build a better risk management program by monitoring driver behavior, identifying the root causes of poor driving performance and developing training and other approaches to improve performance.”
Actions risk managers can take to better manage commercial auto frequency and severity trends.
Rather than focusing on the vehicle, the Managing Vital Driver Performance tool focuses on the driver, looking for indicators of aggressive driving that may lead to accidents, such as speeding, sharp turns and hard or sudden braking.
The tool helps a risk manager see if drivers consistently exhibit any of these behaviors, and take actions to improve driving performance before an accident happens. Liberty’s risk control consultants can also interview drivers to drill deeper into the data and find out what causes those behaviors in the first place.
Sometimes patterns of unsafe driving reveal issues at the management level.
“Our behavior-based program is also for supervisors and managers, not just drivers,” Blessing said. “This is where we help them set the tone and expectations with their drivers.”
For example, if data analysis and interviews reveal that fatigue factors into poor driving performance, management can identify ways to address that fatigue, including changing assigned work levels and requirements. Are drivers expected to make too many deliveries in a single shift, or are they required to interact with dispatch while driving?
“Management support of safety is so important, and work levels and expectations should be realistic,” Blessing said.
A Consultative Approach
In addition to its Managing Vital Driver Performance tool, Liberty’s team of risk control consultants helps commercial auto policyholders establish screening criteria for new drivers, creating a “driver scorecard” to reflect a potential new hire’s driving record, any Motor Vehicle Reports, years of experience, and familiarity with the type of vehicle that a company uses.
“Our whole approach is consultative,” Blessing said. “We probe and listen and try to understand a client’s strengths and challenges, and then make recommendations to help them establish the best practices they need.”
“With our approach and tools, we do something no one else in the industry does, which is perform the root cause analysis to help prevent accidents, better protecting a commercial auto policyholder’s employees and bottom line.”
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.