DAN REYNOLDS, senior editor of Risk & Insurance®.
When it comes to offering supply chain insurance, the need and the interest are there. However, the lack of reinsurance support and the absence of a syndicated approach to coverage means meager limits, for now.
Karen O'Reilly, chief innovation officer with Boston-based Lexington Insurance Co., the Chartis subsidiary, said the company launched its supply chain product in the late summer and early fall of 2008 with the hopes that it could create additional capacity through syndication. That capacity, which Lexington and its brokering partner had hoped to arrange, never arrived.
"They could not find enough markets to sign up, so perhaps over time that will change," O'Reilly said. "I do think that is the only way you will get the capacity that you need to address the needs of a Fortune 100 company," she said.
Lexington launched the product it did because its research indicated the need was there.
"In the research that we had done, one of the major concerns was that expressed by CEO's of manufacturing companies throughout the United States who were starting to become aware of their supply chain exposures," O'Reilly said.
"And in numerous interviews that were conducted by various risk management entities it came up as one of the top ten exposures that CEOs were concerned about for their firms."
With little to no backing from reinsurance carriers, Lexington has focused on targeting the product to middle market prospects for now. "I think that limits in this whole arena are somewhat challenged," O'Reilly said.
"We advertise that we are willing to put out $25 million per occurrence up to $50 million on a policy aggregate. It is structured a little bit differently than traditional property in that there is an aggregate on our policy," she said.
"While $25 million to $50 million is a lot of money, in reality it may not be adequate if you think about the financial exposure a significant supply chain disruption represents," she said.
The reason for that lies primarily in the distinction between contingent business interruption and supply chain insurance.
Most contingent business interruption insurance is triggered by physical damage, but supply chain insurance is intended to cover a wide range of triggers, fuel shortages, transportation bottlenecks and other occurrences that don't result in direct physical damage to the original equipment manufacturer but that nevertheless shut its supply chain down.
"When you start stepping outside of those traditional triggers and you are covering things like a political risk or an embargo or a pandemic or other events that might cause a supply chain disruption, but do not cause direct physical loss or damage those fall out of most reinsurance agreements and consequently reinsurance becomes an issue. It is a quantum leap," O'Reilly said.
Al Gier, the director of corporate risk management for General Motors, which has a massive global procurement system, said he is aware of the supply chain insurance products.
For a company of his size, however, the limits offered at this point don't do him much good. "The issue we always have when these programs started is the capacity is pretty limited and so we keep an eye on them," Gier said.
In the future, though, he's likely to give supply chain coverage products a closer look.
"As capacity grows we may have some more interest and then we'll have to look at what the trade-offs are--what is covered in our property program versus what would be covered under these programs--is there overlap, is there an additional benefit to having these things, because we wouldn't just bolt them on," he said.
August 1, 2011
Copyright 2011© LRP Publications