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Japan one year on: Record claims for business and supply chain interruptions

  • Companies enhance risk management for global supply chains
  • AGCS introduces insurance solution for new types of business interruption risks without physical damage

PRESS RELEASE - London/New York/Munich. March 6, 2012

One year ago, Japan was hit by a triple disaster – an earthquake, a tsunami and a nuclear crisis that not only left the affected areas devastated, but also affected regions around the world. Production stoppages at Japanese suppliers and destroyed logistics infrastructure caused interruptions in global supply chains that were felt across the globe. “More than half of our insurance losses from the Japan disaster were the result of business and supply chain interruptions – that’s a new dimension,” says Andreas Shell, Global Head of Property Claims at Allianz Global Corporate & Specialty (AGCS), the industrial insurance division of the Allianz Group.

Many companies’ supply chains have become more global in recent years; at the same time, inventories have been scaled back amid the focus on just-in-time deliveries. In addition, companies have outsourced larger shares of their operations and reduced the number of individual component suppliers in an increasing drive for competitiveness. The disasters in Japan and, even more so, the extensive flooding in Thailand late in 2011 showed companies and insurers just how vulnerable global supply chains are. The electronics and automotive industries, in particular, were faced with bottlenecks or even production outages around the world through so-called ‘contingent business interruptions’ where suppliers were unable to deliver as planned, impacting production in these industries directly.

Rising risk awareness

A recent AGCS survey revealed that many companies view disruptions in the supply chain and business interruptions as a major business risk. Many are undertaking systematic efforts to make their supply chain risks more transparent and limit their risks. “For cost reasons, many companies will still be forced to source their components from just a few suppliers or even a single one in the future. But risk awareness is growing,” observes AGCS risk consultant Ralf Dumke. Companies are taking an increasingly professional approach to addressing specific risks by listing key suppliers and their production locations, running through catastrophe scenarios applying geocoding and developing business contingency plans. However, companies should not merely professionalize their own risk management, but also engage their suppliers in this process: “Even the suppliers’ suppliers must be involved,” Dumke stresses.

Going beyond proprietary risk management systems, many companies are also preparing for business interruptions by taking the necessary insurance cover. “While we had to deal with a high claims burden as a result of the large number of natural disasters last year, we continue to provide sufficient cover for business and supply chain interruptions. But we expect companies to allow us insight into their risk management approach and also into their supplier structures, particularly when loss exposures are high,” explains Volker Muench, Head of Corporate Underwriting Property at AGCS.

No off-the-shelf product

Conventional business interruption policies are triggered only by physical damage, for example, when either a company or its suppliers are unable to produce due to accidents such as a fire or an earthquake. Many companies, however, also seek cover for business interruptions that are due to such things as strikes or power blackouts, that is, when there is no actual physical damage. AGCS will offer its clients this type of policy in the future, but it will not be an off-the-shelf product: “We don’t have enough historical data for risk modeling. In addition, we are looking at potentially high cumulative totals because entire sectors or regions could be affected,” Muench explains, adding that in a first step, AGCS would therefore cooperate with select clients and offer them a customized product

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