Managing Business Interruption: An insurer’s perspective on supply chain risks

Rapid globalization has increased the interconnectedness of risks. Events that occur in one industry or country can now rapidly transmit to other industries around the globe. As an example, PC manufacturers located thousands of miles from South-East Asia suffered significant losses in November 2011 because of the massive flooding in Thailand. Floodwaters drove suppliers of hard drives out of their factories for months. With those suppliers producing 45% of the world’s computer hard drives, PC manufacturers either had to slow their production or purchase hard drives at higher cost from other suppliers.

The very flexibility and cost-effectiveness that give a modern supply chain its strength and competitive advantage also create its vulnerability to disruption. The only way to deal with this threat is to develop better supply chain risk management systems even if these might add some cost back into today’s very lean processes. Organizations need to consider the necessary trade-off between business efficiencies and operational redundancy.

Not only are companies re-examining how to better mitigate disruptions in future, but insurers are also re-assessing risks in their portfolios. Their key concern is a potential accumulation of risk – or the potential of one catastrophic event triggering multiple insured supply chain-related losses.

In this report, Allianz Global Corporate & Specialty (AGCS) examines the complexities of supply chains, how natural catastrophes and other perils are increasingly putting them at risk, and what that means for both insurance and industry. The study investigates how industries can make supply chains more resilient and outlines the evolving role insurers should play in the process.

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