From the 2011 tragedies of the Tōhoku earthquake and tsunami in Japan to last year’s devastating Hurricane Sandy closer to home, Mother Nature has a way of reminding us to reexamine catastrophe preparedness.

These events, and the tragic aftermath that follows, also serve to remind the insurance industry of the challenges in quantifying risk and accounting for exposure in an increasingly complex supply chain environment. As a result, risk managers are being asked new questions as insurance underwriters require them to seek information from a broader range of stakeholders within and outside of their organizations.

Following the Chain

Generally speaking, on a per-occurrence basis, underwriters already know what an individual insured’s supply chain loss could cost through their receipt of business interruption worksheets. After all, whether an interruption is the result of circumstances at your facility or at a supplier’s or customer’s facility, the result is the same—you can’t produce your product and profits are lost and/or extra expenses incurred. What underwriters don’t always know is which supplier or customer is more likely to have an interruption, what percentage of revenue is exposed based on any one supplier or customer, what interdependencies exist across operations and suppliers, where these losses will occur in the world and due to regional accumulations of values and the catastrophic nature of the occurrences, the magnitude of all losses related to the occurrence.

So underwriters, on a serious fact-finding mission, are increasingly interested in knowing who your suppliers and customers are, how they protect their facilities, where they are, what natural catastrophes they may be exposed to, whether there are alternatives to using their products, and if there are response plans in place designed for a large loss event. As the data being sought is external to the risk manager’s organization, they will have to seek this information from those who communicate and have relationships with suppliers and customers and these parties have never had to gather this type of information before.

Adding to the complexity is that it’s not just a matter of identifying who, what, where and how much from a company’s largest suppliers and customers. The modern supply chain is much larger than suppliers and customers; it also includes suppliers’ suppliers and customers’ customers. All told, it encompasses a seemingly infinite set of variables and exposures, as any single failure anywhere in the supply chain can bring operations and profits to a standstill.

And risk managers, who are already strapped with the complexities of accumulating and collating underwriting information on their own company, are suddenly faced with having to collect additional information through people who are not accustomed to being asked for such information, across international and cultural borders, from outside parties during a time when risk management departments have suffered dearly in the wake of the economic downturn. Although purchasing and procurement professionals consider a multitude of risk issues and seek inputs from multiple parties in making their sourcing decisions, it is unlikely that they know how well a supplier’s facility is protected, or if it is in a high-hazard flood or earthquake zone, nor is it likely that input from their company’s insurance risk managers is actively sought in the procurement process.

And therein lies the problem.