Not Your Grandpa’s Globe: Recognizing and Insuring Supply Chain Interruption

PART TWO: Intangible

10/27/2014

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Not Your Grandpa’s Globe: Recognizing and Insuring Supply Chain Interruption

Presented By:Kevin C. Amrhein, CICFISCE and the CE Partnershipkamrhein@fisce.com

TWO PARTS: Tangible and Intangible

Tangible:

• The global nature of supply chain dependency

• Relevance to small business• Contingency planning• Insurability

Intangible:

• Not all damage stems from direct damage

• Dependence on internet and communication utilities

• Contingency planning• Insurability

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The FIVE Costliest Worldwide Insurance Losses: Direct Property and Business InterruptionAdjusted for 2013 dollars. Source: Swiss Re

WHEN WHAT HOW MUCH

8/29/05 Hurricane Katrina 80.37 B

3/11/11 Tohoku Earthquake/Tsunami 37.66 B

10/24/12 Hurricane Sandy 36.89 B

8/23/92 Hurricane Andrew 27.59 B

9/11/01 Terrorist Attack on WTC and Pentagon 26.66 B

The First Major Hurdle: Helping Insured Identify Their Chain

• How many business are truly “Vertically Integrated?”

• Okay, so maybe your entire book of business is made up of “you pick em’, you eat em’, cash only” fruit farms. If so, maybe you should sit this one out.

Retail to End User

Process/Finish

Mine/Grow

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The First Major Hurdle: Helping Insured Identify Their Chain, cont.

Local Regional

National Global

“Dependent Properties”: How Many Links in the Chain?

Wet Willie’s Shrimp Diner )

Local Seafood Wholesaler

Regional Seafood

Wholesaler

Distribution Facility

Shipping/

Logistics Center

Cargo Carrier

Shipping/

Logistics Center

Processing/

Packaging Facility

Seafood Wholesaler

Crazy Joe’s Shrimpers

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“Strong as Your Weakest Link”Wet Willie’s

Shrimp Diner

Local Seafood Wholesaler

Regional Seafood

Wholesaler

Distribution Facility

Shipping/

Logistics Center

Cargo Carrier

Shipping/

Logistics Center

Processing/

Packaging Facility

Seafood Wholesaler

Crazy Joe’s Shrimpers

YOUR INSURED, New York City

RAW MATERIALS, Coastal LA

NEWORLEANS

“Strong as Your Weakest Link”Wet Willie’s

Shrimp Diner

Local Seafood Wholesaler

Regional Seafood

Wholesaler

Distribution Facility

Shipping/

Logistics Center

Cargo Carrier

Shipping/

Logistics Center

Processing/

Packaging Facility

Seafood Wholesaler

Crazy Joe’s Shrimpers

MAJOR BUYERS in New York City

YOUR INSURED, Coastal LA

NEWORLEANS

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Building Materials Supplier in Tallahassee, FLHurricane Katrina,2005 (TLH weather: clear skies,

90 degrees)

Damage to distribution center in LA

ShippingDelayed

SupplyShortage

Lost Income

On the Dock: Where Global Truly Begins

According to the World Shipping Council:

7 of the 10 busiest ports in the world are located in China5 of the 50 busiest ports in the world are located in the Middle East Only 4 of the 50 busiest ports in the world are located in the United States (LA, Long Beach, NY/NJ, Georgia)

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On the Dock: Where Global Truly Begins, cont.

• According to the DOT, the Port of Boston is the 37th

busiest in the U.S. • The top 50 U.S. ports

increased tonnage by 1% between 2002-2012. During the same time, the Port of Boston saw a 19.8% decrease in tonnage.

• Why does your insured careabout any of this?

• Image from massport.com

The Second Major Hurdle: Direct Damage Trigger

Perils, Exclusions, Limitations in standard Business Interruption insurance

• Tsunami/flooding• Earth movement• Evacuation• Terrorism• Geopolitical exposures• Transit • Power failure

• Nuclear• Disease• Cyber attack• Drought• Decreased Supply• Pollution• Equipment breakdown

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QUESTION:

What cause of loss normally excluded is most likely to cause a supply chain interruption?A) Flood/TsunamiB) Cyber attackC) Earth movementD) Geopolitical exposure (regime change, conflict, etc.)

The Third Major Hurdle: Coverage Territory

• Described premises• Standard coverage territory (USA, territories,

possessions, Puerto Rico, Canada)• Other limitations (e.g. Civil Authority)

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Common Issues with Business Interruption Coverage

• “Time” deductible• Adequate limits /worksheets• Coinsurance• Period of restoration• Payroll continuation• Extra expenses• Access to financial information• Dependent properties coverage

Insuring the RiskWill carriers do just about anything for more money? (HINT: No)

Tsunami/flooding

Earth movement

Evacuation

Terrorism

Geopolitical exposures

Transit

Power failure

Nuclear

Disease

Cyber attack

Drought

Decreased Supply

Pollution

Equipment breakdown

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Insuring the Risk, continued: The Value of the Global Broker

• Market access/insurability• Licensing• Taxation• International trade• Legal resources• Policy review

Contingency Planning for Tangible Loss• Backup suppliers and cost• Reciprocity with competitors• Contract Preservation (illustration on next

slide)• Risk transfer arrangements • So…what plans does the dependent business

have? Potential deal-breaker? How is asking this any different from requesting proof of insurance?!

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Contract Preservation, illustrated:Wet Willie’s

Shrimp Diner

Local Seafood Wholesaler

Regional Seafood

Wholesaler

Distribution Facility

Shipping/

Logistics Center

Cargo Carrier

Shipping/

Logistics Center

Processing/

Packaging Facility

Seafood Wholesaler

Crazy Joe’s Shrimpers

RAW MATERIALS, Coastal LA

NEWORLEANS

YOUR INSURED

Contractual Obligation To:

Contingency Planning for Tangible Loss, cont.

• Resources – Brokers– Carriers– Risk Management Consultants– Ready.gov Business Continuity Planning Suite

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QUESTION:

When was the last time you reviewed a supply chain interruption contingency plan with an insured?A) This weekB) Within the last monthC) I try, but they’re always too busy to talk D) Honestly, and I’m being really real here…never

PART TWO: INTANGIBLEProblem in standard forms: direct damage trigger

Internet Provider

Host/Server Programmer

Software Sales

YOUR INSURED

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PART TWO: INTANGIBLEProblem in standard forms: direct damage trigger

Internet Provider

Host/Server Programmer

Software Sales

YOUR INSURED

CORRUPT DATA HITS HERE

PART TWO: INTANGIBLEProblem in standard forms: direct damage trigger

Buyer/End User

Internet Provider

Alibaba,Amazon, Etsy,

EBay

Internet Provider

Knits Custom Patterns

YOUR INSURED

SHUTDOWN

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Insuring the Risk: What’s Actually Available?

• Endorsements that may or may not help:– Utility Services – Time Element– Electronic Commerce– Coverage Territory limitations

• “Cyber” Insurance– Broadly used, loosely defined term – First-party vs. Third-party

Contingency Planning for Intangible Loss

• Backup utility services and providers• Risk transfer from you to others• Risk transferred from others to you

– Ever read the “user agreement?” Translation: “It’s on you, brother”

• Hardware and software protection• Employee training

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What You, the P&C Agent, Bring to the Table

• Starting the conversation• More than a sale • Getting your insured to “think big” will help them “grow big”

(super corny but true)• Resource document supplemental (a small start)

QUESTION:

The biggest challenge I have with my insureds regarding supply chain interruption is: A) They don’t understand/appreciate itB) They understand/appreciate it but don’t want to put in the

effort to planC) They plan, but don’t want to buy any insuranceD) They plan and they want to buy insurance but I can’t find a

good market

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MY CONTACT INFO:

EMAIL: kamrhein@fisce.com

TWITTER: @fiscetwit

See you next time! And try to have some fun for cryin’out loud!!!!

Thank you for attending!

SUPPLY-CHAIN CONTINGENCY PLANNING:

A Few Small Tips to Get Em’ Thinking and Get It Going!

DESCRIPTION: A shocking percentage of your commercial insureds have little or no supply-chain contingency plan. While not a substitute to the thorough analysis

provided by risk management professionals or other formalized contingency planning resources, this basic document might be just enough to help you get the

insured’s wheels turning (here’s hoping). Good luck and happy planning!

Local Regional

National Global

Intended for use as supplement to: "Not Your Grandpa's Globe: Recognizing and Insuring Supply Chain Interruption

Copyright: FISCE, Inc. 2014

START WITH TWO IMPORTANT LISTS:

FIRST LIST: list all of your primary suppliers/major buyers and where they’re located. Next to each entry, list out the likely exposures that could cause an interruption (Earthquake, Flood, geopolitical climate, loss of internet, etc.)

Important to consider: if you have an extended power or internet outage would it affect your ability to order/receive your supply?

SECOND LIST: list alternative suppliers/major buyers to those in “FIRST LIST” and where they’re located. If it’s likely an alternative is exposed to the same loss as the primary (e.g. located in same city), consider exploring a different option.

How quickly could you engage the alternative and at what additional cost?

REVIEW INSURABILITY:

Are any of the exposures in “FIRST LIST”covered by my current Business Interruption insurance program?

Are any of the exposures that are not currently covered insurable?

REVIEW RISK MANAGEMENT:

Review any purchase agreements you have with your suppliers. Are they under any obligation to indemnify you in the event of a loss/slow down to supply?

Do you have any contractual obligations to buyers? If so, what constitutes a breach (time delay, reduction in product, etc.) and how much will it cost you? Are there exception clauses for any causes of loss?

If you are the seller, does anyone have a contractual obligation to you as a buyer? If so, what happens if they breach due to loss?

Intended for use as supplement to: "Not Your Grandpa's Globe: Recognizing and Insuring Supply Chain Interruption

Copyright: FISCE, Inc. 2014