CRE: Risk management, not transfer, is key to supply chain problems, say experts

01 June 2012

Experts at an insurance congress argued that front-end risk management is key to mitigating exposures, as the insurance industry continues to struggle to deliver fit-for-purpose and cost-effective cover with high enough limits for supply chain risks, particularly contingent business interruption.

The lack of affordable non-physical damage business interruption insurance is hugely problematical for insurance buyers, and solving the issue through the provision of better information and data is not proving easy, they added.

In order to help deliver that information to insurers and secure a better grip on supply chain exposures, risk managers at large companies must better educate their own organisations on supplier risk, delegates were told. They must also help their suppliers, often SMEs with limited risk management capabilities, to improve their risk management standards.

There has been growing criticism from insurance buyers that cover for business interruption is not up to scratch, is too costly and lacks suitable limits.

The risk transfer industry has said that it needs more information from risk managers to continue to cover the risk as they do today, let alone deliver more capital for the much demanded non-physical damage transfer option.

For the time being, and even if a solution is found to bolster current transfer options, it appears risk management of supply chain risk is the best mitigation option. "Supply chains today are more and more sophisticated and often not well understood by both the insurer and the insured", said Cedric Lenoire, Manager, Business Risk Consulting at mutual insurer, FM Global. “This makes things more complicated from an insurer’s point of view and very hard to understand and quantify. The reason why insurers charge a lot for supply chain cover is that we do not fully understand the exposure”, he added.” In agreement with the rest of the panel, he argued that a pure risk transfer solution to supply chain risk is not the right answer.

Carl Leeman, President of IFRIMA and Risk Manager for Katoen Natie, said the good news for risk managers is that managing supply chain risk is in their own hands. “Good risk management will have a much bigger impact on your supply chain risk than insurance. So if you have no insurance but good risk management I think you are much better off than having lousy risk management and great insurance coverage”, he argued.

The panel agreed that because most companies’ supply chain risk landscapes are constantly evolving it is crucial that risk managers and business continuity managers reassess their supply chain risks every six months.

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