If a ship blocks the transport of goods or political riots impede the production of components or a volcanic ash cloud paralyses the European air traffic without any damage at the supplier’s site, standard business interruption insurance will not pay.

The March 2011 tsunami in Japan was another dramatic event that made clear the importance of supply chain risks. It is a risk that looks set to grow and grow in the coming years. Risk managers have to prepare and take appropriate measures to combat the threat.

“I think that supply chain risks have been totally underestimated. Even large companies, which have established a satisfactory risk management programme, have been affected,” said Stefan Nill, member of the executive board of Dortmund-based broker Leue & Nill. “They did not know their supply chain risks as well as smaller companies and did not know how severely they would be affected by this standstill of business.”

Some industrial insurers believe that risk managers still neglect the dangers of supply chain risks. “Companies do not pay enough attention to risk assessment of their supply chains,” said Zurich board member Christoph Willi.

His opinion is backed up by a recent survey conducted by the insurer and the University of Manchester. They interviewed 2,400 companies that had recently suffered a supply chain interruption and 41% said that they are not closely examining likely interruptions.

The consequences of not doing so can be severe. “The longer a business interruption lasts, the more expensive it gets for companies,” said Mr Willi. 20% of the companies in Zurich’s survey suffered some form of supply chain interruption lasting more than nine months.

“The result doesn’t have to be a complete black-out of production, but these interruptions may lead to considerable extra expenses or a drop of earnings in one product line,” said Mr Willi. As a result, the company’s share price may decline and it may suffer damage to its reputation. In the case of such events companies run the danger that their clients will move to a competitor.

58% of the companies in the survey had suffered costs exceeding $10m due to interruption of the supply chain. “For a big company like Daimler this may not be a high sum, but for a medium-sized enterprise the earnings for several years may be gone,” Mr Willi explained.

A proper risk assessment is the first step a company should take, said Hendrik Löffler, Managing Director of risk consultancy Funk RMCE, part of broker Funk.

“The risk manager should know and analyse all the risks along the supply chain in detail,” he said. “Many companies analyse their main suppliers regarding solvability and other risks, but forget that their production depends on one small special producer who is the only one able to deliver special components,” Mr Löffler said. “It is necessary to consider the whole value added chain.”

Weak points identified by this procedure can be countered by enlarging storage capacity instead of relying on just-in-time delivery, or by abandoning single sourcing policies.

In many industries companies get discounts when they obtain all goods from a single supplier, but this may not be a wise move. “When a company only has one supplier for a specific item, it has to see if there is another from whom it can get the things it needs,” said Zurich’s Mr Willi.

However, lots of companies fail to do this. “The risk awareness is there, but it often lacks communication between the risk management and the purchasing department,” said Rüdiger Auras, Underwriting Expert at Zurich.

Björn Müller, Managing Director of Lloyd’s Register Quality Assurance Germany (LRQA), agrees. “Many companies make it look as if they care for supply chain risks but are internally not ready for that,” Mr Müller said. “Companies are demanding that insurers be innovative. When the insurers try this, then the companies have to do their part and provide for proper risk management.”

But Philipp Andreae, Managing Director of DVS, argued that even small companies often carry out intense risk assessment of supply chains. “Germany would not be export world champion if its producers were not reliable,” he said.

Currently Zurich is busy carrying out risk assessment at about a hundred companies to which it is looking to sell its new business interruption policy. German risk managers have complained heavily about the lack of policies in the market that cover interruptions without a preceding property loss.

Besides Zurich, Allianz is working on such a concept. “We are still in the development process and are having talks with our clients about the conditions of the policy,” said Annika Schünemann, spokeswoman of Allianz’ industrial insurer AGCS.

A couple of niche players have also brought such policies to the market. Broker Willis has developed a special product for medium-sized suppliers from the motor industry and insurer ACE provides a policy for aviation risks.

Although many risk managers and companies called for such cover in the aftermath of the volcanic eruption in April 2010, few companies have decided to buy such a policy.

“Generally I appreciate that the insurance industry is reacting to the problem of supply chain disruption without preceding property loss,” said Mathieas Kohl, Head of Corporate Insurance at Lübeck-based Drägerwerk, an international producer of medical and safety technology.

“The problem is that insurers are still lacking underwriting experiences in this field. It is difficult for them to calculate the premiums, that is why rates are still too high compared with the covered amount,” he added.

Mr Schindewolf of Daimler Insurance Service also supports the development of these new policies. “But it will take some more time until the providers have brought a sustainable concept on the market,” he said.

In his opinion one of the reasons for the slow development of new insurance covers for supply chain risks is anxious underwriters. “There are too many people taking part in the developing process who all want to avoid mistakes,” he said. “But I think if an insurer works on such a policy, more sense of proportion and entrepreneurial courage is needed.”

Mr Kohl criticised the construction of the Zurich policy that is based on two pillars—a risk analysis and an insurance cover. In the analysis the insurer works in cooperation with clients to explore all potential risks in a company’s supply chain. “This risk analysis is not especially extensive,” he said. “Our company is already at a more advanced stage.” The same is true for most other large companies, believes Mr Kohl. “The mere insurance cover is then much too expensive.”

According to Mr Schindewolf there is another problem. “The insurers have unrealistic ideas of transparency,” he said. “To analyse all levels of suppliers, which are highly interdependent, is for a large company like ours almost impossible.”

To inform the insurer once every three months about new suppliers, a new risk or new clients is difficult even for large companies to execute, he said.

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