Today’s globalised, interconnected business landscape means companies are often hinged on complex supply chains.
But businesses are only just waking up to the reality of supply chain disruption as a result of geopolitical and environmental factors, according to the chief executive of a risk management firm.
“Organisations are just beginning to think about [geopolitical and environmental risk] broadly in the context of third parties. The reality is, no business is an island and they have suppliers, service providers and public infrastructures they depend on,” David Nolan, founder and CEO of Fusion Risk Management, told Insurance Business.
While it’s a risk that is coming to the forefront, many organisations lack an in-depth understanding of the complex and often global factors that can be at play in even a relatively simple supply chain.
“A lot of companies don’t understand that products and services may be coming through areas that aren’t stable, or through areas that are more vulnerable to weather-related events,” Nolan said.
“As people think more broadly, those categories become more concerning, and the likelihood of an event dramatically increases if all suppliers are in scope. The reality that something will hit, somewhere in my supply chain, either within my organisation or out through to my suppliers or their suppliers, becomes not a possibility but a probability,” he said.
Payouts from trade credit insurers to UK businesses hit a nine-year high last year, according to data published by the Association of British Insurers (ABI) last month.
In the first quarter of 2018, the number of new trade credit insurance claims lodged was up by 50% on the previous quarter as the insolvency of Carillion hit, ABI data showed. The association’s assistant director and head of property, commercial and specialist lines, pointed to the collapse of the British construction firm as highlighting the current strain on supply chains.
“This is a tough time to be in business and it is not getting any easier,” commented Mark Shepherd. “The collapse of Carillion was one of a number of high-profile major insolvencies, which dramatically highlighted how the ripple effect of a company failure can have a devastating impact throughout the supply chain.”
According to Nolan, the risks around business disruption arising from third-parties are beginning to be elevated to the senior echelons of businesses.
“I think the phase we are in now is the realisation that every organisation is going to have to manage through a disruption, whether it’s a cyber disruption, a terror disruption or an act of God, and I think that’s really what’s elevating this area of risk into the C-suite.”