Supply chain protection a hot commodity

After the Bangladesh factory tragedy, commercial clients are increasingly looking for insurance protection against business losses caused by their outsourced suppliers. What can you offer them...?

Brokers’ clients are increasingly interested in purchasing contingent business interruption (CBI)  insurance and trade disruption insurance (TDI) following global tragedies such as the Rana Plaza textile manufacturer collapse in Bangladesh, although take-up has not yet matched the interest.

For clients, two chief obstacles to purchasing CBI or TDI insurance include the potential price of the coverage, depending on how much is to be insured, and the very comprehensive process involved in establishing precisely the risks associated with a company’s key suppliers.

“Underwriters don’t absorb the risk just knowing the name of a supplier and the address,” Daniel Galvao of Marsh Canada told Insurance Business. “They need to do a very detailed work in understanding the supply chain and understanding those suppliers to which they are exposed. That takes anywhere between a month to maybe three months, and not a lot of companies have the time to do that.”

But companies may find that the coverage is worth it, following the business interruption that followed the collapse of the Rana Plaza textile manufacturer in Bangladesh. The tragedy killed more than 1,100 people and raised questions about the corporate reputations of North American clothing companies associated with the poor working and building conditions at the factory.

“Both the CBI and TDI could have covered (some of what happened in Bangladesh),” said Galvao, adding that reputational risk, acts of terrorism and nuclear risks are often excluded in such policies. 

CBI covers losses an insured company incurs when a supplier’s business is interrupted. It is typically attached to an insured’s commercial property policy, and suppliers are all named on the policy.

TDI, which is relatively recent, can be bought for specific key suppliers. It is a kind of business interruption coverage but, unlike CBI, it‘s not attached to any other property policy or main policy. It’s a standalone coverage.

Broker clients are increasingly interested in CBI and TDI, because of increasingly interconnected risks associated with the global supply chain.

For example, the tragedy in Bangladesh exposed the risks of subcontracting manufacturing processes by primary (or first-tier) corporate suppliers, according to a recent report by Marsh on the Bangladesh factory collapse. The report found that the factory collapse involved nearly half of the Top 20 risks identified in a survey of North American corporate executives.

Essentially by contracting out manufacturing processes to others, a company is contracting out its reputation as well, the report states. And insurers have been much more careful lately about vetting a company’s suppliers before agreeing to take on the risk of a CBI or TDI policy.

Marsh’s report talks about managing a number of risks, including supply chain risks, in the aftermath of the Bangladesh factory collapse. One of the major risks is a flawed auditing process.

“The tragedy in Bangladesh exposed a number of problems associated with this [subcontracting to second-tier suppliers] model, such as the flawed factory auditing framework (where first-tier suppliers often neglect to do audits unless explicitly requested to do so by the retailer) and the inherent tension between retailers and their suppliers over compliance enforcement and supplier liability,” the report says.

“These divisions and overall lack of connection between the retailer and its critical second-tier suppliers present major vulnerabilities, as an organization could easily be blindsided by even a small business interruption or reputational disruption.”

The report recommends that retailers should be seeking out more personal connections with its suppliers. This will facilitate the underwriting process for CBI and TDI insurance, since the insured retailer will be able to provide detail requested by the insurance underwriter.

Keep up with the latest news and events

Join our mailing list, it’s free!