Contingent Business Interruption Risk Coverage

Natural disasters across the Globe in 2011 (the Japan Tsunami in March last year, and the Thailand Floods from July to December) have had a far-reaching and lasting impact on businesses small and large world-wide, particularly computer companies for whom Japan and Thailand-based component manufacturers and exporters serve as vital links in their supply chains.

The negative effect of these disasters (on business) has also created a hardening in the attitude of reinsurers who now seek much more detailed information on clients’ suppliers, before agreeing to provide catastrophe insurance cover. The insurance market is now insisting upon greater transparency.

The approach of Europe’s biggest and perhaps best-known reinsurers to catastrophe cover, Munich Re and Swiss Re are being reported in the financial press as hardening. In addition to raising prices for catastrophe insurance cover, reinsurers are setting an 18-month deadline on risks being quantified in detail by clients.

How it works…
A large manufacturing company will have any number of direct or indirect suppliers which represent a critical exposure to the business. Until now, insurance could be bought for all such suppliers without declaring each by individual location.

However, where a group of suppliers supplying a specific industry sector cluster in a certain geographic region, the impact of a natural catastrophe in that area can seriously damage the profitability of the sector. Where re-insurers have a large book of nat cat business in such a sector, the accumulated impact on their balance sheet can be significant. The pain is particularly acute where the suppliers have not been named (prior to the event) and re-insurers have large, unquantified accumulations.

How SCAIR can help take the pressure off
If you are concerned about the effect this hardening of attitude from reinsurers could have on your business, the discipline promoted by SCAIR is your best option when it comes to softening that impact..

The SCAIR tool (see product details here) can lead your company to identify and understand your supply chain exposures in greater detail, thus enabling you to “tick re-insurers’ boxes”, to continue to buy the insurance coverage that you currently enjoy, in the most cost-effective way.

The big advantage of SCAIR (over other supply chain tools) is that it enables you to identify exposures and to quantify them for a range of different scenarios from physical damage, such as fire, earthquake and flood to non-physical damage, such as supplier insolvency and regulatory shutdown – quickly, effectively and affordably.

The tsunami in Japan in March this year caused a dreadful loss of life and unquantifiable human suffering. It also damaged the country’s economy and its industrial base. The full impact (in a broader, global sense), is more difficult to assess.

Five months on, has the predicted disruption to global supply chains (caused by the tsunami) really been as bad as initially forecasted? Or has it been ‘business as usual’ for the most part world-wide?

It all really depends upon just how much of a global ‘driving force’ Japan was at the time of the tsunami – how much sway Japan had on the world economy in the first place.

About Japanese car and steel production

The truth is that at the time of the disaster Japanese influence upon global supply chains overall was not as strong as one would think¹, given the nation’s track record and reputation for being incredibly work-orientated, seemingly industrious to an almost inexhaustible level!

Granted, interruptions to Japanese car and steel production have, to an extent, impacted upon global supply chains, but this hardly constitutes a severe body blow to the world economy. In fact, the disruption to Japanese supply chains (for steel products and cars) may serve to create opportunities for suppliers in America, Europe and indeed other parts of Asia².

What about the electronics industry?

Almost one fifth of all global technology products are made in Japan. And although some major importers of electronic products and components have other suppliers primed to ‘step in’ should their Japanese supply chain suddenly be interrupted, those without a good continuity plan have felt the frighteningly far-reaching effect of the tsunami. Significant supply chain interruptions were caused by the closure of several major Japanese ports and the temporarily closure one of the few silicon wafer foundries.

As a result of delays in the arrival from Japan of electronic components (semiconductors, silicon wafers and memory chips) and goods (digital cameras, music devices, laptops and televisions, etc)², some manufacturers’ and retailers’ reputations across the Globe have been eroded, their sales have significantly dropped (with their profits plummeting in tandem, of course), and perhaps worst of all, once loyal customers are now buying their ‘must have’ video games, digital cameras, iPads, and widescreen TVs, etc., elsewhere.  Never to return?

Sony’s Troubles Mount
The natural disaster hit Sony hard in an already declining market and a period of unfavourable exchange rates. Sony’s Q1 results reported costs totalling $66m for restoration, loss of inventory and production downtime⁴. Additionally, Sony’s CPS and PDS segments saw a drop in sales due to the restricted availability of some components for certain product lines and decreased production capacity due to damaged manufacturing equipment.

Further supply chain problems were experienced in the UK on 8^th August when Sony’s compact discs and DVDs warehouse in Enfield was burnt down during the UK riots. The warehouse was reported to be Sony’s only content products depot in the UK⁵. This certainly isn’t a good time for Sony, which is still reeling from the Play Station cyber-attacks that shut down parts of their network from April until July 2011.

References/Sources

^1&2 Movehut / The Impact of the Japanese Tsunami

³ Freightwatch / Japan Earthquake and Tsunami and the Impact on the Electronics Supply Chain Industry

⁴ http://www.sony.net/SonyInfo/IR/financial/fr/11q1_sony.pdf

⁵ http://www.theregister.co.uk/2011/08/09/sony_warehouse_london_riots/