On March 11, 2011, the Tohoku region of Japan was struck by a massive earthquake and tsunami that not only devastated a nuclear power plant and wreaked havoc on the island, but caused massive worldwide supply chain disruptions, pointing up the fragility of our interconnected world. The disaster caused an estimated $35 to $40 billion in insured losses and many businesses were not adequately protected, both in terms of insurance and risk management, according to the Insurance Information Institute (I.I.I.).
Our global economy puts more businesses at risk of supply chain disruptions. These don’t begin and end with natural disasters but can include industrial accidents; labor issues (strikes, shortages); production process problems; political upheaval, including war and civil strife; trade disputes; health and safety concerns; credit/cash flow problems; and supplier finances or solvency. It can take two years or more for companies to recover from a supply chain failure, according to the III.
We asked risk management experts from around the industry what they believed were the lessons learned from the Japan quake and what weaknesses still remain.
Click “next” to read their responses.
Tom Teixeira, life sciences practice leader, Willis:
The main lessons learned were that there needs to be a better understanding of the breadth and depth of supply chains, the interdependencies and pinch-points and the related exposures, both from a property damage and non-property damage perspective.
While this is a challenging exercise for many sectors, more consideration needs to be given to the use of technology and existing data sources to provide an early understanding of where the exposures exist and the overall size of those exposures.
Supplier extensions CBI (contingent business interruption) that were taken out against property damage business interruption policies did not provide enough cover for the level of business interruption (BI) experienced from the loss of a key supplier due to property damage.
Companies thought they knew who their key suppliers were, but they got it wrong. They failed to identify the “real” key suppliers and therefore miscalculated the level of BI they were exposed to. In many cases this meant they were not covered for the resulting BI impact. Some of these key suppliers were small companies that manufactured unique electronic components that were used across a number of product lines.
There were a number of instances where supply chain interruption cover for non-property damage perils would have been extremely useful. Many suppliers, while they did not suffer from property damage on their premises, did not receive utilities such as power--due to power station failure--and were therefore unable to get goods out of their premises. However, their customers were not insured for this type of peril.
John Dempsey, managing partner, Dempsey Partners:
According to a survey by Dempsey Partners, a forensic accounting, claims management and risk consulting firm, 55 percent of corporate risk managers and other financial executives feel the insurance industry needs to develop new products to help protect against supply chain risks. Sixty-one percent say they experienced such a loss in the last five years that led to a loss of earnings but only 30 percent recovered the losses with an insurance claim.
There’s plenty of room for improvement in how businesses and their insurance companies approach business interruption, contingent BI and their overall supply chain exposures. With related insurance coverages become more restrictive, businesses clearly need to examine supply chain and BI risk with greater precision and understand the extent and limits of the protection afford by their insurance programs.
Oriol Gaspa Rebull, seismologist for Impact Forecasting, Aon Benfield’s model development centre of excellence:
Tohoku highlighted the technical limitations of catastrophe models and their ability to assess earthquake risk. This in turn triggered new collaborations between scientists and catastrophe modelers to help understand the effects of the earthquake and address the unexpectedly vast variety of research needed to develop an enhanced catastrophe model.
Tsunami modelling, stress transfer and redistribution, time-dependent aftershock modeling and global earthquake clustering are examples of topics that have become more pertinent since the earthquake occurred.
Impact Forecasting is focusing on the modelling of probabilistic earthquake-triggered tsunamis and the implementation of time-dependent aftershock modelling, in collaboration with Aon Benfield Research’s academic partners including GFZ in Potsdam and GNS in New Zealand.
Gary Lynch, global leader, Marsh Risk Consulting’s Supply Chain Risk Management Practice:
From the events of Japan and other recent events—the flooding in Thailand and political unrest in the Middle East, for example—we learned that organizations can no longer simply assume anything when it comes to risk management, especially when third parties such as suppliers or contract manufacturers are involved. We also learned that there is still a lack of transparency within many organizations’ increasingly global, complex and interdependent supply chains; beyond the first tier of suppliers, distributors, and contract manufacturers, many organizations still do not know who contributes to these supply chains.
Post-Japan—and exacerbated by events in Thailand and the Middle East, and by the global economic downturn—many organizations are still managing through the depletion of inventories, destruction of production capabilities, absence or permanent loss of key skills and obliteration of small single or sole source suppliers. These organizations are relocating, repurposing, and rethinking the configuration of their sourcing, production and flow of goods and services. There will be continued economic fallout as trade flows shift among sourcing, producing and consuming nations. But the good news is that organizations are now taking action to better understand their risks and make their organizations more resilient—making greater use of analytics and other metrics, and elevating catastrophic risk management to the C-suite and board level.
Linda Conrad, director of strategic business risk management, Zurich Financial Services:
The world is more global than before, but many companies have not adapted business processes to new emerging risks. In the last few years, firms have made a big effort to contain cost through sole sourcing and maintaining thinner inventory levels. Steps taken to drive cost out of the supply chain can often drive risk in.
Zurich maintains a supply chain disruption data base that we analyze for primary cause, length, financial cost, geography and industry that shows that physical disruption isn’t even among the top 5 causes.
The events in Japan and Thailand are causing people to revisit their supply chain, with risk managers feeling more comfortable with raising this risk issue with CFOs and procurement departments. The result is that, instead of just looking at cost, they’re now recognizing the need to analyze the elements of risk and conduct risk assessments of their suppliers.
We also saw that companies aren’t not looking far enough down the supply chain and thinking about the supplier’s supplier; studies show that more than 40 percent of supply chain disruptions occur below the top-tier supplier.