Mitigating Supply Chain Risks with Insurance Solutions

Natural disasters, price hikes, cyber crises, and transportation failures – these are just a few supply chain risks that businesses face. A single point of failure in a supply chain can snowball into a financial catastrophe. Because of this, businesses strive to create adaptable, comprehensive risk management strategies.

Let’s go over supply chain disruptions, how to mitigate them, and the importance of business insurance.

Understanding Supply Chain Risks

Natural disasters

Exposure to natural disasters can result in a supply chain interruption. Floods, earthquakes, wildfires, and severe winds can damage or destroy production facilities. Transportation networks can fall apart. In recent years, increased extreme weather events have caused alarming structural damage and financial losses. Businesses and suppliers should anticipate possible disruptions to their routes due to local natural disasters.

Geopolitical issues

Geopolitical issues can hinder a supplier’s ability to provide you with materials and labor. For example, global or regional tensions can lead to economic sanctions, war, political unrest, and changes in government policies. Political relationships can quickly grow more complex, which often means businesses need to seek out adaptations and alternatives.

To mitigate the effects of geopolitical issues on the supply chain, companies can benefit from connecting with additional onshore and offshore supplier options. In case of disruption due to political tensions or foreign government policies, businesses with viable supply alternatives can recover more easily and quickly.

Cyberattacks

Cyber crimes that target businesses can cause widespread damage, especially if your business is not prepared for crisis management or data recovery. Disruptive types of malicious cyber incidents include:

DDoS attacks: Distributed Denial of Service attacks can bring down business operations by disrupting normal traffic to your networks.

Data breach: Data breaches can cause customer and stakeholder panic. If sensitive data has been stolen or manipulated, businesses need to alert affected parties, conduct digital investigations, and potentially pay ransoms. Businesses may not be able to operate as normal.

Ransomware: Malicious entities often hold data and systems hostage using ransomware. This type of software blocks your access to your computer system until you agree to the cyber criminal’s demands.

Companies that use technology that handles sensitive data should review system access, spread cybersecurity awareness, and keep security software updated. Review what information you exchange with your supplier to strengthen your cybersecurity measures and readiness to deal with cyber incidents that might hurt your business.

Examples of high-profile supply chain failures

In 2007, Boeing suffered from an aviation fastener shortage. This led to showing off a subpar Dreamliner during the first unveiling. Inadequate supply chain management led to widespread disappointment and doubt.

In 2005, Hurricane Katrina devastated businesses that sourced supplies from the Gulf of Mexico. Because organizations did not prepare for the hurricane season, countless businesses had their operations disrupted by this natural disaster. It is estimated that Hurricane Katrina cost businesses between $5 to $9 billion.

Impact of supply chain risks on business health and operations

Both external and internal factors can negatively impact a supplier’s performance. When a supplier fails to meet your requirements for them, this can severely disrupt your business operations. In many cases, customers and stakeholders will blame the business instead of the supplier, which can cause more losses down the line. Not only might businesses take a long time to recover their operations, but they may also need to shell out millions of dollars in an effort to do so. Not all businesses can survive a supply chain problem that spirals out of control.

The Role of Insurance in Mitigating Supply Chain Risks

Supply chain insurance serves to cover expenses related to supply chain interruptions. The coverage can help businesses recover from the potential financial devastation from disruptions. In general, business interruption insurance is offered as an insurance add-on to other policies, and you may need a tailored policy to satisfy the insurance needs of your business.

Let’s discuss the supply chain insurance coverage available.

Types of supply chain insurance coverage

Many types of supply chain insurance products exist, with coverage options and policy restrictions depending on your chosen insurance provider.

Contingent business interruption insurance: Good for small businesses, contingent business interruption insurance covers expenses in case your business loses significant revenue due to a key supplier, partner, or customer shutting down. If your business mainly uses a single supplier, contingent business interruption coverage can be extremely valuable in keeping your business afloat.

Cargo insurance: Specifically protects your cargo during land, sea, and air transportation. If your business needs to ship around any valuable goods, cargo insurance can provide you with significant financial protection. Cargo insurance typically covers theft, vandalism, and acts of nature. Be careful to choose a coverage limit that adequately protects your goods since often, businesses transport cargo with values exceeding the insurance limits.

Trade disruption insurance: If your supplies fail to arrive due to foreign government policy changes or actions, trade disruption insurance coverage can help your business recuperate from losses.

Business income insurance: This helps businesses with ongoing expenses and lost income if a covered peril forces your business to close. Payroll, rent, taxes, and operating expenses may be covered.

Extra expense insurance: Operating costs such as overtime, rent, and relocation expenses may be covered by this type of business interruption coverage.

Civil authority insurance: If your business is forced to close or incurs losses due to a government-mandated policy or limitation, civil authority coverage can help cover your damages.

Benefits of Supply Chain Insurance

Protecting against financial losses

Any interruptions to the supply chain link can result in over $80 million in annual losses to the average enterprise-level organization. If your business predominantly uses one supplier, any interruptions to their operations can lead to serious revenue loss on your business’ part.

Business interruption insurance can give your business room to breathe during the business interruption period. Typical coverage extends to 30 days, but purchasing an insurance endorsement can extend your policy to 360 days.

Ensuring business continuity and reputation management

The inability to continue with regular business operations can hurt a company’s reputation. The reason behind supply chain issues and your business’ public relations can play vital roles in how your customer base will see your business after a supply chain disruption.

However, at the end of the day, disrupted business is disrupted business. Insurance can help you regain your foothold in your industry by providing you with much-needed business continuity assistance. Supply chain insurance can help businesses recover more easily and quickly from vulnerabilities and interruptions.

Providing peace of mind for businesses and stakeholders

Knowing that your organization has insurance coverage can make a big difference in alleviating the concerns of those within and working with your business. Stakeholders may ask you to show proof of insurance for business interruptions and supply chain issues. Other businesses that depend on your organization can also be reassured through a certificate of supply chain insurance.

Sourcing Business Insurance

Assessing the specific risks in your supply chain

Numerous factors influence your level of supply chain risks. If there are specific risks that are more likely to impact your business’ supply chain, it’s important to procure business insurance that covers this type of peril.

Researching insurance providers and coverage options

It’s important to research your supply chain insurance policy options before making a decision. Keep in mind the following factors when picking between insurers.

Premium: Businesses often pay hundreds of dollars each month for various commercial insurance policies. You can use insurance quoting services to quickly and conveniently compare quotes. In general, business interruption insurance premiums cost between $50 and $130 a month for smaller businesses. Premiums will depend on how comprehensive the coverage is and your desired coverage limit.

Coverage limit: The coverage limit refers to the maximum amount that the insurer will pay toward an eligible business interruption insurance claim. Insurance coverage limits for business interruption insurance can go up to $125 million. Take into account your company’s gross earnings and revenue projections, as well as supply chain risks, when deciding how much coverage you need.

Deductible: Business interruption insurance policies may have a “waiting period deductible”. This means that the policy will not provide coverage for losses caused by civil authority orders until this waiting period is over.

Insurer reputation and financial stability: Your insurance provider should have a sufficient financial stability rating and good customer reviews. Testimonials and reviews can give you more insight into whether an insurance carrier offers reliable supply chain insurance.

Exclusions and conditions: Many supply chain insurance policies and add-ons do not provide reimbursements if your business loss is due to a pandemic. Since viruses and bacteria are typically excluded, even from comprehensive policies, it’s a good idea to be aware of this insurance gap when devising your risk management strategy. Floods and earthquakes may also require you to purchase a separate policy or endorsement.

Evaluating the cost-effectiveness of different insurance solutions

Commercial insurance comes in many forms. Popular business insurance coverage that benefits businesses include:

• General liability
• Property
• Commercial auto
• Cyber insurance
• Business interruption
• Commercial umbrella
• Product liability
• Workers’ compensation
• Errors and omissions

Consider which factors pose the greatest financial and reputational risks to your company. For example, if your company handles plenty of sensitive customer data (e.g. Social Security numbers, financial information, or medical records), it may make the most sense to prioritize cyber insurance. If your business has a high risk of vehicular accidents due to using commercial vehicles, you might want commercial auto insurance to secure your assets.

Insurance solutions serve to protect business continuity and prevent a single point of failure from causing cataclysmic financial damages. For most businesses, it is highly recommended to obtain insurance products that are relevant to their industry and operations.

Working with insurance brokers or consultants to tailor coverage

The best insurance providers and brokers can help you tailor your business insurance policy to the specific needs and challenges of your business. Here are some of the top companies that can assist your business in securing tailored insurance solutions.

• Next Insurance
• The Hartford
• Tivly
• Simply Business

Best Practices for Implementing Supply Chain Insurance

Integrating insurance into overall risk management strategies

Every business should have a comprehensive set of risk management strategies, including a section on how to deal with supply chain problems. Risk management doesn’t only involve preventing issues, but also reducing their negative impact. Many factors and exposure to risks are out of a business’ control or simply a part of doing business.

Regularly reviewing and updating insurance coverage to adapt to changing risks

Risks change over time. Businesses that depend on supply chains should keep an observant eye on relevant geopolitical tensions, cyber crime developments, and supply-side trends. Make necessary adaptations as needed.

Collaborating with suppliers and partners

It’s a good idea to ensure comprehensive coverage across the supply chain. A single failure in the supply chain is like a broken cog in a wheel or the spark that lights a chain reaction. Check with your suppliers to see what risk management plans and insurance they have.

Summary

Risk management and insurance coverage work together to provide a stronger foundation and safety net for businesses. Business interruption and supply chain insurance can provide valuable financial assistance in case of:

• Fires and vandalism destroying your supplier’s modes of transport and warehouses
• Cyber attacks interrupting your operations
• Extra expenses incurred due to a business interruption, such as rent, overtime, relocation, business loan payments, and training costs

With how devastating supply chain risks can be, businesses should implement risk mitigation strategies for smoother business continuity. Explore and invest in supply chain insurance to protect your business today.

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