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Business interruption – an invisible threat that causes very visible losses…

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Hurricane Sandy

Allianz Global Corporate & Specialty (AGCS) Report

Key messages:

  • Natural disasters such as Hurricane Sandy have demonstrated how vulnerable global, streamlined supply chains have become.
  • Insurance will cover most of the financial losses within the indemnity period but does not take into account a long-term loss of market share or decline in investors’ confidence.
  • Companies must mitigate supply chain risks to return to normal business as soon as possible after a disruption. To increase resiliency companies should consider adding back some redundancy into streamlined supply chains.
  • AGCS has seen a new dimension of business interruption and contingent business interruption related losses since 2011. Due to the economic interconnectedness a supplier failure can have domino-effects on global industries. One disaster can hit numerous companies. Calculating the accumulation of risk is a lot more detailed than it used to be for insurers.
  • For example: the Thailand flooding one year ago reduced hard drive production by 30% that quarter as 45% of the world’s hard drive production is clustered in Thailand.

Paul Carter, Global Head of Risk Consulting at AGCS comments:

“The very flexibility that provides a modern supply chain with its cost advantages has also caused its inherent vulnerability. Today, companies are increasingly re-examining the trade-off between efficiency and operational redundancy. To improve supply chain resilience companies should consider adding back some redundancy into lean supply chains, even if this reversal of widely used single-supplier sourcing incurs additional costs. Redundancy is expensive, but no redundancy plan can be even more expensive.”

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