Takeaway from the Japan disaster

Our thoughts and prayers continue to go out to all of those affected by the recent tragedy of the earthquake and resulting tsunami that hit the country of Japan just a few weeks ago.  The pictures and stories of the lives lost and extensive damage done to entire communities are overwhelming to say the least.

Although it seems trivial given the magnitude of the personal losses involved, there are lessons to be learned from an insurance and risk management perspective that businesses should seriously consider, primarily the issue of supply chain management.  As many businesses in the U.S. and throughout the world are discovering, natural disasters and other losses that occur within their supply chain, regardless of whether they happen on the other side of the world or right down the street, can cause significant losses to their own bottom line.  The flip side of this exposure is also very possible….that is, when a loss occurs “upstream”, with a large customer, a loss of income can occur due to cancelled orders and other business stoppage issues.

So what are some things a business can do?

  1. First, take a close look at their supply chain and identify key components, customers, suppliers, and methods of transportation that, if a loss occurred, could cause harm to their business.
  2.  For each item identified, develop and document a plan of action in the event of a loss by asking critical questions such as, “Are there other suppliers for our needs?”, “Can they meet our quality, price and delivery requirements?”, “How do we get the material here if there is a transportation issue?”, “What do we do if one of our key customers’ plant is shut down?”, and other similar questions.
  3. Review your insurance program and specifically the limits needed for Contingent Business Interruption, which provides coverage for property losses at a customer or supplier that causes the insured company a loss of income.  Also be sure to review the “perils” covered by the Contingent policy, as typically for a loss to be covered, the insured must be buying coverage for the peril that caused the loss at the customer/supplier.  In other words, if a Flood causes a property loss at an insured’s supplier and the insured does not itself buy Flood coverage, the Contingent BI policy will likely not respond.
  4. Consider the need for “supply-chain insurance” products which are starting to become available in the market and may respond even if the insured was not covered for the specific peril involved.

Too often, many companies don’t think of the potential impact that a loss on someone else’s property can have on their business.  Unfortunately many companies are finding that out now due to the significant losses in Japan.  I hope this reminder will urge you to look at your own supply chain risks and take the necessary and prudent steps to protect your business.