Japanese supply problems put business interruption covers under the spotlight

South African businesses dealing with Japanese suppliers or with third party suppliers dependant on Japanese sources can mitigate their risk by scrutinising their business interruption covers in the wake of the tsunami says risk management and insurance broker, Aon South Africa.

Such caution should be seen in light of the fact that even before the tsunami, insurers were applying stricter underwriting measures to extensions offered with business interruption policies, for events occurring at the premises of suppliers or customers points out Kim Oosthuizen of Aon.

“As a result, insurers have applied lower limits for some time now, cover is often activated after a certain time period and generally insurers have become far more careful about granting cover, all of which suggests the need for local businesses to urgently assess the adequacy of their current business interruption covers.

“This is particularly so if there is the possibility that the loss of supply from a Japanese company impacts other clients of your insurer, therefore increasing the insurer’s risk.

“A simple example would be where a Japanese supplier of components to a local manufacturer halts his production due to the tsunami damage.

The period of time over which this might occur and the gravity of the problem would differ depending on accumulated stock levels at both the supplier and local manufacturer, the duration of the interruption to the supplier’s business and the local manufacturer’s ability to source elsewhere.

“Where there is a large number of suppliers, the manufacturer is less likely to have a problem. He will merely buy from the others. However, where there is, for example, a duopoly – two suppliers – and one suffers a serious interruption because of the tsunami damage, the other may not be able to cope with the demand.

“Also, while foreign markets may be accessed, that usually implies higher cost. With correctly scoped Suppliers Extension cover in place, this additional cost would be covered. On the other hand if no alternative source of supply can be found, the local manufacturer may well be unable to produce and in this instance as well, the resultant loss of sales could be insured by the suppliers extension cover.

In a worst case scenario a company could go out of business as a result of an occurrence which was beyond its control. It’s important, therefore, for businesses that are reliant on others for the supply of critical stocks to address, as a matter of urgency, the potential risk associated with their suppliers and if possible, the suppliers of their suppliers, all the way along the supply chain and to implement an effective business continuity plan which would help to mitigate risks that cannot be insured.”