Unpredictability – the new normal

Business resilience is the key issue firms are grappling with when faced with increasingly large & unpredictable business interruption & supply chain risks. How resilient is your business if the worst happens? Whether it’s a flood on the other side of the world, a fire at a supplier’s premises or a major cyber-attack, business interruption claims can stop a business in its tracks. As companies become more reliant on technology & global supply chains, they have become more vulnerable to disruption, which can threaten their very existence.

From a global perspective, natural catastrophes have emerged as a key driver of business interruption losses. According to the World Economic Forum, disruptions to the production & delivery of goods & services due to environmental disasters have increased by nearly a third since 2012 – reflecting the impact of climate change & global supply chains.

The growing importance of intangible assets is also a key issue. An incident can damage or disrupt the use of an intangible asset, such as data, intellectual property or a company’s brand, but such damage is hard to quantify & insurance cover not always clear. Cyber is a significant exposure – businesses are increasingly dependent on technology & data, which are susceptible to human error, technical flaws & security issues.

Increasing levels of dependency are also becoming a factor. Supply chains are increasingly complex & concentrated. This is particularly evident is some areas of manufacturing – for example cars, where around 30,000 individual parts from thousands of suppliers are used to build a single car. A fire at a US magnesium plant in 2018, for example, disrupted the operations of five different manufacturers – the parts were so specialised the firms did not have effective back-up options.

Maintaining supply chains is becoming more challenging in today’s unpredictable political environment. Tensions in the Middle East & Asia threaten key trade routes, with tankers & container ships being attacked, but closer to home, Brexit has huge implications for UK/EU cross border supply chains. Many UK firms are maintaining stockpiles of key supplies, whilst lengthy delays at UK ports will affect the delivery of components & production capacity.

Problems can be quick to arise, but it takes longer for businesses & supply chains to recover. Longer periods of disruption are evident in business interruption claims where periods of indemnity now commonly need to be 24 or 36 months, up from the more standard 12 months we have seen historically.

As supply chains have become more important, firms have been investing in risk management, supply chain management, business continuity planning & crisis management. Despite this, business interruption incidents continue to happen & many organisations struggle to recover. Too often business continuity plans reveal serious shortcomings – many firms do not have a written business continuity plan &, even if one is in place, it may not have been tested. The number & complexity of business interruption & supply chain incidents suggest that firms need to do more to improve their resilience. Business continuity planning is important, but wider business resilience with a focus on risk management & “what-if” thinking is needed if businesses are to prosper in an increasingly unpredictable & volatile world.

By Beverly Brown FCII, Chartered Insurance BrokerGroup Broking Director

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