How to combat supply chain disruption

Paul Lucas  00:00:00 Hi everyone, welcome to Insurance Business TV as we delve into what has become one of the industry’s hottest topics, namely supply chain risks. There have been so many examples of them in recent years haven’t learned whether it was prompted by the pandemic or even by cyber attacks. We’ve seen businesses hit not because they hadn’t mitigated their own risk, but because the companies they work with from vital supplies and services were impacted instead. So how can this risk be combated? Well, in this edition of Insurance Business TV, we welcome Kevin Nolan, Head of Multinational at The Hartford to explain, Kevin, welcome to Insurance Business TV. 

Kevin Nolan  00:00:46 Thanks Paul. Great to be with you today. 

Paul Lucas  00:00:48 So Kevin, just set the scene for us a little bit explain how companies with global operations are still feeling the effects of supply chain disruption from events that have occurred over the past few years even? 

Kevin Nolan  00:01:01 Absolutely. So maybe it’s best to start with the experience over COVID pandemic. So over COVID, we all obviously felt the effects of supply chain globally, it was top of mind, you couldn’t get services or products that we needed, store shelves were empty. And we really saw global manufacturing dramatically fall. And if you think back to the 1950s manufacturing has been moving more towards just in time inventories where suppliers of raw materials and sub components work with manufacturers to fit very tight timeframes where products are delivered just when the manufacturing needs them. So as a result, manufacturers carry limited inventories. So this helps to reduce costs when suppliers can efficiently meet their needs. But what we saw happened during COVID Was that when disruptions are introduced, it can cause a cascading effect that essentially causes all of those just in time inventory systems to fall apart in a way where their vulnerabilities are highlighted on global stage. And so the learnings coming out of the pandemic were centered around taking a careful look at supply chains and supply chain processes. There’s a lot of talk now about offshoring, or nearshoring, supply chains, to have suppliers close to home, essentially trying to limit that shock volatility from events like the ones we experienced. But you know, in our estimation, that’s a good notion. But in reality, it’s a bit of an impossibility. So if you think about most of the products you buy today, how many countries even have the manufacturing ecosystems to be able to deliver those products just in a single environment. In recent years, China has emerged as having the most complex capabilities for for the most industries. And when you think about supplying products and services across supply chain, the ability to actually shift away from China is really complicated, probably more complicated than people have expected, just due their capacity and how many industries they affect. So what we’re starting to see is this kind of China plus one strategy where companies are moving more of their critical activities close to home, and cutting out some of those multi country handoffs that have been happening with elements of Chinese manufacturing still involved, because, frankly, there has to be. So as a result of that, what you’re seeing is more of that work shifting countries like Indonesia, or Vietnam or Malaysia, and in North America, Mexico, where firms really in complex manufacturing, looking to recreate some of those ecosystems, and nearshoring them in a sense. So it’s interesting, the Federal Reserve Bank in New York put out a report this year that showed the extreme volatility we saw during COVID actually began to settle down over the last 18 months, and in particular costs, volatility, volatility materially stabilized. So that really gives manufacturers some breathing room to start moving forward to more simplified supply chains. 

Paul Lucas  00:03:47 That’s a that’s a fascinating environment, you’ve certainly painted an incredible picture for us. So just tell us a little bit more though about some of the top risks that we need to be considering when building perhaps a plan to combat business interruption. And if you don’t mind as well just tell me some of the things that businesses should consider implementing to help minimize or avoid future business interruptions?  

Kevin Nolan  00:04:08 Sure, so the Institute of Supply Chain Management listed top 10 priorities that they see for supply chains in 2024. And three of them are actually risk related items. So first, it was the cost reduction that I just mentioned. Second is just general risk management. So really understanding the supply chain, the handoffs, the risk within manufacturing, and third nearshoring manufacturing and sourcing. So if you look at the World Economic Forum, they actually cited three supply chain related items in their top 15 and risks that are I think, I think they said most likely to present a material crisis in 2024. So it was disrupted supply chains for critical goods and resources, disrupted supply chains for food and disrupted supply chains for energy. So obviously, these are now Global Concerns given the interconnectivity of everything today. When we start Thinking about insurance programs. What brokers who represent manufacturer should really be talking about and looking to understand as they consult with their clients. There’s really three things. So one, the starting point is understanding your risk. And I mean that in a literal sense in terms of exposure, but also risk tolerance, you know, what are the discrete handoffs in the supply chain? Are their single points of failure? Who are your suppliers? What are the dependencies? How much inventory do you hold to kind of things of that nature? Secondly, it’s do you have the ability to replace a supplier if they have instruction. So when we’re having risk conversations with clients, you’d be surprised how many companies don’t spend a ton of time truly understanding their vulnerabilities. And as a result, don’t have a good handle on some of the exposures presented by their suppliers, who really don’t have the requisite checks and balances in place. So that’s really the starting point. And, you know, insurance is kind of the outcome. But as an industry, you know, we can look to insurers to put policies in place to finance risk, but the most important thing is really understanding the supply chain, those handoffs and your suppliers. And then third, is understanding the cost accounting to value each step of the handoff. And really understanding kind of what balance sheet is going to be impacted in the event of loss or disruption. That’s really the starting point for taking out surprises. So it’s, it’s defining the risk, and then designing an insurance program that’s fit for purpose in terms of how you want it to be financed. 

Paul Lucas  00:06:30 And it’s interesting, because to hear you talk about the different levels of exposure there, because, of course, one size obviously will not fit all when it comes to coverage for every business to address those exposures. But are there any policy features that brokers should focus in on for their clients? Would you say? 

Kevin Nolan  00:06:47 Yeah, I think the most obvious is dependency, particularly when it’s a global operation. And, you know, the domestic and foreign insurance programs might be split with different carriers on the property side, the handoff from one owned operation to another owned operation, something that’s reasonably understood and able to be expressed, you know, to a broker or to an insurance carrier. But one of the most poorly understood aspects of the supply chain is the contingent exposures that are introduced when you have third party suppliers. So either have raw materials or sub components, and being able to define what is dependent versus interdependent exposure is really critical when you think about program structure, and how a business operates. And when it’s a global program. That’s more of a moot point. But again, when there’s split property programs, it’s a critical idea when you think about the idea of a program that’s fit for purpose. It’s really around understanding how financial slow accounting for internal versus external sales, and really making sure there’s an appropriate limit at the location where the true financial impact would be. 

Paul Lucas  00:07:51 And of course, Kevin, The Hartford is very big in the business interruption space as well. So what sets your policies aside, what do you think makes your offer standout? 

Kevin Nolan  00:08:02 Yeah, I think it’s really taking time to understand the needs of the individual client. When we’re talking about business interruption and supply chain risk. It’s not a generic offering, it feels commoditized in the market, but each company has unique characteristics and handoffs within their supply chain. So taking time to understand those before you put a program together is really where the value resides. It shouldn’t be treated as an off the shelf offering. It’s something that needs to be crafted individually as kind of a tripartite arrangement between a broker client and an insurer. And I think that’s what stands out to me the most about the Hartford is we really do try to take the time to work with our broker partners and clients to structure programs that help finance risk in a way that’s intended by our insurance, which is really kind of what we’re there for, at the end of the day. 

Paul Lucas  00:08:52 You spoke about your broker partners, any tips for brokers who are looking to ensure that the businesses that they work with have appropriate levels of coverage in the year ahead? 

Kevin Nolan  00:09:03 Yeah, as I said, I think it really comes back to building a program that’s fit for purpose and taking time to work with clients to really understand their financial model, where the risk resides in the chain. Especially in some more nuanced cases. For more complex clients where it may be a client’s tax department can be involved in opine on where they think the risk is, you know, in those situations that can really help inform and guide how a program is designed to work to meet that client’s needs, then it’s really just breaking down the basics pre loss to understand from a manufacturing perspective, you know, in the event of a disruption, which entity is going to suffer the economic loss. So, you know, that’s not big, dramatic headline grabbing items, but the value and business interruption and ensuring supply chains it is really in the standard blocking and tackling use of football reference. So it’s getting down to the finer points of detail around how a company operates, how they organize their processes, and then really just structuring a program that aligns with those. It’s really that as straightforward as that. 

Paul Lucas  00:10:02 Excellent tips, Kevin, and great to have you with us. Huge thanks for your time today. 

Kevin Nolan  00:10:07 No thanks Paul. I appreciate the opportunity to chat. 

Paul Lucas  00:10:11 And of course if you want more tips and expert guidance from the very best the sector has to offer and just like Kevin Of course, then keep it right here. And Insurance Business TV