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How to Mitigate Supply Chain Risk: Cover Your Second-Tier Suppliers

As supply chains increasingly extend across regional and continental borders and manufacturers become dependent on other firms to provide components of their end products, companies need to protect their operations, systems, and lines of production. Extended supply chains create more opportunity for disruption and, therefore, increase the potential for financial loss. Given that reality, companies must actively consider disruptions from their second-tier suppliers when evaluating risk and exploring what insurance tools are available to mitigate unintended consequences.

Although this type of insurance coverage may have seemed less necessary a decade ago, extreme weather events in the past few years have highlighted the growing need as disruptions at the second-tier supplier level delayed or terminated the production process and left manufacturers unable to meet demand.

We probably all remember the major weather catastrophes in 2011: Car and computer hardware manufacturers suffered from the repercussions when the earthquake and tsunami interrupted microchip production in Japan. Thailand and Australia experienced extensive flooding. Mexico and parts of the United States endured severe drought. Weather-related catastrophes made that year the costliest ever in terms of catastrophe losses, totaling about $380 billion, according to Munich Re. Such events highlight how secondary dependencies can affect primary relationships.

At ISO, we listened to our customers’ needs for a more comprehensive coverage plan and rolled out a revised Dependent Property Coverage endorsement as part of our Business Income program. Recognizing that even a slight disruption to a second-tier supplier can have serious adverse effects on a company’s operations and financial results, the DPC model addresses the need for coverage that encompasses all points in the supply chain, right down to the second-tier suppliers. The more robust coverage plan is valuable in mitigating supply chain risk and helping to navigate unexpected bumps along the path to profitability.

Stephen C. Clarke

Stephen C. Clarke, CPCU, is assistant vice president of ISO's Government Relations Division, responsible for ISO's interaction with government agencies on product filings and other regulatory matters. Steve has more than 30 years of experience in the industry, encompassing regulatory affairs, compliance, operations, and product development. Steve is also an adjunct instructor at St. John's University School of Risk Management.

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