post from WillisWire
By Steve Higginson
Are you superstitious? I reckon most people are—walking under ladders, black cats crossing the road, the number 13—it’s all about our fear of the unknown.
Contingent Business Interruption (CBI)/Supply Chain exposure is the greatest unknown in the insurable risk transfer business. It has been an insured extension to most Industrial Special Risks insurance contracts for decades, but the impact of globalization on this extension has only really been felt in the last few years.
Identifying, quantifying and then insuring risk is frankly, at best, an inexact science, and trying to actuarially measure this through modeling techniques has proven to be less than accurate, and this applies to risks we think we know and understand.
The risks to the supply chain may be identifiable, but quantifying your exposure to them is very difficult and indeed complicated. This is especially so in the case of unspecified customers and suppliers—how can an underwriter quantify something which is unspecified and therefore completely unknown? The “inexact science” becomes a “punt” and last time I checked, insurance isn’t in the business of punting.
The difficulty in assessing the degree of risk, and exposure to it:
- Manifested itself in the case of the Apache Energy gas explosion at Varanus Island (Apache Energy was a supplier to a supplier).
- Reared its head in Japan after the tsunami/earthquake.
- Showed its ugly face in the catastrophic flooding in Thailand which caused huge unforeseen supply chain disruption.
These serve to illustrate that the CBI/ Supply Chain risks and exposures of today have emerged to become something of a monster – scary and very destructive. Insurance’s equivalent of a werewolf, or a zombie or a vampire! Regrettably, our CBI “werewolf” is no mythical creature but is very real and getting bigger and scarier… watch this space.