Supply chain losses from 2011 disasters ‘very unclear’: Aon Benfield exec

Calculating contingent business interruption losses from catastrophes can be difficult, and in order to do this, commercial policyholders need to know where their suppliers and customers are located and what risks they face in those locations, an official with Aon Benfield suggested Tuesday.

Over the last 20 years, there has been an “exponential increase” in losses from catastrophes, while at the same time, companies are becoming more dependent on just-in-time production and offshore suppliers, suggested Paul Cutbush, senior vice president at Aon Benfield Analytics in Toronto, during the Insurance Brokers of Toronto Region (IBTR) luncheon.

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Business interruption insurance usually covers loss of income caused by direct damage from an insured peril at the insured’s premise, Cutbush noted during his presentation, titled How Global Catastrophe Risks Affect The Supply Chain.

He suggested that contingent business interruption covers loss of income due to direct damage to a supplier or customer, but normally those customers and suppliers have to be named in the policies.

“You have to know where your suppliers and where your customers are located and have an idea where the exposure is,” he told a room full of brokers at the Le Parc banquet hall in Markham, north of Toronto.

Manufacturers tend to rely more on just-in-time production today than they did 20 years ago, he noted.

“You could actually produce something in Arkansas and have it installed in a BMW in Germany five days later,” he said. “Now we are seeing key elements produced offshore.”

Cutbush suggested in two disasters in 2011, total losses due to breakdowns in the supply chain were difficult to calculate.

He cited several statistics from the Tohoku earthquake, which occurred March 11, 2011 off the coast of Japan, caused a tsunami and killed more than 16,000.

Insured losses from that tragedy were about $36.2 billion, Cutbush said.

“We will never be able to find out exactly what the supply chain loss was, but ultimately the range was between $5 billion and $15 billion,” he said, adding many automobile and electronics firms were affected.

Hitachi, for example, operated a factory in Japan that produced 60% of the airflow sensors of all cars in the world, Cutbush recounted.

Also in 2011, floods in Thailand affected about 1,000 industrial facilities north of Bangkok.

Those floods caused about $43 billion in economic losses and about $16 billion in insured losses, Cutbush reported.

 “It’s very unclear what the supply chain loss was,” Cutbush added. “Up until this event, we thought of Thailand as being wonderful beaches, gorgeous Buddhist temples and places people go to backpack, but two things that really stood out at the time of the floods was how industrialized Thailand was and (the amount of) automobiles, electronics and computer products that actually come from Thailand.”

After the Second World War, Cutbush noted, the area on the coast north of Bangkok “was principally rice paddies.”

But during the 1960s, Honda built a facility in that area. In its annual report for 2011-12, Honda noted its unit sales were 10.7% lower than in 2010-11, and the “primary reason” was shutdowns caused by the Tohoku earthquake and floods in Thailand.

In Thailand in 2011, about 430 multinational industrial facilities were under two metres or more of water for up to two months, Cutbush recounted, adding 43% of all hard drives made for all computers in the world were produced in that area.

Also in that area, there were about 570 “sub-tier manufacturers,” some of whom produced components that were “ultimately” used in computers, but not necessarily named in contingent business interruption policies.

“Contingent business interruption policies normally require that first-tier suppliers and end customers are listed in the policy,” Cutbush said. “If you are in an area like Thailand, there’s a good possibility (sub-tier suppliers) are not listed. This started making people think, ‘Oh my gosh, we better start thinking about this.'”