Sandy: Global supply chains turned out to be the Achilles heel of global economy
Hurricane Sandy brought life in New York to a standstill. Sitting in front of our television screens, we all became witness to how vulnerable modern society is to natural catastrophes. Wall Street was submerged in water, Manhattan’s subways were flooded and airports were closed. Thousands of homes and businesses were left with no electricity or heating for days on end and sustained considerable damage.
But for companies, the material damage only accounts for part of the losses. The “invisible” damage, namely the revenue and profit lost as a result of a disruption, is a far heavier burden for them to shoulder. Often, the full magnitude of these losses only becomes apparent some time later. As a result, it is virtually impossible to put a figure on the macroeconomic and insured losses caused by Sandy at the moment – which is also reflected in the wide range of estimates that are being thrown around. Past experience, however, tells us that business interruption and contingent business interruption (CBI) – which provides insurance cover in the event of a failure of a key supplier caused by physical damage – typically account for 50 to 70 percent of overall catastrophe losses.
Insurers have to cough up, via P&C insurance policies, not only for the repair work to buildings and factories, but also for a large chunk of the financial losses. Offering protection against natural hazards like these is at the core of our business model. But often, even a generous claims payment is only of limited use to companies if their competitors have eaten into their market share in the meantime, or if confidence among investors has suffered. This is why companies have to do everything in their power to get back to business as soon as they can for their own good.
Global supply chains turned out to be the Achilles heel of the global economy. Because every single link in the chain has been built to ensure maximum cost efficiency, sudden downtime can have far- reaching implications. The eruption of the Icelandic volcano Eyjafjallajökull, which grounded air traffic across Europe for several days in 2010, the earthquake disaster in Japan and the flooding in Thailand one year later have highlighted just how vulnerable our modern manufacturing and procurement networks are. These events have prompted a rethink at many companies. Attempts are being made to strike a new balance in the conflict between low costs on the one hand, and redundancy on the other. Companies are making more of an effort to identify critical suppliers and analyze their production locations. If, for example, an Asian supplier has its manufacturing