The U.S. arm of Swiss insurance and financial giant Zurich Financial Services Group has introduced what it calls a new type of supply chain risk insurance product: one that covers all occurrences that could disrupt a manufacturer's or retailer's supply chain but that extends coverage only to those suppliers considered most critical to the companies' operations.
Zurich executives say the product is different from traditional "trade insurance," which covers a company's entire supplier base but protects only against specific scenarios, known in business insurance lingo as "named perils." The Zurich product inverts the traditional model by providing "all-risk" coverage but only to those vendors that after a detailed assessment are identified by the manufacturer as most vital to its continuing operations, according to the insurer.
The end user is the policy's beneficiary, with specific suppliers listed on the policy, according to Linda Conrad, director of strategic business risk for Zurich Global Corporate. The product has been available in Europe for several years, but was unveiled in the United States in April, she said.
Conrad said the idea behind the product's development is that only 15 to 20 percent of supply chain disruptions involve physical damage to the shipment, and that supply interruptions can arise from a wide range of scenarios. In addition, large companies that would be candidates for the product have hundreds, if not thousands, of suppliers, and it would be unrealistic and even unnecessary to extend coverage to all of them, she said.
Conrad said the risk assessment involves quantifying the value of a particular supplier to a manufacturer's or retailer's operations, and then determining what it would cost the policyholder to be made "whole" in the event of a supply chain disruption.
As with other insurance products, the Zurich offering doesn't prevent a scenario from arising or the disruptions that may result. However, Conrad asserts that it will provide the policyholder with a financial cushion that in some cases, may be an operating lifeline while it seeks out alternate sources of supply.
In a press release announcing the U.S. product launch, Zurich cited a previously reported study by Vinod Singhal of Georgia Tech and Kevin Hendricks of Canada's Wilfrid Laurier University* showing that publicly traded companies experiencing a supply chain disruption suffer a 33- to 40-percent decline in their equity values over a three-year period relative to peers who did not have any issues.
Conrad said disruptions historically result in a 7-percent decline in sales and an 11-percent rise in costs. Zurich also cited findings from research firm Strategic Research Corp. that between 40 and 43 percent of companies that suffer extended interruptions—defined in the study as lasting one to two years—never recover from them.
*Note: An earlier version of this story misidentified the co-author of the study.