Supply Chain Risk Management. Willis Latin America Energy Conference October 10, 2012

Transcription

1 Supply Chain Risk Management Willis Latin America Energy Conference October 10, 2012

2 Session Overview Traditional view of Business Interruption (BI), Contingent Business Interruption (CBI) & Extra Expense (EE) Latin America Trends/Issues Explanation of Supply Chain Risk Identification of Risks Process to Value Risks Strategy to Mitigate Risks

3 Traditional View of Business Interruption / Contingent Business Interruption: Strategy Analyze BI, Contingent BI (CBI), EE exposure to locations/products/segments identified by the Insured Understand the revenue streams - identify those at risk and those not at risk due to physical damage Evidence business continuity plans and other mitigation techniques in conjunction with insurance strategy Compute BI Maximum Foreseeable Loss (MFL) for the locations identified including interdependencies Present findings to stakeholders (brokers, insurers, senior management) from an unbiased and independent expert

4 GDP Growth Infrastructure Global Economy Inflation Regulation Adaption to Change Latin America Trends/Issues

5 Where The U.S. Gets Its Oil Source: Energy Information Administration

6 Exports From Central and South America by Destination Source: BP Statistical Review of World Energy

7 South & Central America Oil Statistics Source: BP Statistical Review of World Energy

8 Supply Chain Risk Management Process - Simplified Quantify Strategize Identify Monitor & repeat the process as the organization & environment change Implement Strategy: Mitigate/Eliminate Transfer

9 The Supply Chain of Supply Chain Risks Source Trigger Impact/ Risk 1. Internal 2. Customers 3. Suppliers 1. Natural Disasters/ Accidents 2. Property/ Equipment Damage 3. IT/ Power Failures 4. Labor Disputes/ Sabotage 5. Terrorism/ Crime/Piracy 6. Regulatory/Political Changes 7. Pandemics/Illness 8. Customer Tastes 9. Product quality/recall 10. Counterfeit 11. Company mismanagement 12. Google Supply chain disruptions 13. And you will find others Revenues Reputation Relationships Share price Employees Survival!

10 Assessment of Supply Chain Risk Quantification Framework Supply chain risk quantification starts with your P&L Business model analysis and Value at Risk How do we make money? If disruption occurs, what is impact on overall profitability? Lost profits Continuing operational costs BCP and mitigation Time to recover Redundancy Stock Cost of mitigation

11 $100M Quantification of Supply Chain Risk $30M Whether BI, CBI, or SCBI, the methodology used to quantify exposure is the same. The key variables are: - Criticality function and supply - Expected length of disruption - Impact on operating expenses - Mitigation strategies - Cost of mitigation $12M $8M $7M $10M Annual Value at Risk Maximum Time to Replace Conversion Capacity Is 3 Months Safety Stock Reduces Maximum Downtime To 3 Weeks Customers Tolerate Some Delivery Delays Product Substitution Preserves Some Margin Expense Incurred To Reduce BI Loss

12 Benefits of Supply Chain Quantification - Qualitative Critical step in management of the supply chain Identification of critical processes and their impact Better understanding of the risk - for multiple types of policies A common methodology to address all triggers and all sources Replicable and centralized process for annual value collection Evidence of ERM for rating agencies Improved internal relationships with key stakeholders - IT, Operations, Treasury, Procurement, BCP Improved external relationships - suppliers, customers, underwriters Significant contribution on the part of risk management

13 Benefits of Supply Chain Quantification - Quantitative Potential premium savings on property, terrorism, marine, cyber-risk policies Differentiation of the risk Potential additional capacity and new markets Potential improvement in limits, sublimits and deductibles Confidence level in calculation of % and time element deductibles Documentation for regulatory purposes Platform for discussion of risk transfer via new products

14 Supply Chain Risk Insurance Gap between information needed by insurers and reinsurers, and information provided by risk managers Insurers/reinsurers are not entirely sure what they need, however they want more and better Risk managers only wish to provide what is needed Therefore not much data or analytics changes hands Insurers and reinsurers have yet to attach a monetary value to the improved data and analytics Buyers rightly ask what s in it for me? Since BI/CBI and SCBI pose such significant risks to buyers, insurers and reinsurers alike, BI risk assessments should be viewed in the same way as property loss control

15 Supply Chain Insurance: Lessons from Japan and Thailand Insurer point of view CBI from natural catastrophe is difficult to underwrite without more and better information More discrimination will occur regions/locations/industries/redundancy/transparenc y/information Possible limitation of capacity and higher prices Risk manager point of view CBI provides limited protection and losses are very difficult to prove, especially beyond Tier I Physical damage trigger is often problematic New products are clearly needed

16 Supply Chain Insurance: Comparison of Offerings Zurich SCI Kiln TDI Munich Re Limit $50mm+ $60mm Quota share Industries All (except auto) All All Triggers Locations All risk - PD and non-pd - System failures - Labor disputes - Loss of access Named supplies and suppliers Named perils - Force majeure - Political/war - Strikes - Port blockage All Pre-defined - PD and non-pd - Trade disruption - Insolvency - Regulatory Named facilities owned and supplier Attachment 10% of policy limit Fixed dollar deductible Agreed waiting period Indemnity Up to 12 months Up to 12 months As agreed Coverage Agreed formula Gross earnings and EE Exclusions Terrorism, war, pandemic, recall, quality of supply Terrorism, war, nuclear, financial, pandemic Lost profit and EE Terrorism, war, default, gross negligence, nuclear, pandemic Assessment Zurich, Marsh, Aon, DP Ad hoc Munich Re KARL

17 About Dempsey Partners Accounting firm created in % of revenues derived from PD/BI claims and exposure studies (X-V Analysis) 20% from other assignments (fidelity claims, litigation support, expert testimony, consulting) Eight offices, 30 full-time professionals 300 corporate clients including 15% of Fortune 500 Services provided worldwide $10 billion in loss recoveries Assignments range from $250,000 to $1.2 billion

18 Our Service Offerings

19 Contact Information Ronald P. Hajjar, CPA Partner Dempsey Partners 6900 North Dallas Parkway, Suite 860 Plano, TX T M