Supply Chain Risk
One of the challenges facing firms in the food and agri sector is to manage their supply chain effectively and to understand how they can mitigate and where possible avoid losses. By Simon Lusher, Head of Food & Agri at JLT Specialty
Here we look at five different potential problems and some of the factors that need to be considered carefully when managing them.
Non-Damage Business Interruption
One potential headache for the food and agri sector is non-damage business interruption losses that emanate from a problem with a supplier. The issue that has perhaps attracted most attention in recent months and years is Avian Flu.
If you’re a farmer, a poultry processor, an egg supplier, or you rely on eggs as an ingredient, then an outbreak of Avian Flu could be crippling.
A lot of non-damage business interruption policies will not pick up all of the losses from an Avian Flu outbreak and while there may be some level of non-damage business interruption insurance in supplier extension wordings, this is unlikely to be sufficient to cover the losses incurred. Similarly, denial of access extensions will offer some cover, but it will not be comprehensive.
One of the issues is that property insurers writing policies for the food and agri sector are not comfortable with either pricing or taking on pandemic exposures. We are working with specialist food and agri underwriters who are used to writing poultry and livestock cover.
We are exploring how they can provide non-damage business interruption policies that better meet the needs of operators in the market and offer insurance solutions that have fewer exclusions.
It also remains hugely important for firms in this sector to understand the events that might affect them and to have alternative supply chain options available in the event of a problem.
Food security fraud within the supply chain
The recent poultry scandal in Brazil has drawn a lot of attention to food security and the widespread problems with horsemeat are still very fresh in the industry’s mind.
There are also more benign issues that arise when considering the quality and traceability of ingredients in the supply chain. For example, certain products such as extra virgin olive oil and Manuka honey attract high prices and are therefore targeted by criminals who substitute or adulterate with inferior quality oil or honey and then sell, under false pretences, as a premium product.
Standard product recall policies are triggered by bodily injury or physical damage and so in the event of the horsemeat scandal or a situation arising out of mislabelled extra virgin olive oil, the insurance would not respond.
Such events can create significant losses for businesses and we are working to extend the cover available for fraudulent ingredients that are not actually harmful.
In recent years a lot of companies have taken steps to try and simplify their supply chain to avoid such problems and thorough supply chain mapping is one way they can go about mitigating their exposures and ensuring their reputation is not damaged.
Although a lot of work has been done by governments to improve regulation and checks on imported and exported products, Brexit could lead to some level of deregulation and the establishment of new trade deals and different certification standards.
This could create uncertainty that unscrupulous firms might look to exploit and so the industry will have to be even more mindful about counterfeit ingredients in the months and years ahead.
Some of the most commonly traded commodities in the sector, such as cocoa, coffee and soya beans, come from countries that do not have long-term stable regimes in place.
Even where a stable political leadership is in place, recent election results including Donald Trump’s victory in the US and the UK’s decision to leave the European Union, can lead to significant policy changes that affect established relationships, import/export duties and trading quotas.
The insurance industry has well-developed wordings to help companies cope with political risk exposure, although many firms who have been operating in an unstable territory for several years often feel they know the lie of the land well enough to manage their way around these issues.
However, there has been an increased amount of investment from banks in these third world and emerging markets and these financial institutions are more concerned about their exposures, driving demand for political risks cover.
It’s important to highlight that political risks can have a knock-on effect on a country’s economy and in territories experiencing hyper-inflation, for example, this can lead to governments putting quotas on exports.
We have seen this is Nigeria recently and for those using products from the country like palm oil, this can have an impact on their business.
Contamination of stock
Whether through your own actions or those of a third party, stock can rot, deteriorate or become contaminated.
Stock throughput insurance cover essentially takes the storage risk out of a property policy and puts it into a cargo policy. These cargo wordings are broader and offer enhanced cover, including, for example, deterioration, infestation and vermin.
Stock throughput cover should respond to losses from the contamination or deterioration of goods in transit, but it will only pay for the value of the goods in question. It will not pick up the onward costs of business interruption.
If the problem has arisen because of the actions of a third party supplier then your contract may offer recourse to compensation and you may be able to claw back financial losses through legal action. But pursuing such legal action can be time consuming and costly depending on where suppliers are located.
Increasingly erratic weather patterns have created an added layer of complexity for firms in the food and agri sector trying to manage their supply chain risk.
Where flooding, hurricanes or droughts are normal weather conditions for operators in the supply chain, then it’s possible to implement effective defences for all but the most severe events. However, when extreme weather events are unexpected, then this becomes very difficult.
For example, recent heavy rainfall in the highlands of Peru caused landslides on a daily basis, when there are normally three of four annually. The landslides took out roads cutting off supply routes to the rest of the country, and the limited infra-structure meant there were no alternative routes to transport goods out of the area.
A supply chain interruption policy will offer some cover for these events, but many companies do not have such insurance as they often believe they will not hit their own supply chains.
Companies need to have alternative supplier options available to overcome such issues and to assess what costs their balance sheet could support when implementing these secondary arrangements.
In analysing all of the potential losses that might come from their supply chains, companies will have to decide how insurance could protect them. As part of this planning, comprehensive supply chain mapping and crisis management planning will help identify foreseeable problems and solutions, as well as improving the underlying risk and encouraging carrier to offer better terms and premiums.
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