Category Archives: Supply Chain

Climate Change Report Causes Alarm

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New findings on climate change, establishing it as a manmade phenomenon, are garnering attention from the insurance industry, which recommends immediate action.

The Intergovernmental Panel on Climate Change’s (IPCC) newest report  “clarifies what businesses and investors already know, that climate change is happening now and human activity is the dominant reason why,” Mindy Lubber, president of CERES, a nonprofit organization that works with insurers and investors said recently on a conference call. “Climate change is disrupting all aspects of our global economy, including supply chains, commodity markets and the entire insurance industry, which is seeing exponentially large losses from extreme weather events.”

Lara Mowery, managing director, head of global property specialty practice with Guy Carpenter & Co., noted that the report should cause “significant concern” and impact how insurers and reinsurers shape their business going forward.

Insurers’ and reinsurers’ business plans “depend critically on understanding and assessing risk, which is likely to become even more challenging as weather variability increases,” she said. Identifying and understanding the causes and consequences of climate change is essential to “implementing workable risk management solutions.”

Global cat losses are increasing, she explained. In the 1980s, “the rolling 10-year annual average for the worldwide cat loss was less than $10 billion. In the last few years that average has jumped up to more than $50 billion average, based on that 10-year rolling time frame.” In addition, 2005, 2011 and 2012 represent the top three insured cat loss years on record, she noted.

Given the IPCC’s conclusion on flood, drought and changing weather patterns and evidence of this over the past 50 years, the industry needs to evaluate how these changes could impact future losses. As an example, she said, the most widespread hazard of global warming is coastal flooding. Impact of events such as Superstorm Sandy, which produced devastating storm surge, could have even worse consequences if sea levels continue to rise. “Insurers and reinsurers must continually assess the most up to date research and adjust their business plans according to increases in calculated loss.”

While this has meant more insurer capital is at risk, “that can’t be the only response, the only solution and the only answer. We can’t just keep putting more money in the path of what’s happening,” Mowery said.

She emphasized that the industry and insurance buyers can be taking steps now to address the risks.

A recent example of innovation in this area is the Metropolitan Transportation Authority’s (MTA) $200 million catastrophe bond that was issued in July, “the first of its kind to cover storm surge specifically,” she explained. The MTA commented in the aftermath of Sandy that their traditional avenues for insurance and reinsurance “constricted dramatically,” making it more difficult for them to obtain the kind of risk transfer they needed.

She also pointed out that “We can’t continue to let human and economic costs escalate. Building codes and standards and land use strategies are accepted adaptation measures to improve resilience against flood, wind and fire impacts that may worsen under global warming.”

Lessons Learned from the Lululemon Recall

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Lululemon’s Chief Product Officer, Sheree Waterson, recently announced she would be stepping down following the fallout from the yoga apparel company’s recall of some of its unintentionally see-through yoga pants. The popular piece of workout clothing makes up about 17% of all women’s yoga pants sold in Lululemon stores, and the company noted that the recall would “significantly hurt its financial results.” From the financial hit on earnings to the reputational damage to the brand to the forced departure of Sheree Waterson, Lululemon’s voluntary recall highlights the importance of thinking through and planning for potential risks, which means having a strategy in place for product recalls.

In the event of a recall situation for a popular product, it is important for companies to consider not just the day of the recall, but anticipate the processes and communications in the weeks following. Companies must have a complete plan of action for ensuring that the recall is effectively communicated to distributors and customers, the product is removed from shelves, and the potential varying ramifications—in this case, the decrease in quarterly sales for Lululemon and the exit of a top executive—from a voluntary recall are considered in the action plan.

As we’ve seen in recent news, it’s not an “if” but “when” a company faces a recall, and so being prepared for the outcome is imperative.

Even in a voluntary recall, the fallout that could occur is unclear and can be damaging.

The best way to navigate a voluntary product recall is to ensure that there is not only a process in place for the immediate actions, but also that there is a full plan to better alleviate and potentially avoid the multiple risks that might stem from it.

Lululemon’s recall highlights how proper preparation must address various scenarios and risks in order to avoid having a recall spiral out of control. In today’s market with global supply chains, companies face increasing uncertainties that make developing a recall management plan an even more pressing issue.

It is critical to not wait for a crisis to strike before developing a plan for such events, and instead build a plan now in order to best mitigate a product crisis.

The Growing Problem of Supply Chain Risk

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As the modern business world becomes more and more sophisticated, so too do the supply chains on which organizations rely. And as these supply chains have become more sophisticated and intertwined, the risk of possible problems has grown.

A recent report by Deloitte states that “Because of the importance of supply chain management to companies’ success, supply chain risk events are having a profound effect and becoming more costly.” The consulting firm surveyed 600 executives at manufacturing and retail companies to understand their perceptions of the causes and affects of supply chain risks. Some of the key findings include:

  • Supply chain risk is a strategic issue. There are now more risks to the supply chain and risk events are becoming more costly. As a result, 71% of executives said that supply chain risk is important in strategic decision making at their companies.
  • Margin erosion and sudden demand changes cause the greatest impacts. The most common and the most costly outcomes of supply chain disruptions are erosion of margins and an inability to keep up with sudden changes in demand, which illustrates the extent to which the supply chain risk issue affects the “heart of the business.”
  • Most concern about extended value chain. Executives surveyed are more concerned about risks to their extended value chain—outside suppliers, distributors, and customers—than about risks to company-owned operations and supporting functions.
  • Supply chain risk management is not always considered effective. Two thirds of companies have a supply chain risk management program in place, but only half the surveyed executives believed those programs are extremely or very effective.
  • Companies face a wide variety of challenges. Executives cited a wide variety of challenges including problems with collaboration, end-to-end visibility, and justifying investment in supply chain risk programs, among others. However, no single challenge stood out, indicating the need for broad approaches.
  • Many companies lack the latest tools. Current tools and limited adoption of advanced technologies are often constraining companies’ ability to understand and mitigate today’s evolving supply chain risks.

What’s alarming in this report is that even though companies are taking a proactive approach to managing supply chain risks, only about half of the executives surveyed believed their companies are extremely or very effective at managing supply chain risk, including just 13% who considered their companies to be extremely effective. However, when asked which strategies have been most effective, executives most often cited building stronger relationships, building business continuity plans and developing the ability to quickly adapt the production or distribution network.

In all, however, Deloitte’s survey did not reveal the most positive news for companies and how they manage supply chain risk. But if anything, executives can use this information to better understand the weaknesses in today’s supply chain environment. As we’ve seen with past catastrophes and economic troubles, the chain is complex and ever-evolving. Keeping up with changes and eliminating the affect of events is what true supply chain resiliency is.

 

Discussing Trends at the Advisen Casualty Conference

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At Tuesday’s Advisen Casualty Conference here in New York, a hot topic was that of trends within the industry. It was clear that Stan Galanski, president and CEO of Navigators, had put some thought into the topic, coming up with the following trends he feels are important to the industry:

  • Globalization — “There is a need for global product liability coverage,” said Galanski. We need to look no further than the UK Bribery Act and the Foreign Corrupt Practices Act (the recent news involving Walmart is a good example).
  • Miniaturization — “We’ve gone from records to 8-tracks to CDs to iPods to the cloud,” said Galanski, talking about how the density of electronic components can be construed as a risk. He referenced the case of Intuitive Surgery, Inc., the maker of the da Vinci surgical robot, which has allegedly caused numerous injuries and at least one death — that of a 24-year-old woman who was undergoing a hysterectomy when the robot caused burns to an artery and her intestines, which led to her death two weeks later.
  • Disintermediaton — By this, Galanski means the removal of intermediaries in a supply chain. “So what exposures are risk managers picking up with the absence of these people and/or businesses?” Though disintermediation may be more cost effective, it comes with added risk.
  • Personalization — When you open iTunes, the application suggests songs you may like based on your recent purchases or downloads. The same goes for Amazon. When you log into the site, it suggests new books or apparel you may want to purchase based on past buying habits. “It’s a great feeling as a consumer, but as a risk manager it brings concerns about your business’ laptops and computers.
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These are indeed interesting observations of trends, but they are, in fact, only one man’s opinion. But we learn by sharing. With that in mind, I ask you what trends you’re noticing within the casualty industry?

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