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Supply chain risks face ‘extreme protection gap’

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Risk assessment methods need to be overhauled to protect companies from global supply chain disruptions as virtual and physical interconnection increases, Lloyd’s and modelling firm Air Worldwide say.

In a new report outlining a new modelling approach, they say that business interruption (BI) policies for a company’s own assets, and contingent business interruption (CBI) policies for issues within wider supply networks, are failing to address the problems.

They say “an extreme protection gap exists in the supply chain insurance space, and the take-up rate for CBI insurance is minimal”.

“For this emerging risk, the insurance industry cannot rely on old techniques of taking historical data and projecting it forward.”

Advances in data-mining and machine learning offer an “alternative paradigm” to develop predictive, quantitative models to assess disruption costs, according to the report, Hidden Vulnerabilities in Supply Chain Risk: A Quantitative Risk Modelling Framework.

It suggests insurers, corporations and modelling companies should consider working together in developing data and analytics products for emerging interconnected risks.

Supply chain disruption impacts for global companies were highlighted by Japan’s 2011 earthquake and tsunami, and flooding in Thailand in the same year.

An increase in global trade has also been accompanied recently by the wider adoption of cloud technologies by corporations. A Lloyd’s report last year estimated a three- to five-day outage in the US could generate losses of $US8.6 billion ($12.8 billion) for manufacturing alone.

The Lloyd’s report has been published alongside a guide by UK risk management group Airmic titled Complex Supply Chains in a Complex World.