Best's Review

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Risk Adviser
Rising Costs, Supply Chain Issues Impact Business Income Coverage

Agents can work with their manufacturing clients to review their current business income protection and limits and educate them on the increased risks related to business income.
  • Matthew S. Mitchell
  • August 2022

Between supply chain disruptions, inflation and staffing challenges, manufacturers are facing some potentially significant business interruption risks of late—risks that can push business income losses over policy limits. The good news is an appropriate business income limit and contingency plans can help offset risks like these, enabling business owners to avoid unnecessary financial exposure.

Business income is commonly included in many property policies, but calculating proper limits is often challenging, especially with costs and added time that are much different than they may have been just a few years ago. As a result, agents increasingly are working with manufacturing clients to take a close look at their increased business income exposures, keeping in mind the potential cascading effects of supply chain and logistic issues.

Related: Swiss Re International Program Head: Every Link of Supply Chain Under Scrutiny

Business income coverage: Five key areas to consider in today's market

1. Cost and availability of materials, equipment, and inventory: U.S. manufacturers are increasingly dependent on overseas suppliers for raw materials, goods and machinery. This dependency, coupled with just-in-time manufacturing where there is little excess on hand, and extended wait times, creates increased risk.

2. Leveraging new automation: More and more manufacturers are utilizing automation to meet demand and ease labor market challenges, implementing robotics to eliminate manual tasks and leveraging end-to-end automation and computer numerical control or CNC machines to complete finished products in a single operation. However, these technologies can be more expensive to repair and replace, so this is an important consideration.

3. Building restoration: When a manufacturing facility requires repair, rebuild or restoration, it may face increased costs of materials, added time to acquire the materials and potential delays. Manufacturers oftentimes may not realize their coverage is inadequate in this area until it is too late. Restoration that may have taken six months can now take well over a year and have cascading effects on the future of the business.

4. Temporary relocation and interdependency: Manufacturers' business continuity plans often rely on temporary locations to continue production. With many facilities running production shifts around the clock, limited time may be available for another manufacturer to use their facilities to mitigate a loss. In addition, with interdependent locations, an issue at an upstream location could result in a significant negative downstream impact on total production.

5. Supply chain resiliency: A loss during a peak season, whether within the manufacturer's operation or in the supply chain, can be difficult to overcome. A resilient supply chain considers underlying vulnerabilities in the chain. Common vulnerabilities include product complexity and supplier networks, transportation, and financial resiliency. Businesses need to consider the level of susceptibility to unforeseen events and look for ways to reduce their impact, offsetting that with appropriate business income coverage.

Related: Insurers Confront Inflation for the First Time in Ages

The Agents' Role

Current and comprehensive business continuity plans are a manufacturer's first line of defense when faced with an interruption. Agents can encourage clients to take advantage of carrier resources for the development of these plans, while encouraging clients to consider back-up supply chains to also help mitigate risks.

Independent agents are well positioned to serve as valued advisers to their manufacturing clients as they look to navigate this complex market. Agents can work with their manufacturing clients to review their current business income protection and limits, educate them on the increased risks related to business income and call attention to potential downstream impacts.


Best’s Review contributor Matthew S. Mitchell is president, middle market at The Hanover Insurance Group Inc. He can be reached at bestreviewcomment@ambest.com.




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