Paul Lucas 00:00:00 Hello everyone, welcome to Insurance Business TV as we discuss what has become one of the hottest topics in the industry, supply chain risks. There have been too many examples in recent years of them never learning whether they were caused by a pandemic or a cyber attack. We've seen businesses affected not because they didn't mitigate their risk, but because the companies they work with from key materials and services were affected instead. So how can this danger be fought? Well, on this edition of Insurance Business TV, we welcome Kevin Nolan, Head of International Affairs at The Hartford to explain, Kevin, welcome to Insurance Business TV.
Kevin Nolan 00:00:46 Thank you Paul. It's good to be with you today.
Paul Lucas 00:00:48 So Kevin, just back up a bit and explain to us how companies operating around the world are still feeling the effects of supply chain disruptions from the events of the last few years?
Kevin Nolan 00:01:01 Definitely. So it's probably best to start with some information about the COVID pandemic. So on top of the COVID, we all obviously felt the effects of the supply chain around the world, it was in the head, you couldn't get the services or products that we needed, the store shelves were empty. And we've really seen global production go down a lot. And if you think back to the 1950s manufacturing was moving forward in inventory at a time when suppliers of raw materials and small parts were working with manufacturers to fit tight deadlines where products were delivered just when production needed them. Therefore, as a result, manufacturers carry limited supplies. So this helps reduce costs when suppliers can meet their needs more efficiently. But what we saw happen during the time of COVID was that when a disruption is introduced, it can cause a trickle-down effect that causes all those innovation systems at the time to be disintegrated in a way where their vulnerability is highlighted around the world. And so the learning from this pandemic has focused on taking a closer look at supply chains and supply chain processes. There's a lot of talk now about offshoring, or nearshoring, supply chains, to have suppliers closer to home, actually trying to limit that volatility from the shock of events like the ones we've experienced. But you know, in our estimation, that's a good idea. But in reality, it is a little impossible. So if you think about many of the products you buy today, how many countries have a manufacturing system that can bring those products to just one place. In recent years, China has emerged as a very sophisticated power in many industries. And if you think about providing products and services throughout the supply chain, the power from China is really complex, maybe more complex than people expected, just because of its power and how many industries it touches. So what we're starting to see is this kind of China and one strategy where companies are moving their core operations closer to home, and cutting some of those multinational shares that were happening with Chinese manufacturing still involved, because, obviously, there has to be. So as a result, what you see is more than that activity that changes countries like Indonesia, or Vietnam or Malaysia, and in North America, Mexico, where firms actually produce complex things, they want to recreate some of those ecosystems, and bring them closer in a sense. So it's interesting, the Federal Reserve Bank in New York put out a report this year that shows the extreme volatility that we've seen during COVID has actually started to come down over the last 18 months, and especially the cost, volatility, material volatility. So that really gives manufacturers some breathing room to start moving towards streamlined supply chains.
Paul Lucas 00:03:47 That's an interesting place, you really paint a great picture. So just tell us a little bit more about some of the top risks that we have to consider when we're building maybe a business disruption plan. And if you don't mind just telling me some of the things businesses should consider doing to help reduce or avoid business disruption in the future?
Kevin Nolan 00:04:08 Indeed, so the Institute of Supply Chain Management listed the 10 most important things they see in 2024. And three of them are risk-related. So first, it was the cost cutting that I just mentioned. The second is general risk management. So really understanding the supply chain, handoffs, risk within manufacturing, and manufacturing and near third manufacturing. So if you look at the World Economic Forum, they actually cited three things related to the supply chain in their top 15 and risks that I think, I think they say it is very possible to present a material crisis in 2024. essential goods and services, disrupted food supplies and power supply disruptions. So obviously, these are now Global Concerns given to all of your communications today. When we start thinking about insurance plans. What salespeople represent builders should talk about and look to understand as they negotiate with their clients. There are really three things. So, the first place is to understand your risk. And I mean in a practical sense in terms of exposure, but also risk tolerance, you know, what are the different faults in the supply chain? Do their single points fail? Who are your suppliers? What is dependency? How much inventory do you hold for that type of item? Second, it is because you have the ability to change the supplier if they have instructions. So when we have risk conversations with customers, you'd be surprised how many companies don't spend a lot of time understanding their risks. And because of that, you don't have a good handle on the other exposures presented by their providers, who don't really have the necessary checks and balances. So that's really the beginning. And, you know, insurance is kind of a consequence. But as an industry, you know, we can look to insurers to put risk financing policies in place, but the most important thing is to understand the supply chain, that supply and your suppliers. And then third, understanding the costing to inform each step of the handoff. And really understanding what kind of balance will be affected in the event of a loss or disruption. That's really the beginning of taking surprises. So, define the risk, and design a fit-for-purpose insurance plan based on how you want it financed.
Paul Lucas 00:06:30 And it's interesting, because to hear you talk about different levels of exposure there, because, of course, one size obviously doesn't fit all when it comes to the availability of each business to deal with that exposure. But are there policy aspects that marketers should focus on for their customers? Can you tell?
Kevin Nolan 00:06:47 Yes, I think the most obvious one is the dependency, especially if it's a global operation. And, you know, the domestic and foreign insurance systems may be separated with different carriers on the structural side, the provision from one-man operation to another managed, something that is well understood and can be expressed, you know, to the seller or. to the insurance carrier. But one of the most misunderstood aspects of the supply chain is the potential exposure introduced when you have third-party suppliers. So whether you have raw materials or small parts, and being able to define what is dependent versus what is exposed is very important when you think about the structure of the system, and how the business works. And if it's a global program. That is more than a point blank. But again, if there are distributed architecture systems, it is an important consideration when thinking about the concept of a fit-for-purpose system. It's really about understanding how slow accounting is for both internal and external sales, and really making sure there's a proper margin in place where the real financial impact can be.
Paul Lucas 00:07:51 And by the way, Kevin, Hartford is very big on business disruption. So what sets your policies aside, what do you think makes your offering stand out?
Kevin Nolan 00:08:02 Yes, I think it really takes time to understand the needs of each client. When we talk about business disruption and supply chain risk. It's not a standard offering, it sounds like it's sold in the market, but each company has unique features and offerings within its supply chain. So taking the time to understand those before putting together a plan is where the value lies. It should not be considered an off-the-shelf offering. It is something that needs to be developed individually as a three-part arrangement between the merchant client and the insurer. And I think that's what really stands out to me about Hartford is that we really try to take the time to work with our partners and clients to design programs that help finance risk in the way that our insurance is intended, which is exactly what it is. kind of what we came for, at the end of the day.
Paul Lucas 00:08:52 You mentioned merchant partners, any tips for merchants who want to make sure the businesses they work with have the right performance standards for the year ahead?
Kevin Nolan 00:09:03 Yeah, like I said, I think it really comes back to building a fit-for-purpose program and taking the time to work with clients to really understand their financial model, where the risk is in the chain. Especially in some nuanced cases. For complex clients where it might be the client's tax department you can get involved in the idea of where you think the risk is, you know, in those situations that can really help inform and guide how the system is designed to work to meet the needs of that client. , then it's actually breaking the basics of the previous loss to understand it from a production point of view, you know, if there is a disruption, which is a business that will lose the economy. So, you know, that's not the big, big headline grab thing, but the value and the business disruption and making sure that the supply chains are in place to prevent and address the use of football reference. So it gets to the finer points of detail about how the company works, how it organizes its processes, and then it just plans a program that matches those. Of course it's as straightforward as that.
Paul Lucas 00:10:02 Great tips, Kevin, and good to have you. Thank you very much for your time today.
Kevin Nolan 00:10:07 No thanks Paul. I appreciate the opportunity to chat.
Paul Lucas 00:10:11 And if you're looking for more tips and expert guidance from the best the industry has to offer and like Kevin of course, keep it right here. And TV for the insurance business
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