87
5
Hazard Risk
In July 2011, a tsunami o the coast of Japan caused human tragedy on an
almost unimaginable scale, killing thousands and rendering almost a mil-
lion people homeless. Also in July, ooding in ailand forced the closure
of 9,800 factories and le more than 660,000 people unemployed. An
untold number of people around the globe were impacted by this natural
disaster, both personally and economically. In the automotive industry,
approximately 6,600 autos were not built per day. In the camera indus-
try, Nikons net loss of sales equaled $786 million, while Canon experi-
enced over $600 million in losses. With over 45% of all computer hard
drives produced in the aected area, many computer manufacturers had
to delay product launches, which resulted in lost sales and a doubling of
hard drive prices.
1
Unfortunately, examples of hazard risks are not hard
to come by.
Hazard risk pertains to random disruptions, some of which involve acts
of God. Additionally, hazard risk has traditionally involved liability torts,
property damage, and natural disasters. In this chapter, we will address how
corporations mitigate hazard risk, whether it’s a natural disaster, re, mali-
cious behavior, product tampering, the, or acts of terrorism. e chapter
will cover denitions, options, and variants of traditional and emerging
global disruption insurance products. Later chapters will present other tools
and approaches that support the eective management of hazard risk.
THE TRADITIONAL WORLD OF HAZARD RISK
AND INSURANCE
With global supply chains expanding to support growth initiatives,
many companies are entering into indemnity and other types of partner
88 • Supply Chain Risk Management: An Emerging Discipline
agreements in an eort to mitigate risk through risk pooling, sharing risk,
and disruption insurance. Insurance may not be the total solution to miti-
gating risk within this category, but many new and improved business and
trade disruption insurance products and services are emerging every day.
Before we move into denitions, options, and variants of risk transfer
packages, we’ll begin with a glimpse into the landscape of this traditional
risk mitigation arena. We’ll use Figure5.1 as a reference point for our
entire chapter discussion. is gure includes three columns. From le to
right are the risks, the types of coverage, and nally the triggers or drivers
behind traditional hazard event mitigation insurance.
e rst risk in Figure5.1 is credit risk. e trigger event is normally
payment default, and the coverage is normally geared toward mitigating
for insolvency or protracted default by a partner or customer. Next are
political risks. e trigger events here are normally sovereign debt default
or asset loss and coverage that revolves around contract frustrations and
expropriation. Within the insurance coverage area for political risks,
contract frustration tends to revolve around corporate loans, the lenders
interest, or project nancing of equity and debt. Also within this coverage
area, the bulk of expropriation revolves around xed investments (equity)
and possibly mobile assets, such as stocks.
Continuing down the le side of Figure5.1 is property risk. e trig-
gers in this category are physical damage or loss and additional perils
Risk
Credit Insolvency
Contract frustrations Expropriation
Property replacement
Lost profit
Continuing & expediting expenses
Contingent loss
Sovereign contractual
default
Asset loss
Physical damage
Certain perils
Political
Natural disasters
Suppliers
Loss/Damage
Lost profit
Continuing & expediting expenses
Contingent loss
Goods in transit
Customs delays
Protracted default
Payment default
Political
Property
Trade
Disruption
Logistics
Coverage Trigger
FIGURE 5.1
Risk transfer tools—the business of hazard insurance. (Source: Eric Wieczorek, for-
mer risk director- navigant, “Supply Chain Risk Management” presentation at MAPI,
Manufacturing Alliance for Productivity & Innovation’s Council Meeting, 2013.)

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