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Loss Prevention

Risky Business

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I n an increasingly complex supply chain, few things are more important than insurance. Forensic accountant John D. Dempsey, of Wilton, Conn.-based Dempsey Partners, recently spoke with STORES contributor Len Lewis about insurance and risk management.

Do you find that many retailers have the wrong insurance coverage?
Not necessarily wrong. But insurance basically covers two things: First, the replacement value of the merchandise in the store or distribution center; second, the profits associated with that merchandise after it’s sold.

How is it calculated?
Traditional insurance covers replacement costs. But if a store is closed due to a catastrophic event, the profits it would have earned during the shutdown are covered by business interruption insurance.

What issues should retailers look at to assess supply chain risks?
In general we look at worst-case scenarios like losing a store [or] distribution centers and a company’s electronic infrastructure. ... We also look at the amount of time a business will likely be impacted, along with the revenue stream and profit expectations for that period.

Why look at worst-case scenarios first?
It’s to set a framework. If you have enough insurance to cover extremes, your other coverage is probably fine.

What do you see as the most vulnerable areas of the supply chain?
Electronic or cyber disruption has emerged as a big issue. ... An infrastructure disruption can shut down an entire business.

Are many retailers underinsured in that area?
It’s an emerging risk and insurance companies are trying to offer new products. However, exposures haven’t been fully quantified yet.

Do retailers pay enough attention to their coverage?
Most retailers renew annually. But every couple of years they should take a deep dive and look at how pieces of the supply chain fit together and what risks there might be ... to see if there is a concentration of risk in catastrophe-prone areas.

What’s the most overlooked area of coverage?
Retailers who are dependent on a selective group of suppliers are more at risk than general merchandise retailers who rely on thousands of vendors. Disruptions like the disasters we saw in Japan and Thailand show that there can be a serious downstream impact.

Is that a separate segment of insurance coverage?
It doesn’t have to be. Today, policies on business interruptions can be extended to include supplier risks. There’s also an emerging class of policies that protects against events which don’t involve physical damage to the supply chain. For example, the Iceland volcano was not a physical damage event but it did disrupt trade.

What’s been the effect of all this on premiums?
Retailers want as much coverage as they can get for a reasonable price, and insurers are happy to underwrite most risks. But without accurate exposure data, insurers don’t know how much risk to take on or how much to charge. So some coverage could become more expensive.

Where are premiums going?
I believe the cost of supply chain coverage will come down over time as exposures are more properly assessed and the market for coverage rightsizes. As more information is exchanged, insurers will be happy to put more capacity out there and charge appropriate premiums — lower than they are today.