Business Interruption Expected to Push Hurricane Sandy Losses Higher

Initial estimates for losses from hurricane Sandy range from up to US$45bn in damage and lost production to between US$5bn and US$10bn in insured losses.

“These numbers, unfortunately, are not surprising,” said Tom Teixeira, a practice leader in Willis Global Solutions. “In fact, I expect the figure to be a lot bigger once all of the losses have been analysed, including the business interruption [BI] losses.” This is because many major companies have failed to take on-board the lessons learnt from last year’s spate of natural catastrophes, he suggests.

“There is still not enough alignment between the procurement function and group risk. The silo mentality, driven by localised profit and loss [P&L] accounts, has created opposing objectives such as procurement trying to significantly reduce inventory and group risk trying to reduce the level of business interruption should disasters occur,” added Teixeira

“Once the full extent of the damage from Sandy is analysed I have no doubt we will see large BI losses – not just as a result of property damage at supplier sites but as a result of power failure to suppliers leading to the stoppage or partial stoppage of production.”

According to Teixeira, BI losses will be compounded by two key issues:

  1. Many companies have failed to drive effective business continuity planning across their supply chains.
  2. Cost reduction measures continue to increase the dependency of companies on a greater number of critical suppliers. This causes large BI losses and additional cost of working when one of these suppliers goes down.

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