AIR expands risk modeling suite to include supply chain risk quantification

by Artemis on April 16, 2012

AIR Worldwide has announced that they have expanded their suite of Catastrophe Risk Engineering (CRE) solutions to add the ability to better quantify, mitigate, and manage the risk associated with the impact of catastrophes on supply chain networks. Supply chain business interruption is a huge insurance risk which was highlighted by catastrophes last year including the Tohoku earthquake and Thailand flood events. AIR want to enable risk managers to better assess and reduce the risks associated with supply chain downtime.

The new offering from AIR will help re/insurers and risk managers to better assess and reduce their risk from catastrophic perils such as hurricanes, earthquakes, floods, tornadoes, and tsunamis now including the impact of supply chain disruptions. Both direct and contingent business interruption losses across the whole supply chain can now be quantified according to their press release.

“The catastrophe risk to supply chain networks came into focus following the volcanic eruption in Iceland in 2010. Just one year later, awareness of this risk was heightened further by the Tohoku earthquake and tsunami in Japan, as well as the major flooding in Thailand,” said Dr. Akshay Gupta, P.E., director of AIR’s Catastrophe Risk Engineering practice. “While the catastrophe risk to supply chain networks is quite complex, it can be effectively quantified. Once completed, the work involved to quantify this risk can also help expand risk assessment to other non-catastrophe perils.”

“The existing method of assessing supply chain catastrophe risk is based on worst-case scenarios, establishing either 0% or 100% disruption one node at a time and propagating the impact through the entire the supply chain,” explained Dr. Gupta. “It does not include the likelihood or frequency of shutdown, nor does it consider the partial shutdown of a single node or the simultaneous disruption of multiple nodes. This traditional approach can now be improved to provide a realistic and comprehensive assessment of the supply chain’s catastrophe risk exposure.”

Dr. Gupta continued, “AIR’s CRE solutions combine a detailed network analysis with catastrophe risk models. As a result, partial damage and downtime states for all nodes can be simultaneously and explicitly considered. CRE solutions also account for the level of disruption at each location from multiple perils. By quantifying the impact of these disruptions on the overall supply chain network, CRE solutions provide a much more realistic and reliable view of downtime and loss.”

It will be interesting to see how this new CRE offering could be integrated into broader catastrophe risk modeling and whether we could see new insurance and reinsurance products for supply chain business interruption emerge. It may be possible in the future to create an index of industry-wide supply chain losses against which instruments such as industry loss warranties (ILW’s) or even insurance-linked securities (ILS) could be triggered. If indeed supply chain risks from catastrophes can be accurately quantified, as AIR say, then surely there is an opportunity to create instruments targeting that risk alone (so ignoring physical damage from catastrophes). Maybe supply chain business interruption modeled loss triggers could be created for ILW and ILS instruments and perhaps one day we could see a supply chain risk catastrophe bond.

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