21 April 2010

Iceland volcano eruption could disrupt supply chains

An eruption at the Eyjafjallajökull volcano in southern Iceland last week has generated an ash plume that has disrupted air traffic and trade across Europe. Several major airports were forced to close, increasing the need for alternative forms of transportation and shipping.

Affected organisations are faced with several coverage issues under an insured's first-party property contracts as well as personnel operational, reputational, and compliance challenges. Many have begun implementing business contingency plans to continue operations, mitigate challenges posed by staff absences, minimise supply chain disruptions, contain the financial and brand fallout, and preserve stakeholder relationships.

"The health and safety of employees should be a priority," said Gary Lynch, Marsh Risk Consulting's Global Supply Chain Risk Consulting Practice Leader. "At the same time, businesses must realise there are serious implications in the short and long term for their supply chains, particularly those involved in the manufacture and distribution of perishable, time-sensitive, or high-value goods such as produce, flowers, pharmaceutical, technology, or resources critical to production processes."

Today's extended global supply chains often do not provide the transparency needed to ensure a continuous flow of products and parts under current circumstances, Lynch cautioned.

"While it's easy to check the inventory of products destined for the ultimate buyer, it is more difficult to assess inventories of component parts or ingredients used in intermediate production or by suppliers several steps removed from the final product. Organisations not familiar with the extent of their supply chains and their suppliers' plans for managing disruptions could face shortages as inventories become depleted and replenishment becomes a challenge," Lynch added.

Paul McVey, Marsh Property Claims, explained, "Most property policies — even those with ingress-egress or civil authority time element extensions — will only be triggered in the event of physical damage of the type insured that causes lack of access to the insured’s location. Volcanic eruptions are generally included under earthquake policies, and will typically have occurrence definitions with time frames, such as 72 hours for losses resulting from an earthquake."

While some air traffic has resumed, it is unclear when service will return to normal levels — particularly if the volcano remains active. The International Air Transport Association estimates that airlines suffered US$1.7 billion loss in revenue during the crisis

About Marsh
Marsh, the world’s leading insurance broker and risk advisor, has 26,000 employees and provides advice and transactional capabilities to clients in over 100 countries. Marsh is a unit of Marsh & McLennan Companies (MMC), a global professional services firm with more than 55,000 employees and exceeding $11 billion of annual revenues. MMC also is the parent company of Guy Carpenter, the risk and reinsurance specialist; Kroll, the risk consulting firm; Mercer, the provider of HR and related financial advice and services; and Oliver Wyman, the management consultancy. MMC’s stock (ticker symbol: MMC) is listed on the New York, Chicago and London stock exchanges. MMC’s Web Site is www.mmc.com.  Marsh’s Web site is www.marsh.com.