November 7, 2018
The need for Business Income Insurance Protection (Primary & Contingent) is Important.
The American Supply Management Institute points out in its September 2018 Report on Business that “economic activity in the manufacturing sector expanded in September and the overall economy grew for the 113th consecutive month.”
“Demand remains strong, with the new order index at 60 percent or above for the 17th straight month, and customers inventories index remaining low. The backlog of orders index continues to expand.”
However, there are continued supply chain inefficiencies in the form of lead time extensions, steel and aluminum disruptions, supplier labor issues and transportation difficulties.
Finally, “the market is in a state of chaos with the latest round of tariffs. The tariffs have caused a mass rush to buy up inventories of affected products in order to minimize the long-term financial impact.”
In summary, there are shortages of workers and material at both ends of any production process. Also, the uncertainty and impact of tariffs could put a major squeeze on profits.
Manufacturing businesses need to pay careful attention to the following risk management and insurance concerns:
BUSINESS PERSONAL PROPERTY
“Spot buying, advanced buying or hoarding” may cause raw materials and components stored in the insured’s facilities to increase dramatically, at least on a temporary basis. The Fedeli Group needs to know of these increases to adjust your business insurance property accordingly. Warehouse fires and other forms of damage can wipe out a manufacturing business on both a temporary or permanent basis.
Some manufacturers and distributors use a “reporting form” method to make sure personal property values are transmitted to the insurance carrier on a monthly or quarterly basis, as necessary. In this method, insurable personal property is almost always up to date, and a catastrophic loss can be paid quickly.
DIRECT PRIMARY BUSINESS INCOME INSURANCE
Insurance protects the loss of or diminution of a company’s gross profits. Its calculation has a basic simple component and a more complicated “inner” component.
The outer component recognizes that, when your sales increase your gross profit should also elevate accordingly. This is the simple part of the calculation.
More complex are the relationships among cost of goods sold, overhead, direct payroll and net profits. Business income insurance never covers cost of goods sold (it’s covered under business personal property) but does cover the other elements mentioned above.
It’s important that The Fedeli Group has a complete business interruption calculator (worksheet) form for the client on at least an annual basis, or interim timeframe to accurately measure your risk!
CONTINGENT BUSINESS INTERRUPTION
This insurance protection responds in the same fashion as direct, business interruption insurance, but is placed on supplier’s manufacturing plants.
The strategy here is to insure the loss of gross profit our client would suffer if a supplier to us has a claim due to a peril such as fire, windstorm, etc. that damages his/her plant. Our client may not be able to produce a finished product.
This is extremely important because of price increases due to tariffs, or in cases where our client must seek alternative sources of raw material supply from sources with which our client is not familiar. It is a key part of supply chain risk management strategy.
As the above demonstrates, it is critical to the company’s financial well-being that it considers and implements risk management principals in insuring their supply chain exposures.
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