Understanding external dependencies

Defining external dependencies

External partners are considered to be companies, service providers or other stakeholders supporting the client in delivering their business products and solutions to the market.

Be aware, the insurance industry uses a variety of terms to refer to the same things, these include but are not limited to e.g. unnamed and named dependencies, contingent business interruption, as well as first tier or multiple tiers insurance.

Tiers below 1st Tier (supplier’s suppliers) are not commonly part of the insurance program and are considered on a case by case basis.

It is common for companies to be dependent upon some suppliers directly, sometimes these can be combined into one category, for example Public Utilities (water, electricity and data), Named Supplier's and Customer's, etc. Another example is Denial of Access, where no physical damage has occurred at the insured location, however there may be business interruption losses due to ­other circumstances (e.g. inaccessibility to premises due to fire in a neighbouring ­facility). 

As an example, finding a secondary supplier may be more expensive, may have an impact on the quality and can cause possible delays in production and/or delivery. In the worst case, this can lead to a loss of market share or even bankruptcy.

External dependency claims are commonplace

As companies manufacture increasingly complex products, they also require more and more levels of suppliers. In addition to this, lean production methods enable cost savings by way of on-demand production, reducing the size of inventory and therefore cutting the stocking of products which in normal situations will save costs in the short-term. However, the downside to this is that in case of a serious business interruption when production is impacted, there can be an immediate consequence by way of suppliers and companies having an insufficient amount of products available in stock to fulfil orders.

External dependencies can also play out as a chain reaction. Delays and issues with one supplier can have a ripple effect across the entire market. In cases where a few suppliers are maintaining the availability of specific components or resources to support production, there is little room for interruptions. When these basic materials or services are not available, the impact of this shortage can be substantial.

Insurance solutions to help manage risks

Insurers must estimate what could be the ‘worst case scenario’ in the case of a claim. External dependency issues are often more expensive and take longer to process, when comparing with interdependencies that occur within the Group. This is due to not having direct access to all parties involved which can delay the initiation of loss mitigating actions.

To keep up to date with external dependencies, it is recommended that a thorough business continuity management plan is in place. This should be regularly updated and maintained to stay on top of potential Business Interruption risks coming from external partners. Following a thorough assessment, you are better positioned to face possible external dependency losses. Only then can mitigating these risks begin in earnest.

Examples of reducing single source supplier dependencies are:

• deep collaboration with your network
• continuity planning
• diversifying customer network