Disaster risksIndustrial, materials industry facing risks on global scale

The struggling global economy and recent disasters, including the Thailand floods and Japan earthquake and tsunami, have forced the global industrial and materials industry to change the way it views and prioritizes resources for risk response, according to the 2012 Industrial and Materials Industry Report released at the Risk and Insurance Management Society’s annual conference and exhibition by Aon Risk Solutions, the global risk management business of Aon plc.

The global industrial and materials industry consists of manufacturers in several sub-industries, including automotive, metals, construction and agricultural equipment, building materials, industrial machinery, and defense contractors.

As the findings of Aon’s 2011 Aon Global Risk Management Survey show, the three largest risks faced by companies in the global industrial and materials industry today are economic turmoil, commodity pricing fluctuations, and business interruption, which includes supply chain disruption.

A slow recovery in the United States, prolonged economic stability issues in the European Union, and a slowing market in China make it difficult to forecast demand. With raw materials and energy making significant contributions to the cost of goods sold, concerns over commodity price volatility — which affects cost structure, budget, inventory, and production — loom large. With growing complexity of global supply chains and rapid developments in technology, the range of risk issues is widening for organizations. This challenge is magnified as the trend to outsource component parts and offshore production becomes more prevalent.

“The natural disasters in Japan and Thailand during 2011 caused widespread supply chain and business interruption failures for the automotive and other industrial manufacturing sectors. These events served as a wake-up call for all organizations to more carefully evaluate the interdependencies of their global operations,” said Mike Stankard, managing director of the Automotive Practice and Industrial and Materials Practice for Aon Risk Solutions. “It is more important than ever for organizations to embrace an enterprise-wide approach to managing risk and optimize that strategy on a global basis.”

Key findings shared in the Aon Risk Solutions 2012 Industrial and Materials Industry Report:

— Risk financing: While insurance for the industrial and materials industry remains competitive in terms of coverage provided and enhancements available, Aon clients are looking for further efficiencies in their approach to risk financing through the use of captive insurance companies.

— Property terms and conditions: Aon expects carriers will be more cautious and conservative with flood and contingent business interruption coverage in 2012.

— Umbrella/excess liability limits: Aon is seeing an average limit of $150 million purchased by clients — evidence of a continued concern around product liability and automobile liability litigation.

— Directors’ and officers’ liability limits: Aon is seeing an average limit of $77 million purchased by publicly traded company clients in the S&P Industrials and Materials sectors.

— Aon Global Risk Management Survey results: When industrial and materials organizations with operations in more than one country were asked how they purchase/control their insurance programs, 61 percent of respondents indicated their corporate headquarters control procurement of all of their global and local insurance programs.

— Read more in 2012 U.S. Industry Report: Industrial and Materials (AON, 2012)