The ‘Bullwhip’ Effect: What It Is and How It’s Exacerbating Supply Chain Issues

Companies may be expanding inventory to manage increased online shopping, but are they managing the risk appropriately?

Cargo delays, a trucking labor shortage, and continued pandemic shutdown measures are exacerbating supply chain woes. The dynamic is leading to empty shelves and panic buying, which is creating even more headaches for those trying to manage inventories.

Nick Kohlhof, account executive in property casualty for Holmes Murphy in Des Moines, said many companies are repeating a behavior that was witnessed among consumers at the start of the pandemic: Fearing shortages, they stockpiled necessities like toilet paper.

Pandemic panic buying led to shortages up the supply chain and is representative of “The Bullwhip Effect,” a phrase coined by MIT professor Jay Forrester.

He first described the phenomenon that refers to increased demand at the end of a supply chain causing a ripple effect and distortions throughout the chain.

Supply Challenges Today

A company’s purchasing practices also can have a major impact on insurance coverage and costs. More inventory means there’s more product to insure and more warehouse space could add another property to a policy.

Having a smoothly working supply chain is a competitive advantage for business. It allows them to stock only what they need, keeping costs low.

“The buying frenzy only makes things more complicated and unpredictable,” said Kohlhof.

He also has noticed that companies are trying to anticipate or deal with supply chain delays by stockpiling inventory, which makes it more challenging to predict inventory values and come up with appropriate coverage limits.

“Lead time for products, inventory on hand and supply chain interruptions are all taken into consideration and impact policy structure and coverage requirements,” he said.

Talk to Your Broker

When a company increases its inventory or opens a new warehouse, it should also be communicating with its insurance broker about these changes.

“Expanding into new warehouse space, increasing on-site inventory, or developing new product lines are positives for businesses,” he said.

“However, when these changes aren’t properly reported to your insurance broker, businesses face uncovered insurance claims.”

In today’s unpredictable environment, Kohlhof said a traditional yearly review with a broker is often not enough to make sure insurance coverages are sufficient to cover a warehouse or inventory fire, flood or theft loss.

Risk Management’s Hand in Helping

While updating insurance coverages might not be top of mind during such a challenging time, Kohlhof said risk managers should drive home the idea that it should be a priority. He makes it a point to keep in touch with clients on a frequent basis about how their purchasing and inventory approaches are affecting their insurance needs.

He added that businesses also need to make sure their inventory and facilities are well protected against loss.

Brendan Neligan, ocean cargo broker with Risk Placement Services, said businesses that are stockpiling inventories need to mitigate risk at their facilities.

Businesses should determine if their facilities are clean and well maintained; whether they are protected against theft with cameras, water detectors or other security measures; and they have fire protection equipment such as sprinkler systems or smoke alarms in place.

Neligan said it is crucial for businesses to consider worst case scenarios that could cause inventory losses and put measures in place to prevent them.

Showing an underwriter that inventory, even though it may be expanding, is well protected can affect the rates a company will pay for insurance coverage.

“Inventories are rising and there will be costs associated with that, but businesses can defray some of those costs by understanding their risks and mitigating losses,” he said.

Neligan said underwriters often estimate the value of losses based on industry averages. But those may not be sufficient at a time when companies are keeping large inventories on hand. It’s up to businesses to have a clear idea of what they are holding and communicate that.

“It’s very important that businesses know what they are on the hook for,” he said. “They should have the maximum policy limits in place for what they are holding at any particular time.”

Shipping Costs Rising

Neligan said insurance is only one of the rising costs related to the supply chain; the cost of a shipping container traveling from East Asia to the U.S. increased dramatically during the pandemic, he said.

A container that might hold 1,000 pairs of shoes or 100 TVs used to rent for between $2,500 and $5,000. Today, it costs $15,000. The time frame for shipping from East Asia to the U.S. is also up. It used to be about 40 days and now is about 75.

“It’s taking double the time and five times the cost,” he said.

With such concerns, it might be tempting to consider foregoing other additional costs such as paying for an increase in insurance coverage or footing the bill for taking risk mitigation measures at a warehouse.

He urges businesses not to follow that course, particularly as supply chain issues are expected to drag further into 2022 and perhaps even beyond.

He added the pandemic has prompted more consumers to shop online. He doesn’t expect that trend to reverse.

“It’s a rock going down a hill,” he said. “It’s gaining momentum.”

The best advice he has to offer is for businesses to make sure they know the maximum inventory on hand at any point, to talk with their broker about it, and to insure it appropriately.

“You should have a deep discussion with an insurance broker and figure out what you need,” he said.

“Seek a broker, and a second opinion, if needed. These are people working in the trenches every day. Use their knowledge and experience to your advantage.” &

Annemarie Mannion is a freelance writer. She can be reached at [email protected].

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.