These Are the Disturbing Ways Manufacturing, Retail and Food Supply Chains Are Destabilizing Under Political Risk

Never have so many political upsets impacted the supply chain at once, say experts, so risk managers need to stay ahead of the changes.
By: | March 25, 2019

The waters of global trade are growing murkier than ever for importers and exporters. The departure of the UK from the European Union, trade scuffles between U.S. and China and a new North American Free Trade Agreement have all brought uncertainty to supply chains in the past year. U.S. retailers and manufacturers, while concerned about the prospect for tariffs, say uncertainty is especially challenging.

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While these individual developments may be a short-term obstacle, experts say a bigger issue lies in entering a new era of global trade that may not be as open and free as in the past couple of decades.

Compliance and risk management experts add that organizations will have to think more carefully about their supply chains and strategize to reduce the risk.

New Levels of Uncertainty in Global Trade

The year leading up to the UK’s departure from the European Union on March 29 has provoked concern for global supply chains.

U.S.-China relations have also been bumpy, and the Trump administration announced, in early-2018, tariffs as high as 25 percent on $200 billion worth of Chinese imports. While that decision was postponed on several occasions, it includes everything from metal products and electronics to auto parts and textiles, according to the Office of the United States Trade Representatives.

Importers and exporters have dealt with trade regulations before, but it’s uncommon for so many things to happen at once with so little clarity.

“It’s unlike anything we’ve seen,” said Gabrielle Griffith, director at BPE Global. “Free trade agreements being on hold, being redrafted — it’s all occurred before but never with as little guidance as we are being given at the moment.”

And most American companies aren’t accustomed to dealing with tightening trade agreements.

For the past three decades, global trade has trended towards freer trade with more seamless transactions and borders, said Kamala Raman, senior director analyst in supply chain at Gartner. “People have gotten really used to long, global supply chains … They’re not used to worrying about where things come from and that’s starting to change,” Raman said.

The rise of populist governments and prospects for protectionist policies raises concerns among importers and exporters around the globe. Retailers from the British Retail Consortium warned in a letter in late-January that a no-deal Brexit could threaten the food security in the nation and leave shelves empty as one-third of country’s food comes from the EU.

In the U.S., National Association of Manufacturers (NAM) president and CEO Jay Timmons said in an August 2018 statement that while tariffs “may be an attempt to create more leverage, they also increase the risks for manufacturing in America and add to mounting uncertainty.”

The current unfolding environment is one that could result in a surge in tariffs, goods being held up at customs, longer waits at the border and contractual liabilities for the late arrival of goods, said Laura Burns, senior vice president and U.S. political risk leader for political and credit risk financial solutions at Willis Towers Watson.

“It fundamentally changes the risk environment for multinationals as these are quite large financial implications,” Burns said.

Mapping Supply Chains and Modeling Scenarios

Organizations can’t influence the direction of trade agreements, but they can mitigate some of the risks and negative impacts. Griffith recommends creating a “playbook” by mapping out products through the supply chain and identifying import and export controls.

Organizations should also ensure their products are properly classified according to the Harmonized Tariff Schedule, as misclassification is not uncommon.

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Risk managers can use that map and information to identify what supply lanes may be impacted in the loss of free trade agreements, then they can determine the best course of action.

For example, a U.S. company with a supply-chain-lane to the EU may have a partnership with a UK-based entity for tax purposes but moves goods to warehouses in Amsterdam for logistical reasons. In the post-Brexit world, the tariffs could outweigh certain tax or logistical benefits of the locations.

“Free trade agreements being on hold, being redrafted — it’s all occurred before but never with as little guidance as we are being given at the moment.” — Gabrielle Griffith, director at BPE Global

“You can model for nothing happening or model for the split, at which point you’ll have to move your company registration to the EU or start paying taxes,” Griffith said. “You need to understand how it impacts your organization.”

U.S. importers should also more carefully review their products to identify their true origin. While many U.S. companies assemble products in China and then have them shipped here, they’re not always made with Chinese components.

For instance, a company may source 95 percent of its components elsewhere in Asia, then only do final assemble in China before shipping the products to the United States. “In that case, it may not qualify by the regulatory definition of ‘country of origin’ for being considered as a country of origin in China,” Griffith said.

Organizations should use insight like this to model different scenarios to find the measures that produce the best outcomes. Risk managers may need to consult and communicate departments across the organization, including operations, tax, finance and legal.

Many manufacturers, such as those in the steel and metal industries, achieved success passing on higher costs to end users, said Marc Wagman, managing director of trade credit & political risk at Gallagher. While such price elasticity could remain somewhat sustainable in a strong economy, a global recession or downturn would exacerbate the supply chain risks: “In that scenario, pricing leverage over the customer base can disappear quickly,” Wagman said.

Looking Ahead

As Brexit and U.S.-China relations may be a hint of what’s to come, organizations must look beyond these single events and consider the potential for tightening trade agreements, Raman said.

Manufacturers, retailers and importers must adopt a forward-thinking approach about diversifying their supply chains and planning for long-term “big picture” scenarios, she added.

“If you must treat every single incident as a one-off problem to solve, you’re always going to be on the backfoot … Before 2016, no one thought tariffs or Brexit would be an issue. We can’t know what’s going to come in 2021 or 2022,” Raman said.

Some importers are sharing costs with suppliers or customers. Others are diversifying their supply chains by ordering from several strategically-located suppliers in different regions.

There’s also evidence that some companies are divesting in subsidiaries and foreign partnerships. The recent Global Corporate Divestment Study by EY found a record 87 percent of companies were planning to divest in the next two years, and of those, 62 percent said cross-border trade agreements were driving their divestment decisions.

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Many are also reviewing their insurance policies, said Daniel Riordan, president of political risk, credit and bond at AXA XL. While political risk insurance doesn’t cover the fallout of a bad trade deal, it can help when new laws put a company in a situation where it’s unable to pay its suppliers, get goods to market or operate. “When it comes to the level of being punitive, political risk insurance can help make a company whole,” Riordan said.

Trade disruption insurance can also cover the gap in some traditional programs, even when there isn’t a physical loss or damage, Burns added. It typically offers global enterprises protection from loss of profits, extra expenses, trade sanctions, embargoes and delayed debt repayments.

Despite the current concerns and uncertainties, global trade is growing and unlikely to be significantly deterred by any new trade agreements. What it does mean is that organizations will have to learn to “play by new rules and adjust their risk models” when it comes to their supply chains, Riordan said.

“We’re entering a new era. There’s great opportunity, but political relationships have been challenging and there’s a big of reaction to the global consensus about how things should operate.” &

Craig Guillot is a writer and photographer, based in New Orleans. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Scenario

The Betrayal of Elizabeth

In this Risk Scenario, Risk & Insurance explores what might happen in the event a telemedicine or similar home health visit violates a patient's privacy. What consequences await when a young girl's tele visit goes viral?
By: | October 12, 2020
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.

PART ONE: CRACKS IN THE FOUNDATION

Elizabeth Cunningham seemingly had it all. The daughter of two well-established professionals — her father was a personal injury attorney, her mother, also an attorney, had her own estate planning practice — she grew up in a house in Maryland horse country with lots of love and the financial security that can iron out at least some of life’s problems.

Tall, good-looking and talented, Elizabeth was moving through her junior year at the University of Pennsylvania in seemingly good order; check that, very good order, by all appearances.

Her pre-med grades were outstanding. Despite the heavy load of her course work, she’d even managed to place in the Penn Relays in the mile, in the spring of her sophomore season, in May of 2019.

But the winter of 2019/2020 brought challenges, challenges that festered below the surface, known only to her and a couple of close friends.

First came betrayal at the hands of her boyfriend, Tom, right around Thanksgiving. She saw a message pop up on his phone from Rebecca, a young woman she thought was their friend. As it turned out, Rebecca and Tom had been intimate together, and both seemed game to do it again.

Reeling, her holiday mood shattered and her relationship with Tom fractured, Elizabeth was beset by deep feelings of anxiety. As the winter gray became more dense and forbidding, the anxiety grew.

Fed up, she broke up with Tom just after Christmas. What looked like a promising start to 2020 now didn’t feel as joyous.

Right around the end of the year, she plucked a copy of her father’s New York Times from the table in his study. A budding physician, her eyes were drawn to a piece about an outbreak of a highly contagious virus in Wuhan, China.

“Sounds dreadful,” she said to herself.

Within three months, anxiety gnawed at Elizabeth daily as she sat cloistered in her family’s house in Bel Air, Maryland.

It didn’t help matters that her brother, Billy, a high school senior and a constant thorn in her side, was cloistered with her.

She felt like she was suffocating.

One night in early May, feeling shutdown and unable to bring herself to tell her parents about her true condition, Elizabeth reached out to her family physician for help.

Dr. Johnson had been Elizabeth’s doctor for a number of years and, being from a small town, Elizabeth had grown up and gone to school with Dr. Johnson’s son Evan. In fact, back in high school, Evan had asked Elizabeth out once. Not interested, Elizabeth had declined Evan’s advances and did not give this a second thought.

Dr. Johnson’s practice had recently been acquired by a Virginia-based hospital system, Medwell, so when Elizabeth called the office, she was first patched through to Medwell’s receptionist/scheduling service. Within 30 minutes, an online Telehealth consult had been arranged for her to speak directly with Dr. Johnson.

Due to the pandemic, Dr. Johnson called from the office in her home. The doctor was kind. She was practiced.

“So can you tell me what’s going on?” she said.

Elizabeth took a deep breath. She tried to fight what was happening. But she could not. Tears started streaming down her face.

“It’s just… It’s just…” she managed to stammer.

The doctor waited patiently. “It’s okay,” she said. “Just take your time.”

Elizabeth took a deep breath. “It’s like I can’t manage my own mind anymore. It’s nonstop. It won’t turn off…”

More tears streamed down her face.

Patiently, with compassion, the doctor walked Elizabeth through what she might be experiencing. The doctor recommended a follow-up with Medwell’s psychology department.

“Okay,” Elizabeth said, some semblance of relief passing through her.

Unbeknownst to Dr. Johnson, her office door had not been completely closed. During the telehealth call, Evan stopped by his mother’s office to ask her a question. Before knocking he overheard Elizabeth talking and decided to listen in.

PART TWO: BETRAYAL

As Elizabeth was finding the courage to open up to Dr. Johnson about her psychological condition, Evan was recording her with his smartphone through a crack in the doorway.

Spurred by who knows what — his attraction to her, his irritation at being rejected, the idleness of the COVID quarantine — it really didn’t matter. Evan posted his recording of Elizabeth to his Instagram feed.

#CantManageMyMind, #CrazyGirl, #HelpMeDoctorImBeautiful is just some of what followed.

Elizabeth and Evan were both well-liked and very well connected on social media. The posts, shares and reactions that followed Evan’s digital betrayal numbered in the hundreds. Each one of them a knife into the already troubled soul of Elizabeth Cunningham.

By noon of the following day, her well-connected father unleashed the dogs of war.

Rand Davis, the risk manager for the Medwell Health System, a 15-hospital health care company based in Alexandria, Virginia was just finishing lunch when he got a call from the company’s general counsel, Emily Vittorio.

“Yes?” Rand said. He and Emily were accustomed to being quick and blunt with each other. They didn’t have time for much else.

“I just picked up a notice of intent to sue from a personal injury attorney in Bel Air, Maryland. It seems his daughter was in a teleconference with one of our docs. She was experiencing anxiety, the daughter that is. The doctor’s son recorded the call and posted it to social media.”

“Great. Thanks, kid,” Rand said.

“His attorneys want to initiate a discovery dialogue on Monday,” Emily said.

It was Thursday. Rand’s dreams of slipping onto his fishing boat over the weekend evaporated, just like that. He closed his eyes and tilted his face up to the heavens.

Wasn’t it enough that he and the other members of the C-suite fought tooth and nail to keep thousands of people safe and treat them during the COVID-crisis?

He’d watched the explosion in the use of telemedicine with a mixture of awe and alarm. On the one hand, they were saving lives. On the other hand, they were opening themselves to exposures under the Health Insurance Portability and Accountability Act. He just knew it.

He and his colleagues tried to do the right thing. But what they were doing, overwhelmed as they were, was simply not enough.

PART THREE: FALLING DOMINOES

Within the space of two weeks, the torture suffered by Elizabeth Cunningham grew into a class action against Medwell.

In addition to the violation of her privacy, the investigation by Mr. Cunningham’s attorneys revealed the following:

Medwell’s telemedicine component, as needed and well-intended as it was, lacked a viable informed consent protocol.

The consultation with Elizabeth, and as it turned out, hundreds of additional patients in Maryland, Pennsylvania and West Virginia, violated telemedicine regulations in all three states.

Numerous practitioners in the system took part in teleconferences with patients in states in which they were not credentialed to provide that service.

Even if Evan hadn’t cracked open Dr. Johnson’s door and surreptitiously recorded her conversation with Elizabeth, the Medwell telehealth system was found to be insecure — yet another violation of HIPAA.

The amount sought in the class action was $100 million. In an era of social inflation, with jury awards that were once unthinkable becoming commonplace, Medwell was standing squarely in the crosshairs of a liability jury decision that was going to devour entire towers of its insurance program.

Adding another layer of certain pain to the equation was that the case would be heard in Baltimore, a jurisdiction where plaintiffs’ attorneys tended to dance out of courtrooms with millions in their pockets.

That fall, Rand sat with his broker on a call with a specialty insurer, talking about renewals of the group’s general liability, cyber and professional liability programs.

“Yeah, we were kind of hoping to keep the increases on all three at less than 25%,” the broker said breezily.

There was a long silence from the underwriters at the other end of the phone.

“To be honest, we’re borderline about being able to offer you any cover at all,” one of the lead underwriters said.

Rand just sat silently and waited for another shoe to drop.

“Well, what can you do?” the broker said, with hope draining from his voice.

The conversation that followed would propel Rand and his broker on the difficult, next to impossible path of trying to find coverage, with general liability underwriters in full retreat, professional liability underwriters looking for double digit increases and cyber underwriters asking very pointed questions about the health system’s risk management.

Elizabeth, a strong young woman with a good support network, would eventually recover from the damage done to her.

Medwell’s relationships with the insurance markets looked like it almost never would. &

Bar-Lessons-Learned---Partner's-Content-V1b

Risk & Insurance® partnered with Allied World to produce this scenario. Below are Allied World’s recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance.®.

The use of telehealth has exponentially accelerated with the advent of COVID-19. Few health care providers were prepared for this shift. Health care organizations should confirm that Telehealth coverage is included in their Medical Professional, General Liability and Cyber policies, and to what extent. Concerns around Telehealth focus on HIPAA compliance and the internal policies in place to meet the federal and state standards and best practices for privacy and quality care. As states open businesses and the crisis abates, will pre-COVID-19 telehealth policies and regulations once again be enforced?

Risk Management Considerations:

The same ethical and standard of care issues around caring for patients face-to-face in an office apply in telehealth settings:

  • maintain a strong patient-physician relationship;
  • protect patient privacy; and
  • seek the best possible outcome.

Telehealth can create challenges around “informed consent.” It is critical to inform patients of the potential benefits and risks of telehealth (including privacy and security), ensure the use of HIPAA compliant platforms and make sure there is a good level of understanding of the scope of telehealth. Providers must be aware of the regulatory and licensure requirements in the state where the patient is located, as well as those of the state in which they are licensed.

A professional and private environment should be maintained for patient privacy and confidentiality. Best practices must be in place and followed. Medical professionals who engage in telehealth should be fully trained in operating the technology. Patients must also be instructed in its use and provided instructions on what to do if there are technical difficulties.

This case study is for illustrative purposes only and is not intended to be a summary of, and does not in any way vary, the actual coverage available to a policyholder under any insurance policy. Actual coverage for specific claims will be determined by the actual policy language and will be based on the specific facts and circumstances of the claim. Consult your insurance advisors or legal counsel for guidance on your organization’s policies and coverage matters and other issues specific to your organization.

This information is provided as a general overview for agents and brokers. Coverage will be underwritten by an insurance subsidiary of Allied World Assurance Company Holdings, Ltd, a Fairfax company (“Allied World”). Such subsidiaries currently carry an A.M. Best rating of “A” (Excellent), a Moody’s rating of “A3” (Good) and a Standard & Poor’s rating of “A-” (Strong), as applicable. Coverage is offered only through licensed agents and brokers. Actual coverage may vary and is subject to policy language as issued. Coverage may not be available in all jurisdictions. Risk management services are provided or arranged through AWAC Services Company, a member company of Allied World. © 2020 Allied World Assurance Company Holdings, Ltd. All rights reserved.




Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]