Hurricane Sandy could cost insurers between US$5 billion and US$10 billion, according to a report in the Wall Street Journal. Bloomberg reports that the hurricane’s toll is poised to top US$20 billion worth of “economic damage”.

“These numbers, unfortunately, are not surprising,” says Tom Teixeira, a practice leader in Willis Global Solutions, in his latest blog on WillisWire. “In fact, I expect the figure to be a lot bigger once all of the losses have been analysed, including the business interruption losses.”

This is due to many companies failing to take on board the lessons learnt from last year’s catastrophes, he says.

“There is still not enough alignment between the procurement function and group risk. The silo mentality – driven by localised profit and loss accounts – has created opposing objectives, such as procurement trying to significantly reduce inventory and group risk trying to reduce the level of business interruption should disasters occur.”

“Once the full extent of the damage from Sandy is analysed I have no doubt we will see large business interruption losses – not just as a result of property damage at supplier sites but as a result of power failure to suppliers leading to the stoppage or partial stoppage of production.”

Teixeira says that business interruption losses will be compounded by two key issues:
•Many companies have failed to drive effective business continuity planning across their supply chains.
•Cost reduction measures continue to increase the dependency of companies on a greater number of critical suppliers. This causes large business interruption losses and additional cost of working when one of these suppliers goes down.

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