Trade Disruption Insurance (TDI) is a relatively new product developed to address shortcomings in traditional insurance coverage for firms that depend on global supply chains.
Rather than build plants overseas, companies now rely on offshore contract manufacturing to fulfill orders. Goods are manufactured by a variety of suppliers in the developing world and brought to market just in time for sale. Interruption to these supply chains can be financially disastrous.
Political risk coverage has now adapted to these norms by creating TDI. Rather than insuring against the losses caused by political events to goods in transit or bricks and mortar, it insures against the loss of gross or net income caused by the interruption of the supply chain from beginning to end.
Insured perils are very broad allowing the inclusion of political risk force majeure and insolvency risk, but the thrust of the coverage is that it is a business interruption, contingent business interruption and an extra expense loss. A TDI policy acts as an umbrella for traditional Marine, Transit, Business Interruption, Extra Expense and All Risk DIC insurance forms. The policy also fills gaps covering items specifically excluded in these forms.
Trade Disruption events can include:
- Failure of a supplier to deliver goods on time and consequential penalties
- Insolvency or bankruptcy of a supplier
- Closure of ports, railways or airports and blockage of waterways
- War, civil war, political terrorism, revolution, riots, strikes
- Confiscation, deprivation or requisition of a supplier’s business
- Imposition of trade restrictions (license revocations, embargoes, sanctions)
- Diversion or delay of products and equipment necessary to fulfill contract, including penalties
- Power grid failure or disruption
- Damage to material handling equipment in port, rail yard or airport
- Weather related perils such as flood, hurricane, tsunami, typhoon, tornado and earthquake
Financial loss is determined above a time deductible and can include:
- Costs to purchase and deliver goods from an alternative supplier
- Contractual penalties for failing to meet supply, milestone or construction deadlines
- Costs to execute contingency or emergency plans
- Loss of revenue earmarked for corporate dividends or debt repayment
- Loss of tax credits or incentives
Examples where TDI should be used – import and export:
|Foreign contract manufacturing – especially highly engineered products||Import of seasonal apparel, shoes or other retail goods|
|Concentrations in one or two key suppliers||Chemical feedstock supply|
|Construction / engineering projects with delay or completion penalties||Supply chain running through politically volatile areas|
|Foreign mineral, or rare element resource reliance||Component assemblies, especially those requiring just in time delivery|
|Reliance on suppliers located in politically volatile countries||Debt related to any of the above|