A New Frontier for Specialty Risk Management – Counterfeit Parts Liability Risk

Many insurance brokerage and risk management firms support the A&D contractor community in the area of “supply chain risk”. The scope, however, tends to focus on supply chain disruptions due to financial volatility, natural disasters, and civil unrest; and cyber-attacks. The counterfeit parts threat appears to be a new frontier for Risk Management and Insurance specialists.

This week, a colleague shared with me a copy of correspondence from an insurance brokerage and specialty risk management consulting firm describing US Government scrutiny of it supply chain. Upon reading this correspondence, I wondered how specialty risk management firms view counterfeit parts risk exposure in a climate where (1) costs to remedy a counterfeit part escape may not be a allowable costs, and (2) considerable challenges exist in approaching quantitative risk analysis necessary for risk profiling and financing.

I took some time to search for insurance and risk management firms that openly discuss the counterfeit parts threat. Though I found several that discuss supply chain disruptions and cyber-attacks, thus far I have found only one that discusses “the damage and liability that can be caused by undetected counterfeit parts” and describes “steps companies can take to protect themselves and their customers”

Getting real – defending your supply chain from counterfeit components

Though the target audience for this material appears to be a broad range of electronics producers, sellers and users, much of the information describing the threat comes from reports and resources that are very familiar to DoD contractors. This material identifies “widely recognized sources of standards”, including SAE Standards AS5553, AS6081 and AS6171 developed by the SAE G19 Committee which is heavily represented by DoD and its suppliers. I was particularly interested to see that this firm recommends companies “follow a best-practice approach to defend its supply chain”. These recommendations align well with thoughts offered earlier for A&D contractors to consider while establishing and implementing a compliance program for counterfeit parts avoidance and detection.

While this material is helpful toward pointing organizations in the right direction for designing enterprise level counterfeit avoidance compliance programs, it has limited utility for risk assessment purposes. I look forward to the day I see a study conducted by the insurance and risk management community that quantifies counterfeit parts risk from an actuarial point of view. Such a study would support practical applications to evaluate counterfeit risk and avoidance approaches and to size enterprise level business system implications.

Henry Livingston



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