How insurance can shore up the supply chain

Vol: 44 Issue: 3 | Oct 2021

When container ship Ever Given ran aground and blocked the Suez Canal for six days earlier this year, the world became acutely aware of how quickly global supply chains can be disrupted.

Recent COVID-19 outbreaks in southern China, South-East Asia and Taiwan have reinforced that message and caused further pain. One of those outbreaks, at the end of May, led to a five-day traffic halt for inbound container deliveries to the Yantian International Container Terminal in Shenzhen. In July, a massive backlog of appliances, commodities and toys was still sitting in storage, waiting to be exported.

The past 18 months have been highly stressful for those relying on international ports to conduct business. The COVID-19 pandemic has caused massive disruption on a global scale, and Australian ports have been further challenged by bouts of poor weather, infrastructure upgrades and union disputes. Shipping schedules have been thrown into chaos, resulting in heavy surcharges and rate increases with little or no notice. 

‘The very nature of emerging supply-chain risks is that they aren’t usually predictable,’ says Neil Hiller, managing director of Hiller Marine. ‘Known risks tend to be eclipsed by new types of exposures — unanticipated “black swan” events.

The paradox can sometimes be that as new forms of supply-chain risk emerge, some insurers’ first reaction is to exclude cover for it, COVID-19 being the most obvious example.’

Support for clients

Hiller notes that, in response to the outbreak of the COVID-19 pandemic, most insurers excluded losses arising from an infectious disease. His company took a different approach.

Hiller recognised that clients were incurring extra costs as shipping lines exercised their right to pass on to importers additional freight charges caused by delays or by having to divert cargoes to other ports.

He devised a new product called supply chain risk cover, which is specifically aimed at providing coverage when disruptions occur across international supply chains. 

The policy includes elements of property, stock throughput, business interruption, trade disruption, liability and legal dispute expense coverage. Hiller says the advantage of this approach is that they can identify the particular types of risks that an extended supply chain presents and then deliver a combination of covers that are specifically designed to address these exposures. 

Frederick Gentile, director of risk engagement at Willis Towers Watson in the United Kingdom, also offered increased support to his clients. He hosted conversations with experts such as business continuity professionals and loss management specialists. His team also penned a series of thought leadership articles and delivered webinars to help educate clients about various supply-chain challenges. 

Severe legal liabilities 

It’s not only physical disruptions that can wreak havoc on supply chains. Other forms of risk exposure include legal and contractual liabilities, fines and penalties, financial loss and cyber attacks. Various insurance policies — such as trade credit, product liability, management liability and cyber risk — offer protection against these exposures. 

However, says Hiller, company directors are often oblivious to the potential seriousness of their supply-chain legal liability exposures. For example, recent changes to Australian heavy vehicle laws mean that executives could face hefty fines and other penalties if imported goods cause injury or death due to not being packed properly overseas or locally. It is imperative for brokers to tell clients about these new obligations.

‘The underwriters of these products usually engage with their policyholders via the clients’ brokers,’ says Hiller. ‘Brokers are best placed to assess their clients’ evolving supply-chain risk profile and work with insurers to ensure that a holistic perspective is taken when matching risk exposures with the appropriate coverage.’

Gentile points out that many insurers already include supplier failure coverage as a clause within their property damage and business interruption policies, and that it often extends to customer failure. 

‘However, the coverage limits are generally limited, with larger suppliers requiring identification and in some cases risk profiling,’ he adds. ‘Some insurers offer specialised supply-chain policies covering some of the gaps not included in contingent business interruption.’ 

The case for an overarching program

Hiller believes it would be more effective if certain insurance products were combined to form a supply-chain risk insurance program. He says relevant insurance products could include elements of property, marine, trade credit, general liability, management liability, product liability, business interruption, contingent business interruption, trade disruption and legal expense covers, as well as alternative risk transfer solutions.

Another emerging supply-chain risk that could be included in such a program is the permanent loss of key suppliers. This may arise simply due to the economic impact of COVID-19.

‘As various government economic responses to COVID-19 begin to wind down, it is very possible that we will see smaller suppliers and companies struggle to survive, which, in turn, may mean reductions in supplier alternatives and higher costs as markets regain their equilibriums,’ explains Gentile. 

He adds that supplier failures may also be caused by the loss of skilled employees, an inability to recruit new employees at competitive costs or when customers themselves are forced to find alternative supply solutions. 

Gentile suggests that insurers work with customers to manage their risks by holding joint workshops that focus on supply interruption scenarios and offering more flexibility over policies by extending the clauses within a business interruption policy. He also thinks it worthwhile to reward and recognise the advantages of effective risk management by clients and the steps taken to boost resilience, such as developing business or supplier continuity plans.

Leveraging tech to manage risks

New technologies are being used at Willis Towers Watson to monitor supply-chain risks. Its research and analytics team recently developed a supply-chain modelling tool that is linked to its global peril diagnostic modelling tool. 

‘The tool will enable our clients to assess natural catastrophe, terrorism and pandemic risks across the internal and external network, at both an individual third-party level and aggregate level, in addition to other features,’ says Gentile.

Further, Willis Towers Watson’s Acclimatise company uses software and big data to help clients manage climate risks and build resilience. Its climate change modelling also provides information on the longer-term implications for regions and their supply routes. Among the many projects benefiting from this modelling and analysis is Cotton 2040, an international collaboration working towards a more sustainable global cotton industry.

Whatever the sector or business, resilience and sustainability will be key as the risks posed to global supply chains become more complex and numerous — and clients will increasingly look to their insurers for help in meeting the challenges.

Technologies transforming global supply chains

Before COVID-19, these key technology trends were already helping to transform global supply chains:

• Internet of Things devices and machine intelligence drive new insights towards end-to-end visibility.
• Digital ecosystems facilitate access to digital twins (virtual models of a process, product or service) at points of need.
• Distributed ledger technology and confidential computing enable trust among layers of counterparties.
• Parametric insurance and resilience / risk management as a service create new ways to close the insurance protection gap.

Source: Swiss Re Institute

Growth opportunities for insurers 

COVID-19 has been a wake-up call to many companies, which are now more aware of the risks inherent in complex global supply chains. Looking ahead, Swiss Re expects many to step up their efforts to reshape their supply-chain networks. 

‘Restructuring of supply chains has become a key global macro-economic trend, which will present opportunities for innovation in new insurance solutions,’ says Jerome Jean Haegeli, group chief economist at Swiss Re.

He expects more parallel supply chains to develop as companies diversify and develop new manufacturing locations alongside existing operations. Markets in South-East Asia will be among the preferred destinations as new host locations. There will also be some reshoring back to advanced markets, says Haegeli.

In the wake of COVID-19, Swiss Re believes the healthcare sector will be one of the main areas of supply-chain reform. The motivation is in large part political, as governments seek to safeguard national supplies of critical medical equipment and drugs. Other sectors at the forefront of restructuring will include technology, consumer staples, textiles and electronics, Swiss Re says in a recent Sigma report.

The report expects supply-chain changes to generate about US$63 billion in additional global insurance premiums over a five-year period.

‘As they continue to upscale their capabilities in digital technology and data analytics, insurers will be able to better understand supply-chain risks 
and design innovative covers, particularly in the realms of contingent business interruption and non-physical damage solutions,’ it says. 

‘The construction of manufacturing facilities and infrastructure in alternative production locations will also yield additional premium opportunities in commercial insurance.’