Supply chain risk insurance – An unknown maze?

The risk landscape is continuously changing. However, business interruption including supply chain risk continues to remain as one of the top three risks businesses face for the seventh year in a row.[i] Most businesses operate within a complex supply chain web and a break in any part of that structure can cause tremendous financial losses. Traditional property damage/business interruption (PD/BI) policies are not tailored to cope with the extent and nature of a supply chain interruption.

Therefore, businesses will need to look beyond the traditional PD/BI polices to transfer their supply chain risks. PD/BI policies have many limitations when providing indemnity coverage to the insured for named/unnamed suppliers in the event of a gross profit loss resulting from physical damage at the direct (tier one) supplier’s premises. According to the report issued by Zurich Business Continuity Institute (BCI) in 2018, only 52% of the businesses surveyed suffered a loss at a tier one supplier with the remaining losses being from tier two suppliers and beyond.

It is important for businesses to thoroughly understand their supply chain risks to ensure appropriate insurance solutions are obtained to cover their risks. The top causes identified include:

  • Information technology outages
  • Adverse weather
  • Cyber attacks
  • Loss of talent/skills
  • Transportation network disruption
  • New laws or regulations[ii]

It is unlikely that the causes above will trigger a loss under the PD/BI policies unless there is actual physical damage involved. In most instances, supply chain interruptions are due to non-damage triggers including the causes listed above, which will not be covered by the traditional PD/BI polices. Businesses surveyed by the BCI confirmed that 47% of the supply chain losses were not insured.

With Brexit in motion, the Chartered Institute of Procurement and Supply estimates that almost two-thirds (63%) of European Union (EU) businesses that work with suppliers located in the United Kingdom (UK) expect to move some part of their supply chains out of the UK. Maintaining relationships with suppliers post Brexit will become the biggest challenge and more of a reason to re-visit the supply chain risk exposures closely. New laws and regulations that are likely to come in force will dramatically slow down the flow of goods, and reduce visibility and control in and out of the EU and UK. It is likely there will be potential changes to regulations on grants and incentive, customs and tariffs, and legal contracts to name a few.

Businesses should therefore make every effort to maintain a resilient supply chain. The table below outlines some of the coverage options available in the market.


Risk

Non- damage supply chain

PD/BI -contingent BI

Marine/marine BI

Trade credit

Political risk

Cyber

Product liability

Supplier insolvency

 

 

 

 

 

Failure of fuel and utilities

 

 

 

 

 

 

Communication system failure

 

 

 

 

 

 

Transport/port failure blockage

 

 

 

 

 

Raw material delays

 

 

 

 

 

 

Supplier staff illness/ strikes

 

 

 

 

 

 

Cyber risk, virus

 

 

 

 

 

Denial access to supplier premises

 

 

 

 

 

 

Physical damage

 

 

 

 

Political risk

 

 

 

 

 

Expropriation

 

 

 

 

 

Product quality/ recall

 

 

 

 

 

 

The non-damage supply chain policies available in the market are thought to cover most non-damage perils other than war, terrorism and nuclear reaction, and radioactive contamination. However, the cost of obtaining such coverage may be more expensive than traditional PD/BI policies.

Recent surveys confirm that the primary reason businesses purchase inappropriate coverage is due to the challenges involved in understanding their supply chain and not because it is thought to be expensive or because insurers’ requests for information are too onerous. This reveals an awareness gap that can be rather costly. By undertaking a thorough review of supply chain risks, businesses can better identify the exposures they face. Below are some recommendations for businesses:

  • Develop value chain mapping to identify and quantify the impact of losing key suppliers; quantified monetary consequences are a powerful tool to rouse a board of directors into action
  • Determine the accumulation of risk beyond tier one suppliers and understand the single point of failure
  • Review the insured’s business continuity plans as well as the suppliers’ business continuity plans to ensure mitigation measures are in place at all levels
  • Maintain strong communication links to promote transparency, accountability and faster responses in a crisis
  • Understand intercompany dependency as well as reliance on other parts of the business in the external supply source
  • Understand the current insurance policy/risk transfer options in place, and tailor existing coverage to suit your requirement or obtain necessary standalone policies

Commitment from senior management is essential to make informed decisions on purchasing tailored insurance for supply chain risks and untangle the maze.


[i] Allianz Risk Barometer issued in 2019

[ii] BCI report 2018

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