What drove the supply chain problem?
Consumer demand recovered fast from the initial COVID-19 impact but as movement restrictions and labour shortages caused factories to slow down, so supply faltered, with shortages in some areas like semiconductor chips impacting everything from manufacturing through gaming, telecoms and medical devices.
What began as local supply issues fast compounded into a global demand-supply dislocation. This situation was exacerbated further by cyber-attacks on infrastructure and floods that disrupted manufacturing and severed railway links in China and Europe.
Some 42% of Healthcare and Life Sciences businesses in the US and UK predicted supply chain risk would be their primary concern in this risk category this year – more than any other sector we surveyed – with concern particularly elevated in the US.
Supply chain challenges, labour shortages and rising costs present real potential to drive claims activity as well as resulting losses. A major concern is reliance on specialised staff, who may be over-stretched or burnt out, or who may be covered for by under-trained substitutes, feeding into a worsening claims picture.
Beth DiamondGroup Head of Claims, Beazley
How challenging is business continuity?
As the flow of goods slowed and the backlog at ports grew last year, storage capacity begun to be maxed out. This in turn created logjams that made a mockery of the lean, just-in-time manufacturing models on which many businesses depend and creating knock-ons for business continuity.
Overall, more Tech, Media and Telecoms businesses predicted that business interruption would be their top risk in this category this year than any other sector.
What’s the solution?
Supply chains are adapting and rebounding.2
While there is no universal answer to the current supply chain issues, many companies are combining multiple strategies to build supply chain and business interruption resilience: increasing the inventory of critical products and components while simultaneously diversifying the supplier base and bringing some elements on-shore.
While approaches differ, the goals are common: to shorten and simplify supply chains and to reduce the dependencies within them.3
Although this process is ongoing, business leaders are not confident that this year will see a significant rise in resilience to supply chain risk.
Hospitality, Entertainment and Leisure businesses are particularly pessimistic on supply chain risk, as are Marine and Warehousing. For Business Interruption, sectors expecting to be least resilient in 2022 include the Public Sector, Education and Healthcare and Life Sciences.
Is supply chain re-set an opportunity to add value?
Already business leaders are monitoring tier one suppliers for key personnel changes, quality issues or commodity crunches that may signal disruption is likely. They are also focused on understanding the supply web better. Currently, only 2% have visibility of tier three suppliers and beyond, even though key component shortages, such as semiconductors, often happen here.4
While traditional supply chain insurances might include contingent business interruption covers - such as lost income (the money the company would have earned if the triggering event hadn’t occurred), extra expenses (such as replacement costs for obtaining the necessary goods from other suppliers, or expenses incurred to mitigate/prevent additional losses) - the real value of insurance is likely to come from more than traditional risk transfer policies.
How can the industry innovate and tailor cover to add value?
As a specialist insurer, we can work with insureds across industries to pool and interrogate the data from automated supply chains. Over time, we will be able to develop a hub of centralised services adding risk management value, surrounded by straight-forward risk transfer mechanisms for transferable risks.
Central services could include risk analysis, benchmarking and mitigation advice that can help analyse supply chain quality and business interruption resilience. This will be contingent on improved use of ‘big data’ technologies that are becoming better understood by insurance businesses. Over time, such developments should help insurers offer greater limits.
The onus is on us to think through how we can help and how we can put together a product for supply chain risk because it is very material.
Adrian CoxCEO, Beazley