Business interrupted: Insuring the supply chain
The Ever Given grounding incident highlighted the vulnerability of global supply chains. But with the hard market making related CBI risks harder to insure, there is a growing emphasis on improving data quality
Vulnerability in global supply chains was brought into sharp focus by the grounding of the container vessel Ever Given for a week during March this year in the Suez Canal - one of the world’s most vital maritime trade arteries.
The event highlighted the issue of contingent business interruption (CBI) insurance for commercial buyers. Greater disruption to global logistics was only spared when the ship was re-floated after being stuck for six days blocking the canal - a critical choke point for international shipping - allowing the 'traffic jam' of shipping that had built up over the period to gradually ease.
At the same time, hard market conditions for commercial insurance buyers have made transferring corporate supply chain risks an increased challenge. Carriers have sought to redeploy capacity to take advantage of more lucrative opportunities, underwriting simpler risks for stronger rates.
Intangible and less understood risks – such as product recall, reputational risk and CBI – are among those feeling the pinch.
“It’s getting increasingly difficult to provide the cover clients want, that’s for sure,” says Matthew Grimwade, Aon’s EMEA head of business development. “For many insurers, if they can’t price it and they struggle to understand the exposure, they are questioning whether to underwrite it.”
The market’s love-hate story with CBI goes back at least a decade to a previous logistical crisis, when Thai floods in 2011 caused stoppages for electronics manufacturers reliant on components arriving from suppliers whose warehouses were under water.
That episode prompted a product push pitched at standalone CBI coverage, which achieved only limited take up. However, in the soft market conditions prevalent in the decade since, the overwhelming majority of CBI protection has been packaged within broader property damage and business interruption (PDBI) policies.
“Until a couple of years ago, CBI could be included as an extension to PDBI, with broad coverage and significant sub-limits widely on offer,” Grimwade says. “In other words, it was ‘thrown in’ to a large degree by insurers."
“Cover is still available but restricted,” he adds. “That retraction has accelerated over the past 12 months. Extended coverages provided in a soft market environment are being restricted in favour of what are seen as more core exposures.”
The Ever Given’s grounding is a CBI event, although some of the more obvious consequences will be marine claims, the bulk of which – anticipated to be in the triple digit millions – are likely to stem from third party liability claims against the Ever Given and its owners, representing a long and legalistic claims process.
Speaking on a Lloyd’s webinar in April, Rob McAdams, head of marine, Munich Re Syndicate, characterised the event as a “near miss”, and said it could have been significantly worse if the vessel had remained stuck for longer than six days.
In addition, the lack of damage to the hull or cargo onboard, absence of major pollution, and safety of all crew members are all likely to diminish what could have been a far more costly disaster.
“We should expect more events like this – the world is clearly more interconnected and complex which is causing greater friction and risk, particularly at the intersection of risks,” says Neal Croft, global client relationship director, Willis Towers Watson.
“To be resilient, organisations and individuals need to prepare. To do this, they need to understand potential issues in order to be able to prevent and protect against them and be able to react when things go wrong.”
Sectors such as automotive, food, life sciences and complex manufacturing are particularly vulnerable to supply chain CBI risks, Grimwade notes. He cites the electronics industry’s reliance on semiconductors made in earthquake-prone Taiwan, and the global supply chains of car makers, as two prominent examples.
“In the automotive sector, a car manufacturer will have a significant number of direct contracts with tier one suppliers,” he says. “Behind them there will also be a potentially much greater number of second tier suppliers that provide specific items that go into what the first tier provides.”
Reducing underwriting uncertainty by providing such data to insurers – going into the second, and even beyond into the third and fourth tiers – is increasingly a factor in placing CBI cover, he suggests.
For insurers concerned with the threat of volatile correlations within their underwriting books, unforeseen accumulations and concentrations of risk represent a major problem, with CBI representing a potential blind spot, and one which, although significant, may not meet the attachment points to trigger their reinsurance treaties.
Risk mapping is consequently vital. It has been historically limited for complex manufacturing, but the quality of data is improving, Grimwade suggests. It is increasingly important to providing the degree of certainty underwriters are looking for, he stresses.
“It’s important to know which ingredients these suppliers are providing as well as the locations, and also to give the details of dual sourcing plans alternative suppliers,” he says.
“Most organisations will already have a risk manager or a business continuity manager with a disaster recovery plan, for example, but it’s a question of how good the plan is and how well it’s kept updated.”
Understanding supply chain complexity and building resilience increasingly requires an enterprise-wide approach to risk management, emphasises Croft, viewed from a multi-lens and department perspective.
“From this stance, the range of risks, their drivers, and subsequent effects that organisations face can be properly understood and prioritised, and scenarios to operate against generated and ‘red teamed’ against,” he says. [‘Red teaming’ refers to simulated attacks by security professionals to test an organisation’s resilience]
The result is that risks will be better understood and a comprehensive set of contingency plans and integrated solutions, including insurance, and the triggers for their activation can be developed for use. The direct and indirect cost of these risks can also be better calculated, Croft explains.
“Organisations that can demonstrate better risk management from the board level down using intelligence-led decisions [and] a range of integrated tools to scenario and contingency plan will reduce their risk of surprise shocks from local, national, and global events, and be more attractive to the insurance market and shareholders,” he adds.
Marshalling supply chain data, to provide an underwriter with a useful view of it, has presented challenges because of the way that supply chains have been traditionally managed, Grimwade notes, usually dealt with by the procurement function.
“That is not the same as the insurance or risk management or finance part of the organisation,” he says. “It’s as if they speak a different language within the different parts of a large and complex manufacturing organisation. The challenge is getting those parts to coordinate together, to understand how insurance can form part of the solution to business continuity and supply chain problems.”
Grimwade emphasises that, despite a rising tide of market pricing and difficulties in placing protection, better data can represent one route to securing the coverage clients need.
“It’s less about price and more about the quality of information. You can still get this coverage, but higher the quality of the data provided, the higher the limits you can get,” he says. “It’s about quality rather than quantity.”