Supply chain risk – a missed opportunity for insurers?
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New modelling tools will enable insurers to capitalise on growing demand for supply chain insurance solutions, according to Guidewire’s Michael Dobrovolsky and Lewis Guignard
Supply chain exposures are growing at a fast pace, driven by the onwards march of digitisation, which has accelerated since the pandemic. Across all industries, supply chains are becoming more and more complex and interconnected as manufacturing, logistics and services become reliant on technology and critical IT infrastructure, including third-party cloud services, platforms and data.
Even as supply chains become hard-wired into day-to-day economic activity, they remain largely opaque and poorly understood, while dependencies and the potential consequences of their disruptions are under-appreciated. Supply chains are like Dark Matter. They are all around us, yet largely invisible and difficult to quantify. Only when a crisis strikes – such as a cyberattack or outage, a major fire or flood, war or pandemic – do we come close to seeing the full scale of consequences in wide-spread disruption and shortages, and potentially insured losses.
For the insurance industry, growing supply chain exposures are both an opportunity and a challenge. Business interruption and contingent business interruption (CBI) exposures – for both cyber and property – are growing exponentially with digitisation and globalisation, but the complex web of connections between organisations, suppliers and customers is not well understood, by either the insurer or the insured. This is particularly so for lower tier suppliers, or where complex products and/or digital services are in turn reliant on components or services provided by third parties.
In the absence of transparency, insurers are unable to adequately price supply chain risk or quantify their exposures, either on an individual or aggregate basis. Demand for supply chain risk solutions may be growing, but faced with increased frequency and severity of losses, the insurance industry has curtailed its appetite for CBI and non-damage BI due to lack of data and insights into supply chain interconnectivity.
Interdependencies and concentrations of exposures are particularly challenging for the insurance and reinsurance industry, creating potentially large unknown aggregations and systemic risks whereby one event could trigger multiple policies across a large number of insureds, regions, sectors or even globally. Supply chain risk also goes beyond CBI and BI coverages in property insurance policies, with potential exposures found in standalone cyber insurance, as well as liability coverages like directors and officers, general liability and product liability.
Moving forward, new supply chain risk analytics tools will increasingly enable insurers and reinsurers to quantify supply chain-related exposures in property and casualty coverages, including property damage and non-damage BI and CBI. With increased transparency, supply chain risk is actually comparatively more straightforward to model and quantify than some other complex risks, like cyber, which have more variables and unknowns.
Guidewire’s supply chain risk underwriting platform, due to be released in the first quarter of 2023, tracks connections between digital, logistics and physical supply chains, across some 800,000 organisations and millions of connections. The model reveals interdependencies and interactions between organisations and within sectors, as well as insights into degrees of uncertainty and complexity and levels of supply chain resilience and mitigation.
Guidewire’s supply chain model can be used in combination with catastrophe models to quantify aggregations and identify single points of failure, as well as explore supply chain event scenarios, such as the impact of a natural disaster or a cyberattack.
Failure to get a grip on supply chain exposures will result in an expanding coverage gap for businesses, and huge unfulfilled potential growth opportunity for the insurance industry. Prudent insurers and reinsurers will want to stay ahead of the curve and start developing their understanding of supply chain risk and create supply chain-focused specialised products.