Supply chain disruptions continue to impact nearly every corner of commerce and remain firmly on the minds of global business leaders. Multiple elements are in play that could exasperate supply chain woes and increase vulnerabilities, including:
- Longer and more complex supply chains
- Just in Time vs. Just in Case supply chain philosophies
- Continued port congestion and lack of workers across supply chains
- More intense and frequent natural catastrophes
- Rising geopolitical and political violence risks
Some of the causes and the heightened concerns over supply chain vulnerability and resilience are due to COVID-19 -- a global disruption unseen in the past century. Supply chain disruptions due to the pandemic are well-documented and substantial. According to Aon’s COVID-19 Risk Management and Insurance Survey the largest percentage of disruption in the supply chain due to the pandemic was because of a drop in consumer demand (36 percent) followed by quick surge in demand.
Climate change and its variety of connected perils have also had an impact on supply chains. Wildfires, floods and drought have disrupted the supply of everything from lumber to chocolate.1
Further, the consequences of the Russian invasion of Ukraine have impacted supply chains in a number of areas, especially the global food, agriculture and beverage sector, which was already under stress as the result of the COVID-19 pandemic.2
Increased cyber attacks have also caused broad disruptions in the supply chain. Ransomware attacks are threatening the shipping industry, which relies heavily on the interaction between a number of different digital systems, from ports and cities to individual ships and the companies that own them.
Amid the growing global interconnectedness, business interruption is a major concern among business leaders surveyed in Aon’s 2021 Global Risk Management Survey, however, it is of top concern among leaders in Asia where COVID-19 has particularly exposed the fragility of global supply chains. Business interruption is set against the backdrop of many moving parts in the Asia Pacific region, from regulatory changes to international businesses moving manufacturing closer to their own markets.
This set of often-interconnected risks may result in supply chain concerns and vulnerabilities that continue to hamper businesses and consumers worldwide. In fact, Aon has identified complex supply chain risk as one of the big six risks facing businesses today, along with intellectual property, cyber, reputation damage, climate change and COVID-19.3
Gaps in Conventional Insurance
Traditional risk transfer solutions offer coverages for supply chain exposures, however, a variety of coverage gaps exist that leave holes in a risk management program:
- Business Interruption, Extra Expense, Contingent Time Element. Each provides a partial solution addressing supply chain disruption losses. First, there must be a physical loss or damage trigger before coverage kicks in. Further, Contingent Time Element coverage may be limited for certain suppliers.
- Limitations & Exclusions: There are capacity issues for certain natural catastrophe events, such as California earthquake and Gulf of Mexico windstorm.
- Non-Physical Damage Losses: Such as damage to critical infrastructure, blockades, strikes, protests, etc.
Trade Disruption Insurance as a Supply Chain Risk Solution
There is a risk solution that helps risk managers mitigate some of the impacts of supply chain volatility. Trade Disruption Insurance (TDI) is a specialized named-peril form of insurance that addresses some of the vulnerabilities associated with cross-border supply chains by providing coverage for some of the gaps in property and marine programs. TDI enhances supply chain resilience by:
- Providing a hedge against the disruptive impacts of climate change, including increased frequency and severity of weather events, geopolitical risks and civil unrest.
- Providing companies with an additional liquidity source in times of crisis by covering extra costs and expenses incurred to mitigate disruptive impact.
- Mitigating the downside risks of outsourcing, single/sole source supply chain and “just-in-time” inventory management.
- Helping protect revenue stream against unforeseen disruptive events.
TDI provides coverage for specific segments of the client’s supply chain, including delivery of supplies, such as raw materials, critical equipment, component parts, etc., from key suppliers to the insured’s manufacturing. Also, the delivery of finished goods from the insured’s manufacturing facilities to distribution centers and/or customers around the world.
Coverage is triggered if an insured peril occurs somewhere along the insured’s supply chain and prevents or delays the movement of goods or materials from point of departure (e.g., from a scheduled supplier) to point of destination (e.g., to customers or a distribution center). Insured perils may include natural catastrophes, accidents and political risks, including:
- An earthquake, windstorm, monsoon, flood or other natural catastrophe that damages transport facilities or key infrastructure in a key supplier’s country or a key market destination
- A political crisis that causes massive social or political unrest in a key supplier’s country or a destination country
- Political interference targeting the Insured or its suppliers or its customers
- War or military hostilities or military blockade
TDI will cover the financial impact of the supply chain disruption, including extra costs and expenses incurred and/or loss or net profit.
TDI cover is currently available from a small market with limited capacity. Risk managers interested in accessing the TDI risk transfer market should work closely with a broker skilled in the market to achieve appropriate and adequate coverage.