sigma 6/2020 - De-risking global supply chains

The lockdowns enforced to curb the spread of COVID-19 earlier this year essentially brought international exchange to a near halt, across nearly all sectors. Those businesses that do survive this year's ensuing global recession are now even more aware of the risks inherent in what have become very complex global supply chains (GSCs). As a result, we expect many firms will step up their efforts to reshape their supply chain networks.

The driving force for GSC restructuring will be to de-risk the supply of intermediate goods and services. We expect more parallel supply chains will develop as firms diversify their manufacturing presence across new locations alongside existing operations, predominantly in China. Markets in southeast Asia will be among the preferred destinations as new host locations. There will also be some reshoring back to advanced markets.

In the wake of this year's pandemic, the healthcare sector will be one of the main areas of GSC reform. The motivation is in large part political, as governments seek to safeguard national supplies of critical medical equipment and drugs. Other sectors at the forefront of  GSC restructuring will include technology, consumer staples, textiles and electronics, the sigma report says.

With respect to the world economy, we model that the impact of GSC changes will be net positive, with annual growth in the new host markets and globally boosted by 0.7% and 0.2%, respectively, over five years. Thereafter, however, global growth may slow. For all the rationale of strengthening supply chain resilience and sustainability, there are also trade-offs. Globalisation has delivered a cost-efficient solution for production, with labour-intensive manufacturing taking place in low-wage countries. Relocation or reshoring could entail less cost-efficient production, higher prices for final products, lower corporate profits and, ultimately, slower growth.

All told, the changes to GSCs that we see coming will present opportunities for insurers. In our 5-year scenario, we model that changes will generate around USD 63 billion in additional global insurance premiums over the period. As they continue to upscale their capabilities in digital technology and data analytics, insurers will be able to better understand supply chain risks and design innovative covers, particularly in the realms of contingent business interruption and non-physical damage solutions. The construction of manufacturing facilities and infrastructure in alternative production locations will also yield additional premium opportunities in commercial insurance.

Download the latest sigma to find out more.