The network effect: Asia Pacific’s central role in the global supply chain and emerging risks for insurers
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In the second of a three-part webinar series, Swiss Re’s P&C Business Management team shares insights on supply chain trends in Asia and their impacts. Experts also outline the key factors for insurers to consider when enhancing supply chain risk management.
The supply chain has been battered by a string of disruptive events. The US-China trade tensions, the pandemic and the Suez Canal blockage have exposed the vulnerability of the global supply chain, the accompanying risks and the hidden costs that insurers bear.
As global economies gradually recover, Asia’s role as the leading manufacturing hub becomes more evident with rising demand and a concentration of supply chains in the region.
Higher demand, more complexity
The pressure on Asia’s supply chain has intensified partially due to the pandemic's impact on what, and how, consumers purchase.
With people confined to their homes, spending has shifted from services such as dining at restaurants to hard goods like furniture and toys. The peaks and troughs of pre-pandemic shopping have been replaced by a continuous cycle enabled by online retail.
“Because consumers are shopping throughout the year, manufacturers have to continuously replenish their inventory, which puts pressure on the supply chain," explained Jonathan Anchen, Head, SRI Market Intelligence, Swiss Re Institute. "There's just not enough buffer time to recover between cycles.”
Exacerbating the situation is the limited investment in the supply chain. The shipping container is a good example – the pandemic lockdown hindered container production in the past 12 months – as a result, the shortage of shipping containers puts additional pressure on a network that is already stressed.
The surging demand for consumer goods and the concentration of supply chains in Asia have direct risk implications for insurers, who need to consider these vulnerabilities in the underwriting process and examine their portfolio exposure. These emerging risks can be assessed from three main angles – marine, financial, and property damage and business interruption.
Marine liability, which addresses liabilities due to maritime activity, has been rising due to congested shipping lanes, which increase the probability of accidents, and the pressure to get more goods to destinations faster. The Suez Canal Authority, for example, expects the Ever Given blockage in March 2021 to cost insurers some US$900 million in claims, noted Hima Yalavali, Claims Expert, P&C Business Management Asia, Swiss Re.
As ground crews stack containers higher and quicker, sometimes at the expense of securing them safely, more containers are falling overboard, sending millions of dollars of cargo into the sea. Ships braving bad weather to ensure on-time delivery also increases their risk exposure.
“Accidents are disturbing the supply chain for hundreds of retailers and manufacturers such as Amazon and Tesla who are relying on Asian shipping lines,” Yalavali observed. “They have shown how concentration risk has added to already stressed-out supply chains and negatively impacted loss ratios.”
Pandemic restrictions have also raised unique, hidden challenges, such as finding ports of refuge, tighter availability of repair facilities and spare parts, and various COVID-19 regulations at different ports. These pandemic impacts drive up repair and towage costs, and ultimately result in higher insurance claims.
In addition to a tougher environment for shippers, cycles of lockdowns to manage the pandemic have forced factories to shut down and restart their equipment at short notice, increasing property damage and business interruption risks.
Mothballed facilities that lack adequate maintenance can increase the chance of machinery breakdowns. “When the loss happens and repairs are slower than expected due to pandemic-induced manpower or spare part shortages, claim quantum go up. As these hidden costs are not due to a clear-cut scenario, the insurance industry has to find a way to agree on the quantum, or accept such risks going forward,” noted Yan Rong Tan, Claims Expert, P&C Business Management Asia, Swiss Re.
Government measures to support businesses and save livelihoods have also inadvertently propped up zombie companies with unsustainable business models, which are at higher risk of default once government funding expires. This has added to the potential financial burden insurers face. Aside from distorting the market and making it more difficult to assess default risk in trade credit insurance, such companies could rattle supply chains when they become insolvent.
“The insolvency risk to the supply chain could potentially mean more claims for credit insurance, but with less chance of recovery, which ultimately drives up the loss ratio. It may also pose a threat to Asia's position as the main manufacturing hub,” noted Emma Ng, Claims Expert, P&C Business Management Asia, Swiss Re.
“It's no longer enough to consider the fundamental corporate risk alone. You will also need to consider the counterparty risk. With increased activities in Asia, there will be higher demand from manufacturers to seek financial protection against third party default. Insurers must work closely with their customers to develop a robust risk management framework,” said Ng.
The semiconductor manufacturing industry is a compelling case study of the global value chain and the massive potential impact of supply chain disruptions.
Up to 300 types of specialised items go into creating a smartphone application processor. And although materials account for just 1% of the ultimate value of the chip, they can cause an interruption up to 200 times the ultimate value in the final product, according to Balasubramanian Nagarajan, Head P&C Business Management SID at Swiss Re.
With demand for semiconductors already far outstripping supply, losses due to man-made or natural catastrophes are the last thing the industry can afford. “If losses were to happen, it would be impossible for the insurance industry to segregate the pure elements of the claim from the additional supply chain risk, which adds significant cost to claims,” noted Nagarajan.
The case for industry cooperation
The concentration of supply chains in Asia can bring tremendous opportunities if insurers price risks appropriately. The first step must be to raise awareness of key areas of supply chain vulnerability, and the complex interplay of macro and other factors that contribute to supply chain risks.
It is essential for insurers who offer business interruption coverage to track supply chain developments and their associated risks closely. Insurers who focus on underwriting single risks will benefit from being more alert to supply chain interruptions, and considering scenarios or ramifications beyond interruptions themselves. For example, when evaluating risk from material damage, it’s important to consider potential macro factors such as pandemic-related delays in replacing damaged equipment, and the associated costs, before underwriting that risk.
The international nature of supply chains, and the scope of possible threats and potential sources of disruption, mean coordinated efforts and pooling of data resources will be necessary to build a complete risk picture. Movements in this direction could benefit the industry as a whole.
“When we work together to better understand the complexities of supply chain risk, that will really help us shape both the insurance and the reinsurance needs that we will require in the future around this topic,” noted Blake Dimitrijevic, Head P&C Business Management Asia, Swiss Re.
Global Supply Chains: A paradigm shift in the making is the second session of the 2021 keynote webinar series brought to you by Swiss Re P&C Business Management team. Contact us if you'd like to have the recording of this webinar.