Mitigating risk as supply chains continue to evolve
A key concern of corporate risk managers and large commercial insurers around the world is the fragility of finely tuned and hyper-efficient global supply chains. The upheaval caused by COVID-19 has exposed just how susceptible they are to disruption.
Faced with a period of rapid change, businesses are working to rebuild speed and effectiveness across their networks – and it’s raising up questions for insurers.
In some regards, the changes we have seen in 2020 are no different than other risks – they can be assessed, quantified and insured against. But in among the rapid remodelling driven by the pandemic, the risk landscape is also changing. The risk profile of global supply chains - and the businesses and countries that depend on them - is shifting. Understanding these changes will be vital for understanding new risks and providing the most appropriate kinds of cover to the market.
Rapid transformation and shifting risk
It’s true that COVID-19 has highlighted many of the challenges of complex international supply chains, that we've known from serving many of the world's largest insurance organisations and their equally large customers. And through the disruption new paths have been found.
But so much of the transformation we have witnessed in recent months feeds into a quiet revolution that has been underway for years. Extended supply chains have long faced pressure from multiple angles. Climate events, political unrest and workplace conditions, for example, all have the potential to disrupt supply and increase cost.
As Swiss Re Institute’s latest sigma report – De-risking global supply chains: Rebalancing to strengthen resilience– shows, greater transparency in the supply chain, as well as a more diverse geography are part of the response.
For example, we have increasingly seen in recent years some manufacturing activity switching away from China, which is becoming less competitive. From a wage and cost perspective, countries like Vietnam, Thailand, and Mexico are now being seen as alternatives.
But as global supply chains migrate to other countries and other parts of the world, the market for insurance – and risk assessment – grows, too.
Holistic risk management breeds resilience
The supply chain fragility that COVID-19 has uncovered highlights the need for a holistic approach to risk management. Certain risks are insurable – commercial insurance for buildings, fire, flood or transport and cargo cover, for example. Or insurance against natural disasters or political risk.
But any change to the structure of a supply chain introduces new risks. And these, too, need to be properly quantified and assessed to ensure resilience. Understanding the whole picture is key to identifying the most appropriate insurance.
Much has been made of a potential growth in reshoring as businesses look to protect their operations from potential supply chain fragility. In some developed economies, the increased use of AI and automation in manufacturing may also make such moves seem more cost-efficient on the surface.
But diversifying manufacturing locations can be an expensive way to manage risk. For businesses operating in highly regulated markets, such as the EU, there will be higher labour costs, lower flexibility and other considerations which may eat into margins.
Hand-in-hand with any reshaping of supply chains, there needs to be a risk assessment. Suppliers need to be categorised and assessed from a risk perspective. And this goes right down the chain – who are the tier two and three suppliers? How are they related or connected with each other? What information about them is available – and how can it be used to help assess risks and insurance scope?
For example, we supported a large insurance client on improving their underwriting decisions of product recall insurance. Our analysis has shown that a particular component caused the majority of the recent product recall of a popular car model. As you can imagine, it is likely that this component is also used in other models, by other vehicle manufacturers and potentially in other products altogether. Our ability to trace the failed component back to its source (supplier) – as well as anywhere else it might be in use – is crucial to limiting losses and avoiding a potentially dangerous fall-out.
Managing evolving risk
In situations like the example above, it’s easy to see how dependence on a single supplier can create a costly ripple effect. When it comes to evaluating systemic supply chain risk, data is crucial. Being able to take single data points and understand their impact on entire networks is one of the foundations of supply chain risk management.
As a global reinsurer, Swiss Re is an aggregator of vast amounts of data regarding the movement of goods around the world. Combining external data sources with sophisticated risk and data modelling techniques gives us a clear understanding of risk throughout entire supply chains. We use this knowledge to make evidence-based decisions, pinpoint vulnerabilities and address risks with the appropriate insurance products.
Coronavirus may have uncovered vulnerabilities in some supply chains, but in many cases, it has only served to accelerate changes already taking place. The role for insurers is now in assisting their clients to understand the impact of these changes on their risk profile. It is a role that – due to the relocation and reshoring of supply chains across multiple geographies - translates into a USD 63Bn opportunity for the insurance industry.
With continued turbulence on the horizon, mitigating risks across evolving supply chains will be key to building resilience.
These issues were among the topics we discussed at Swiss Re's virtual conference season. To learn more, please visit our event page here.