Supply chain transformations leave businesses vulnerable as insurance protection falls short

SINGAPORE, May 8, 2023 — Covid-19 caused a domino effect to cascade through global production and logistics networks. It led to shortages of raw materials and components, shipping delays, port blockages, even an undersupply of truck drivers. Supply chains could not adjust to huge fluctuations in consumer demand. This systemic challenge left contingency plans inoperable and has prompted businesses to rebuild their supply chains from the ground up.

The experience has created a demand-bulge for relevant business interruption (BI) insurance coverage, according to Global Supply Chain Risk Report 2023, a new publication published by WTW (NASDAQ: WTW), a leading global advisory, broking, and solutions company. The risk intermediary’s recent survey polled supply-chain risk decision makers at large companies around the world, active in eight key sectors. Most suffered larger-than-expected losses during the supply-chain crisis, many are still recovering, and most are seeking to boost resilience by reducing supply-chain complexity, the survey found.

While businesses are recovering from the pandemic-induced supply chain shock, new emerging disruptions and risks are now adding to operating uncertainty:

• Economic risks: Economic uncertainty emerged as the leading factor underlying supply chain risks, ranked by 32% as being among their top concerns. Inflation was also named among the leading contributors at 26%.
• Cyber risks: Growing digitalisation and automation of production and processes increase the risks of cyber-attacks on suppliers. Survey respondents believed cyber risks to have the most profound effect on supply chains, rated by 34% as a high impact and 54% as medium.
• Sustainability: 83% of respondents agreed that sustainability of supply chain is a key goal in risk management. More than half (54%) place climate change and environment among the top global trends affecting their supply chain risks.
• Geopolitics: More than a third (35%) said geopolitical factors were among the top global trends affecting their supply chain risks.
• Pandemic: 60% of respondents continue to put pandemics among the top global trends affecting their supply chain risks. Legacy issues, including continuing shortages of raw materials (39%), logistics and warehousing (35%), components (33%), and drivers (28%) were all among the top supply chain factors that will impact businesses over the next two years.

“From multiple geopolitical tensions to ongoing inflationary pressures, global uncertainty is adding complexity to businesses just as they are recovering from the supply chain crisis. They will now be in catch-up mode against a disruptive environment, facing challenges such as switches in sourcing models, rapid on-boarding of alternate suppliers and issues impacting production and souring of materials,” said Luke Ware, Head of Corporate Risk & Broking, Asia, WTW.

In complex supply chains with hundreds or even thousands of moving parts, risk can come anywhere along the chain. Particularly in highly specialised sectors, companies can be dependent on a single supplier for an ingredient or key component that is critical to production. Even the loss of one can have a major disruptive impact if an alternative is not readily available. This may explain why almost half (48%) of the respondents said that upstream risks were a great threat to their businesses, as compared to downstream risks (19%), such as logistics and shipping. This sentiment was particularly high in the semi-conductor (54%) and renewables (53%) sectors.

“This makes building resilient supply chains a more critical task, as the disruptive environment will continue to leave companies exposed to significant risks,” Luke said. “The large majority of businesses recognise that insurance has a role to play, which represents a growth opportunity. At the moment, insurance to cover purely financial supply chain losses provides only a wafer-thin patchwork of protection. Major coverage gaps were exposed by the pandemic, and companies remain un- or under-insured.”

“Our survey has found that fewer than one in five companies have specific policies to cover supply chain business interruption (BI). Businesses in all sectors need to transfer their significant exposures, while ensuring their BI insurance is regularly reviewed and adequately insured to achieve true resilience,” added Luke.

The survey was conducted late last year among 800 C-suite officers and heads of risk, supply chain management, and logistics at companies with revenues greater than $250 million in the life sciences, semiconductors, food beverage & agriculture, logistics, complex manufacturing, construction, energy, and renewables sectors, including companies in Asia Pacific.

Survey results highlighted how recent supply chain disruptions have increased the importance of BI insurance to senior decision makers:

• 65% of respondents said supply chain-related losses were higher or much higher than expected over the past two years, although 58% said the sales impact was short-term.
• 83% have made supply chain changes, including 18% that completely transformed their approach. 58% plan to make significant changes over the next two years.
• 73% said supplier unwillingness to share commercial information makes full supply chain transparency difficult to achieve.
• 89% believe insurance of supply chain risks is “mission critical” or “necessary,” but 80% said their lack of coverage poses a serious challenge.
• Only 17% of respondents have specific insurance to cover supply chain business interruption risks, but 53% believe it is covered by other insurance.

The complete report can be downloaded here.

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