Why Insurers Must Remain Flexible When It Comes to Supply Chain Risk Management
Managing global supply chain risk requires a certain level of flexibility, because you never truly know what might happen next.
Take, for example, a global pandemic.
“This is a true Black Swan event,” said Kevin Strong, Head of Multinational at The Hartford.
“Most companies out there that had mitigation plans in place had planned for a localized event — an earthquake or a hurricane. Industries were not prepared for having multiple cities across the globe shut down at one time.”
It just goes to show that “having a well thought out and developed supply chain strategy is critical,” said Patrick Daley, Head of Large Property at The Hartford.
“And it has to be a strategy that involves the entire supply chain,” he added.
This is not only true for COVID-19, but also for other risk factors that could delay or significantly impact a supply chain. Climate change is driving up both the frequency and the severity of natural catastrophes.
Sudden floods, wildfires, more named-hurricanes per season and the like stand to directly affect a company’s bottom line. The United Nations Development Program has even reported that productivity losses related to climate-change workplace disruption in the U.S. could rise to above $2 trillion by 2030.
“There’s a need to maintain business continuity,” said Daley. “There’s a need to be flexible in how we approach these disruptors to the supply chain.”
So, What Does Flexibility Actually Look Like?
Insecurities in the global supply chain brought on by the pandemic have, for many industries, prioritized the need to diversify their supply chain. According to both Daley and Strong, COVID-19 has forced insureds to quickly change suppliers, logistics providers and distribution partners.
Such adjustments result in material changes in property exposures, including changes in hazards, protections and environmental exposures. As a result, insureds have become incentivized to work with carriers that can provide counsel, expertise and flexibility.
“It’s critical that we, as insurers partnering with our insureds, have an overall plan to determine how companies work with not only their distributors and customers, but also the impact any interruption will have on the organization,” said Daley.
The plan must take into account location of operations, any regulatory tax implications that come from changing locations and limitations on cross-border trade, as well as how an insurance policy will respond to product movement.
Even without COVID-19 in the mix, these are vital areas to review when underwriting supply chain risk.
“Underwriters must identify some of the relevant events and risks that could threaten specific locations and, subsequently, an organization’s supply chain,” said Daley.
Part of being flexible comes down to knowing what specific supplier locations’ vulnerabilities are in advance and having conversations about contingency plans before an event takes place.
“As you go deeper the plans become more intricate, you start to look at who supplies your supplier and so on, and that becomes a lot more complicated. But that has to be part of decision making and planning,” said Daley.
Useful Questions Underwriters Should Be Asking
To effectively maneuver the supply chain for an organization, underwriters must also be flexible.
“We have pivoted our underwriting practice to meet the challenges of today,” Strong said.
“Historically, an insured’s schedule of values would be remain relatively static month over month and year over year but disruptions in supply chains and suppliers may cause schedules to change meaningfully within a single policy period. As a result, we’ve had to work more collaboratively than ever with our clients and brokers to understand changing risks and obtain risk information.
Strong further explained that risk engineering has had to adapt as well. Instead of sending risk engineers around the world, we’ve increased utilization of virtual inspections and in-country resources in order to better support our clients.
“We’ve had to be flexible in how we view underwriting risk holistically versus individual risks within a particular client portfolio,” said Strong.
Here’s what Daley and Strong recommend for underwriters to review collaboratively with client and broker partners:
Inventory & Storage — In the event a client must hold increased levels of inventory (as COVID-19 has caused many to do, do clients have adequate (and protected) storage facilities?
Staffing Plans — Does the company have a plan to address staffing issues associated with disruptions, i.e., are furloughs/layoffs planned?
Supplier Review and Back up Plans — Does the company have an ongoing supplier review program/process? Does the company have a disaster/contingency plan to replace key suppliers/factories/country operations in the event of an unexpected disruption?
Vendor Program Quality Control — Because a change in suppliers can lead to dramatic changes in product quality, how does the company quality control its supplies? Do they have a plan for this?
Business Interruption and Contingent Business Interruption — Are contingency plans well understood and tested?
Protecting Businesses Through Any Disruption
Because supply chains rely on one vendor or hundreds of suppliers, any disruption can be detrimental to a company’s ability to continue providing goods and services to their customers.
Insureds turn to their carriers for the support they need during tumultuous times.
“Customers expect us to be thought partners with them,” Strong said.
“They expect us to bring intellectual capital and specialized coverages that will respond to their specialized needs.”
“We have to go further and introduce tools that enable and empower those companies, so that when these events happen, they can quickly understand the impact and put their plans into place,” Daley said. &