Alongside various partners, including Miller, Lloyd’s have put together an insight series on how the Lloyd’s market is responding to customers’ needs post lockdown.

Increasing global supply chain resilience 

Building a more resilient and commercially viable supply chain following Covid-19, what are the potential short-term, mid-term and long-term opportunities to increase supply chain resilience?

Read the Q&A below where Miller’s Rebecca Eagles and Oliver Lombard discuss the hidden supply chain vulnerabilities that businesses might not yet be aware of, what effect using local suppliers has on a business’ insurance policy and how insurance can help businesses make their supply chains more resilient. 

What hidden supply chain vulnerabilities are businesses not yet aware of?

Running into a pandemic such as COVID, many policyholders are not fully aware of the interconnectivity and interdependency exposures that exist in what might appear to be simple supply chains. They are vulnerable to disruptions beyond their control, such as choke points at ports, terminals or routes through canals. For example, there is a huge amount of manufacturing in China. Any delay or disturbance in the manufacturing part of the chain will mean that the product is delayed preventing distribution. This prevents sales with the financial ramifications as a result being severe. At a minimum cashflow will suffer and costs might increase. 

How has COVID-19 affected how businesses view their supply chains?

Companies are having to assess the short-term, the mid-term and also the long-term result of what has happened with COVID. In the short term, it really could be something as simple as improving business continuity plans: being aware of options and securing contingent supply contracts across a wider geographic footprint. 

In the mid-term its more about assessing operational risk, working internally to look at the supply chain and see where those vulnerabilities are, and then more so in the long-term looking at working with third parties who do have specialist resources and can model risk, i.e. they can look at what your future, your past and also what your present risk may look like and allow you to build infrastructure and framework around your supply chain to make it more sustainable and to maintain commercial viability. 

How can insurers help businesses make their supply chains more resilient? 

Insures can’t take away supply chain risks but they can help make supply chains more financially resilient. Typical supply chain products cover property damage, related business interruption and in some instances consequential financial loss, including loss of profit. Working with insurers enables businesses to transfer the risk from their own balance sheet onto that of underwriters and this secures their supply-chain-dependent income, as well as making their supply chain more resilient. 

Has the pandemic created more demand for supply chain related interruption policies?

The immediate response of any client during the height of the pandemic or any large disruption within supply chains will always be “Do I have cover for this?”. Typically what you tend to find is that lots of the policies we see for supply chain are based on physical loss of damage, so the answer is normally “no”. Specific supply chain disruption products are available, however they tend to be costly relative to standard cargo and stock throughput policies. Trade Disruption policies require a great deal of time, data and communication to put together. Each client has a different exposure, therefore each product needs to be entirely different. But what we have seen as a result of the pandemic, is perhaps a slight resurgence in requirement for that coverage in order to ensure a firm’s financial resilience. 

Next pandemic and wider parametric arrangements have become more popular and can address numerous Contingent Business Interruption exposures more simply.  

How are companies and supply chains reacting to ongoing fluctuating lockdown conditions? 

Onshoring supply chains removes the risk of the overseas element. However, what we find is it concentrates the risk in a much smaller territory and also with much fewer suppliers, therefore does not solve the problem it just moves it closer to home. There are other options available out there. We suggest properly assessing and reviewing the supply chain to discover where the pinch points are and to address these specifically. We encourage people to spread their risk among multiple suppliers and different territories, again spreading the risk and finally utilising technology, digitalising the supply chain and enhancing data to give real live updates on what’s going on and how to adapt to challenges. 

What effect does using local suppliers have on businesses insurance policies? 

Every insured is different, as is every territory that we work with so there are many variables. From a cargo perspective, we look at the pure physical loss or damage. A shortened supply chain or an amended supply chain will probably mean reduced cost on an insurance front. Insurers will always attach a higher premium to anything with an import/export element relative to domestic only dependencies. However, if we were to look at the trade disruption perspective, the financial resiliency risk, we’re going to see something quite different. Shortening the supply chain will not always mean a better supply chain. An isolation of goods in a certain area can still be a choke point and that can still represent quite a large financial issue for any one insurer. 

How can the Lloyd’s market help protect against supply chain vulnerabilities? 

Standard supply chain risk focus on the physical loss or damage to the asset itself. In addition, we can look at business interruption, which typically has a physical damage trigger as well. What COVID-19 has really highlighted is the snap in the supply chain and the significant losses which can be incurred without the physical loss or damage.

There are products available, products such as trade disruption insurance, which can be tailored around specific needs to address particular vulnerabilities. These do not require a physical loss or damage trigger. In addition to that there are specialist epidemic risk insurance policies and these are tailored to events such as the next pandemic. These can cover increased cost of workings, loss of profit, where a snap in the supply chain has prevented manufacturers from being able to produce their products and distribute them to their clients.