When the Dali container ship slammed into the Francis Scott Key Bridge in Baltimore, initial thoughts turned to any loss of human life. But as we have moved farther away from the March incident, the monetary cost is starting to add up. It is estimated that the insured losses for the collapse could be up to $4 billion.
In the Red Sea, Iran-backed Houthi rebels have been attacking shipping in response to Israel’s war on Hamas. In January, the cost to insure a ship moving through the region jumped from 0.7% of the ship’s value to more than 1% in a week’s time, with the expectation the rates would move higher.
“Rates are increasing which is reflective of the significant and opaque risk exposure within the Red Sea,” Munro Anderson, head of operations at Vessel Protect, told Reuters at the time.
Supply chains are vulnerable to a series of possible disruptions, from hurricanes and other severe weather events to vehicle accidents and even war. To cover possible losses, it takes an insurance industry ready and willing to accept these risks. Increasingly, it is supply chain industry stakeholders that are paying for these risks.
“To navigate the new landscape of exponential risks, it’s essential to grasp the scale of the threats,” Moody’s wrote in a recent article on insurance costs. Moody’s noted that in the U.S. alone, severe weather has led to insurance losses rising from $10 billion in 1990 to over $50 billion in 2023.
Author Robert Muir-Wood laid out the 10 areas that insurance firms should be aware of. They are:
- Cyber attacks
- Cliimate change
- Net zero
- Economic Shocks
- Insurability for catastrophic perils
- Global supply chains
- Perennial wars
- Crumbling infrastructure
- Long-tail liabilities
- Longevity and mortality
While all of these impact supply chain in some way, in terms of his supply chain risk section, Muir-Wood wrote:
“The global supply chain is an intricate interplay of many moving parts, but as seen with the COVID-19 pandemic or Russia’s invasion of Ukraine, the smooth functioning of the global supply chain that the world has enjoyed could be an exception, rather than the rule.
Production shortages during COVID saw whole industries such as car manufacturing, air travel, and tourism, grind to a halt, with a long, stumbling road back to recovery.
Then Russia’s invasion of Ukraine saw shocks to energy prices as Russia’s energy exports were turned away by Ukraine’s allies, and foreign businesses retreated from Russia.
Construction costs – materials and labor, can represent a sizeable slice of a property insurer’s costs, and double-digit cost increases have had to be passed through in response to supply shortages, price increases, and rising labor costs in a tight labor market.
Businesses are rapidly relearning how they approach global supply chains, assuming that nothing is certain, and building resilience and contingency into their systems. Identifying the new vulnerabilities in each supply chain, recognizing that the leanest approach may not be the best fit, and that supply continuity is now the best outcome, will help to minimize future supply shocks.”
Disruptions abound
For supply chains, insurance costs should be part of the broader risk mitigation strategy they employ. Unfortunately, a March Dun & Bradstreet report found that most supply chains are underprepared for big disruptions.
According to the research from supply chain management platform Kinaxis, less than one-fifth (17%) of global supply chain leaders say their companies can respond to disruptions within 24 hours. Even more distressing is that 67% said they are “not very satisfied” with their firm’s response time.
“It’s more common than ever on quarterly earnings calls to hear that supply chains make or break success and this data proves that there is a tremendous opportunity across all sectors to improve resilience and risk mitigation,” said John Sicard, president and CEO at Kinaxis. “Cutting-edge, AI-enhanced, end-to-end orchestration tools that enable companies to gain transparency, agility and improved collaboration can help address these compounding trends and make chief supply chain officers the heroes instead of the scapegoats the next time trouble appears on the horizon.”
Heather Wheatley, senior director analyst for Gartner Supply Chain, recently penned an article for Supply Chain Management Review that addressed how organizations can address risk.
“According to Gartner research, 53% of supply chains surveyed report that disruptions severely impacted their supply chain in terms of cost, services or sales at least half of the time in 2022. As a result of these dynamics, CSCOs are being asked by organizational leadership to provide assurance on supply chain risks. This includes describing control activities and potential financial, operational and reputational impacts,” she wrote.
“In response, CSCOs must strengthen supply chain risk governance to ensure effective management of supply chain risk and accurate reporting. These committees, or risk councils, bring together supply chain risk owners and other subject matter experts to analyze current risks, plan for emerging ones and evaluate control effectiveness,” Wheatley added.
Reducing risk exposure is one of the key tenets of lowering insurance costs. Trucking companies that install cameras in their cabs often see lower insurance premiums, for example. Supply chains, by reducing their exposure to risk, can also see some benefits. As Wheatley advises, risk councils are a good place to start.
“As organizations experience an abundance of compounding and coinciding risks, there is an increasing need for oversight on end-to-end risk management within the supply chain. Risk councils are an important component of a risk governance and management strategy, but only with the necessary ingredients, including a charter, stakeholder engagement and executive support,” she wrote.
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