Buyers urged to consider blended parametric and indemnity transfer solutions for supply chain risk

Risk managers have been advised by experts at our latest conference to use a blend of parametric insurance cover and more traditional indemnity policies to transfer supply chain risk, with one speaker arguing it is now the right time to push the boundaries of insurability and devise solutions that are not based on named perils. Speakers at Commercial Risk’s Supply Chain Risk Management conference in London this week said supply chain insurance solutions are available but take-up is low because of coverage, cost and data requirement issues. As Kamban Parasuraman, principal engineer-manager at Verisk, explained: “The cover is limited with a lot of sublimits and exclusions… For the price insureds are being quoted, they not getting a coverage they would like to buy from the market. That is why we see a huge protection gap. Insurers are also asking for too much info but can’t write the cover without that data.” To help solve this problem, fellow speakers on the insurance panel suggested ways to best mitigate and transfer supply chain risk given current insurance solutions on offer. Tina Kirby, who until recently was head of innovation and product development at Beazley, suggested using a mixture of parametric and more traditional cover. “Some risks are brilliant for parametric insurance. If you know you are going to be impacted by a weather change, for example, insure that piece parametrically. Then take the rest that you can’t do parametrically and transfer it under a more traditional, and potentially expensive, method of indemnity insurance that has to be more bespoke to the particular nuances of your supply chain,” said the expert, who is now an insurance innovation consultant. “Where it is very clear that a change of temperature, a trade deal, or a court being out of action causes a loss that you can predetermine, then probably the cheapest and best way is to use a parametric, predefined loss coverage for that piece. Then use more creative solutions, perhaps not trigger-driven, for the other pieces,” she added. Ms Kirby told delegates at the event supported by the Business Continuity Institute, Airmic and the Institute of Risk Management, that there is now a real opportunity to deliver, and make further moves towards, more innovative supply chain insurance solutions. “I think there is a real moment now where insurers can work with risk managers using what technologies are available in terms of data to create policies that are perhaps not on a named-peril basis. Beazley, for example, recently did a reputational policy that didn’t try to name what caused the damage because it is so unpredictable, and tried to contain things in other ways. Is there the potential do something similar with supply chain?” she asked. “One of the offputting things about supply chain insurance is the triggers. Are you going to be able to guess exactly what is going to cause a problem to your supply chain? Do we think there should be a change where there could be a non-specific trigger – a failure of certain stakeholders or even a loss over a certain amount – being a trigger rather than causation being a trigger? I think that is where some coverages are going towards,” she added at the event sponsored by AXA, Belfor, Clyde & Co, the Supply Chain Risk Management Consortium, Verisk and Zurich. Fellow speaker Mark Wing, a partner at Clyde & Co, said traditional indemnity insurance requires causation, which can be problematic for supply chain risks, and therefore he too pushed the merits of parametric solutions. “Given the complexity of supply chain risk… trying to map that through in a straightforward causation model is incredibly complicated and very difficult. Which is why I think some of the more innovative insurance solutions, such as parametric, are of interest,” said Mr Wing. He said parametric insurance effectively reverses the process by quantifying the loss before an event hits and agreeing various triggers that will qualify for a payment. “We have seen some solutions based on the amount of sunshine and I think data requirements are a bit more manageable. So, I think the insurance industry can come up with some innovative solutions to these problems,” said Mr Wing. But like Ms Kirby, he said parametric solutions lend themselves well to certain risks, but other areas need to be covered by a “more traditional risk transfer type product”. Verisk’s Mr Parasuraman added that parametric covers are increasingly available for supply chin risks at the lower end of losses, and particularly nat cat perils. “It is an interesting area that is starting to emerge,” he said. Speakers at the event also said that many companies are failing to adequately manage supply chain risk because various functions are still too often working in silos and not making use of technological solutions.

Buyers urged to consider blended parametric and indemnity transfer solutions for supply chain risk

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