CBI capacity wanes as supply chain losses mount

Greater transparency and resilience are needed to counter dwindling capacity for supply chain insurance as the market responds to rising claims frequency and severity.

The past two years have witnessed a number of large supply chain events that have caused major disruption to businesses and led to significant claims for insurers. The Covid-19 pandemic, the Texas Big Freeze, a fire at a semiconductor plant in Japan, flooding at an auto manufacturing plant in South Africa and, more recently, the conflict in Ukraine, have all led to sizeable losses for companies and insurers.

These events have triggered a sharp rise in demand for supply chain and contingent business interruption (CBI) insurance, while demonstrating the growing interdependency and complexity of supply chains adopted by organisations, according to Nick Holmes, head of global placement for continental Europe, Middle East and Africa at Marsh.

The increased severity and frequency of claims, coupled with concerns related to accumulation of risk, have resulted in reduced CBI capacity, explained Holmes.

“Carriers’ appetites vary depending on the industry, breadth of cover and, more importantly, clients’ resilience and steps taken to mitigate their supply chain exposures. However, even where clients have a good understanding of their own suppliers’ or customers’ loss controls and business continuity plans, appetite remains limited. Some carriers are still reluctant to provide the capacity and coverage required,” Holmes said.

“The demand, combined with the complexity, has led some carriers to take action, resulting in capacity reductions. As a result, we are seeing an increase in self-insured retentions including captives and parametric solutions for non-physical damage events,” he added.

CBI capacity constraints are likely to continue into 2023 and could encourage companies to focus on resilience, according to Chris Waterman, global head of short-tail lines at Zurich Insurance.

“We expect reduction in appetite to continue this year and well beyond to correct the current situation. The scarcity of capacity available from the insurance and reinsurance market may be an accelerating element to drive the change, and suppliers may be forced to better diversify and spread their risk from a location perspective and increase their resilience. Only when risk is understood and resilience can be part of the solution, can sustainable conditions be provided,” he said.

According to Waterman, supply chain loss events, in part fuelled by Covid-19 and subsequent lockdowns, have significantly increased during the past decade.

“In context of contingent business interruption insurance, risk accumulation is a key concern for insurers, with congested ports, warehouses being full to capacity, driver shortages and increasing natural catastrophe events as a result of climate change. Insurers will typically favour businesses that proactively limit their vulnerability to supply chain risks and follow a proactive monitoring approach to utilise the available capacity in the most meaningful way,” he said.

Uncertainty about the health of supply chains and rising disruption have resulted in reduced appetite for CBI or contingent time element insurance, known as CTE, explained Waterman.

“Insuring the unknown is not an appropriate strategy and a rapid shift to a sustainable approach is needed, otherwise supply chain-related insurance becomes unaffordable and will only be available for a handful of resilient businesses. For many businesses, this means that the uninsured part of a claim… becomes more sizeable and therefore becomes a bigger liability on their balance sheet,” he said.

Insurers are particularly concerned about large dependencies on a limited number of suppliers located in the same region, said Waterman.

He flagged the semiconductor industry’s current overreliance on southeast Asia, a region of the world that can be impacted by severe weather events and geopolitical tensions.

“While in the past it may have been possible to transfer such exposures to insurers, there is clearly a need for businesses to shift to a more sustainable approach and avoid cluster risk, even if it may increase the price of the product when supplier capacity must be procured elsewhere,” he said.

Broad supply chain insurance products that provide cover for events traditionally indemnified under property insurance is currently not available in the market, according to Waterman. “We don’t see insurers’ appetite set to change in the foreseeable future,” he said.

However, there is appetite for CBI insurance if companies can demonstrate they have built resilience into their supply chain strategy, according to Waterman. He thinks captives are a useful tool to tackle supply chain risk in a challenging market.

“A captive can purchase additional capacity in the reinsurance market and provide more accurate risk information to the reinsurer through the collaboration with a fronter. Additional reinsurance capacity can then be included in the primary insurance programme via the captive. And by better understanding the amount of business potentially at risk from a supplier, even unnamed suppliers could be included in the captive and therefore integrated into the primary insurance programme,” he said.

Marsh also sees potential for parametric insurance solutions to help close the supply chain insurance protection gap. “Apart from parametric insurance, there are other alternative transfer solutions that could help organisations in the event of supply chain disruptions, such as liquidated damages protection due to delays, structured solutions or the use of captives,” said Holmes.

On a positive note, recent disruption has raised awareness over supply chain resilience and sparked growing interest in transparency, which could open the door to better risk transfer solutions.

Supply chain risk is now a top priority for boards, according to Atul Vashistha, founder and chairman of Supply Wisdom, a supply chain risk intelligence firm. Companies are looking to monitor evolving risks continuously and want insights to help take immediate mitigation steps, said Vashistha.

“Technology is the only way to gain this level of visibility and proactivity, and boards are taking action. We’re seeing more and more companies implement technology to identify and manage supply chain risk continuously, in real time,” he said.

Companies that increase their supply chain transparency and resilience could benefit from lower insurance premiums, according to Vashistha. In addition, many leading insurance providers are leveraging continuous risk monitoring solutions to determine premiums and ensure compliance, protection and maximised visibility, he explained.

“Technology is opening up opportunities for insurance solutions for many reasons. First and foremost, it is shining a much-needed spotlight on risks, and how they’re rising in severity and frequency. On the other hand, it is giving both insurance firms and customers the ability to be better at avoiding risks,” he said.

While greater supply chain transparency will help in the longer term, complex challenges remain, according to Holmes.

“Greater transparency can only be a good thing, particularly around demonstrating a strong risk management resilience and a full understanding of supply chain exposures. Equally, carriers need to recognise the individual needs and complexities of a client and avoid adopting broad industry-wide restrictions,” he said.

However, the idea that companies can “just switch suppliers” in the event of disruption underestimates the time and complexity involved, said Holmes.

“There will be challenges for the immediate future but organisations investing time in adopting resilience measures, combined with insurers gaining greater understanding of the organisations’ exposures, can only be a good thing. As an industry, we need to respond, to ensure supply chain-related insurance does not become unaffordable,” he said.

Risk managers have a crucial role to play in addressing supply chain exposures, according to Holmes.

“Presenting a transparent and deep understanding of their organisation’s supply chain, detailing not only the most important suppliers but also, equally, other indirect tier-two or tier-three suppliers, is critical. In addition, presenting a comprehensive risk management process mitigating the impact from supply chain disruption will lead to greater flexibility and allocation of capacity by carriers,” he said.