Global crisis could see greater demand for supply chain insurance over BI cover

The global supply chain crisis has exposed the limits of business interruption insurance and, over the long term, demand for supply chain insurance could rise significantly, according to DBRS Morningstar. The ratings agency said the Covid-19 pandemic has posed unique challenges for supply chains globally, causing an imbalance in both supply and demand. It noted that lockdowns and labour shortages limited the supply of key products during most of 2020 and well into 2021. This was then exacerbated by other disruptive events in 2021, including the massive winter storm in Texas, the blockage of the Suez Canal, and the cyberattack on the Colonial Pipeline Company. “In this context, many companies turned to their insurance policies to try to recover some of the losses caused by the pandemic, particularly under their business interruption (BI) and contingent business interruption (CBI) insurance. Although BI insurance is aimed at covering losses arising from physical damage, the pandemic triggered a large number of BI claims in many countries, increasing litigation for insurance companies and creating a number of challenges for the industry as this product was not priced to cover pandemic losses,” DBRS Morningstar noted. It added that most income loss claims resulting from the pandemic are excluded from standard BI and CBI policies. “In our view, the short-term challenges relating to BI and CBI claims remain manageable, given the strong capitalisation and earnings performance of insurance companies. Over the long term, demand for supply chain insurance could significantly rise, given inadequate protection from standard BI and CBI policies amid the coronavirus pandemic,” it said. Marcos Alvarez, senior vice-president and head of insurance, DBRS Morningstar, said: “In addition to BI and CBI policies, insurance companies have offered a broader coverage called supply chain insurance. This product is intended for a relatively small number of clients that need protection against disruption in their supply chains, not only caused by physical damage to the premises of key customers and suppliers but also by a wider range of events, including industrial accidents, labour issues, political upheaval and social unrest, the inability to enter premises, regulatory actions and, in some cases, public health emergencies such as a pandemic.” The ratings agency said supply chain insurance could become more common in the future, despite its additional complexity and cost. “This type of coverage usually comes at a high price and is only available to clients employing advanced risk management tools and willing to partner with brokers and insurers to design a customised insurance programme,” it said. Alvarez added: “In our opinion, global supply chain insurance policies, which are usually bought by large companies with relatively complex needs, could become more prevalent among a larger number of clients. The global supply chain challenges during the pandemic could open new business opportunities for insurance and reinsurance companies, as corporations increase their demand for more comprehensive coverages and risk transfer tools.”

Global crisis could see greater demand for supply chain insurance over BI cover

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