Insurers wary of CBI amid supply chain disruption

There is a growing focus among insurers on contingent business interruption (CBI) and supply chain risks, with the broadest cover now unavailable. But well risk-managed businesses can still get some protection, despite reduced appetite for indirect suppliers and almost universal Covid-19 exclusions.

Recent months have seen unprecedented supply chain disruption caused by Covid-19, which has impacted almost all sectors. The pandemic and a wave of power shortages in Asia have hit production, while a post-lockdown boom in some regions has caused a surge in demand for raw materials and goods, contributing to long delays in shipping. Adding to the pressure, severe labour shortages are affecting many industries.

This has caused insurers to take a long, hard look at their supply chain and CBI exposures, just as demand from buyers has risen.

Palle Kensoe, property practice leader in central Europe, Middle East and Africa at Marsh, said there is no doubt insurers are increasingly concerned about their CBI exposure.

“Where insurers were offering extensions like infectious disease and CBI, they didn’t have a full picture of how they were exposed across a book. So, after they saw the effects of infectious disease clauses when the pandemic hit, they are now are also looking at CBI extensions. And we see insurers wanting to know more and more about the exposure and demanding more information about how clients are dealing with supply chain risk,” he said.

Kensoe said some carriers are starting to focus on CBI limits and reducing their per-risk capacity. He says buyers can generally get the amount of cover they need if they can supply the correct information for their named suppliers. But without this information, risk managers can struggle, he added.

“We still have the capacity and it is still out there, but we do see some of the international insurers starting to focus on their CBI limits. We see some carriers starting to reduce that capacity,” he said.

“But if you can demonstrate to the insurance market that you know your risk, can quantify it and show your mitigation options, like alternative suppliers, that is important and you will get the cover. A big issue on property is named and unnamed suppliers. However, if you can supply the named supplier, you will often still get capacity,” he added.

Chris Waterman, global head of property, marine and technical lines at Zurich Insurance, stressed that insurers’ appetite is “very limited” for unnamed suppliers and indirect, tier two or three suppliers.

He said that growing concern among insurers over supply chain disruption and uncertainty over accumulation risk, coupled with the increased frequency and severity of supply chain incidents, has resulted in a reduced appetite for CBI or contingent time-element insurance.

And the broadest supply insurance cover has now been withdrawn, he said.

But he added that CBI cover remains available for first-tier suppliers at well-managed businesses. However, even here, appetite is reduced, said the insurer.

“For named direct suppliers, appetite depends on how well the risk itself is understood, as well as the risk a supplier poses for the direct insured and/or multiple insureds within a portfolio,” he said.

“Generally speaking, appetite is much more limited than ever before, resulting in a reduction in capacity/limits; increased deductibles or self-insured retentions; restricted/excluded coverage, for example non-physical damage triggers, communicable diseases or cyber; and rises in rate,” he continued.

“However, for those businesses where there is less uncertainty on understanding risk and where they can demonstrate that they have built resilience to reducing frequency and severity into their strategy, an appetite from the insurer can be generated,” said Waterman.

He added that insurers are particularly concentrating on supply chain risks in North America, Asia and Europe.

Marsh’s Kensoe said a focus on risk management is the most important thing for companies wanting CBI cover. “You need to know your risk and assess your risk. In the current market, insurers are willing to insure well-controlled property risks including CBI extensions. But if they don’t see that, they are pulling out and not offering capacity. So, we advise clients to do a thorough assessment of their supply chain risk, not only focusing on tier one but tiers two and three,” he said.

The broker understands that it has become very challenging for industries hit hard by the supply chain disruption to place standalone, specialised supply-chain cover. And he says there is more concern from a property perspective about some of those industries, such as automotive, too.

Maria Grace, global head of property at Allianz Global Corporate & Specialty (AGCS), said her company still offers CBI cover. But the amount of capacity on offer and its cost depends on the specific risk, how well it is managed and then documented. Grace said AGCS and other insurers have limited appetite for CBI for companies that aren’t on top of their supply chain risk.

“At Allianz Global Corporate & Specialty we still provide CBI cover, but our appetite varies depending on the industry, client resilience, loss experience and the breadth of cover,” she said.

“Rates for CBI coverage have to reflect increasing exposures. So, what we offer in rate, terms and conditions will vary depending on the underlying exposure or loss performance of the sector, and the individual client. The better a company understands and mitigates its supply chain exposures, the better we can assess the risk and offer coverage. If the clients don’t have a good understanding of their own suppliers’ or customers’ loss control and business continuity plans, carriers will have limited appetite for CBI,” said Grace.

Andy Edwards, account executive in the cargo and stock throughput team at broker Miller, said the London market for physical damage supply chain and cargo insurance is in a far better position for buyers in terms of coverage on offer, pricing and capacity than it has been for the last 18 to 36 months. The reason for that is increased capacity coming into the market and bringing back competition.

Meanwhile, cover remains available for non-physical supply chain risks but capacity, as has always been the case, remains “very limited”, said Edwards.

“We wouldn’t say it is becoming harder to cover financial loss, but certain issues such as Covid/pandemics and labour shortages remain firm exclusions,” he explained.

The broker said that rate increases in the London market for physical damage cargo supply chain cover have “decelerated rapidly”. This has been spurred by growing competition and an overall appetite among insurers to get more business onto the books following an industry-wide correction in the challenging market.

But Edwards said the cost of non-physical damage supply-chain products has remained pretty much unchanged in the current market. And there is now some pressure to increase rates following recent events, he added.

“Rates for trade disruption insurance, consequential loss, have remained fairly consistent over the years. But the increase of natural catastrophes and political instability in certain countries has put pressure on the market to increase rates,” said Edwards.

Waterman said sustainable insurance solutions can only be provided once supply chain risk is fully understood and resilience built in by risk managers. With a way to go before this is achieved, he said Zurich expects a further reduction in appetite for CBI cover this year and next, to “correct the current situation”.

Kensoe, meanwhile, said rates for general property and CBI cover that is available from the market is stabilising, if risk managers can supply the right information. He explained that property rate increases in continental Europe, for example, slowed to 12% from 18% in the last quarter.

“So, although we are still in a challenging market, it is moderating. CBI is also impacted by this trend, with rate increases slowing down despite the supply chain risks out there,” said the broker.

Zurich’s Waterman concluded by saying that insuring the “unknown” is not an appropriate strategy for insurers, and a sustainable supply-chain approach from carriers and industry is needed. “Otherwise supply chain-related insurance becomes unaffordable and will only be available for a handful of resilient businesses,” he warned.

And this means a bigger focus on supply-chain risk management from risk managers and better presentation of risk.

“A strong presentation of the risk that leaves nothing open to interpretation is always the best strategy for an insured – gaps in information and loss records only throw up red flags to insurers,” said Edwards. “As ever, insureds with a strong relationship with their insurers, as well as longevity of relationship, are also seeing good results. Clients who have trusted their insurance partners through the tough times have definitely reaped the benefits,” he added.