Supply chain woes top the risk list for Spanish firms

The Covid-19 pandemic, a global logistics nightmare and Russia’s invasion of Ukraine have put pressure on commodities markets and supply chains all around the world. It is no surprise then that the topic ranks high on the risk agenda of Spanish companies.

Social unrest and ESG issues are also a big concern currently, said leading risk managers taking part in the Spanish leg of our Risk Frontiers Europe 2022 survey.

They highlighted how even sectors that are not normally prone to supply chain disruptions have been affected by the events of the past few turbulent years.

“The subject that worries us the most at the moment is the enormous increases in commodities prices, as they can completely unbalance our budgets,” said Lourdes Freiria, general director of risk and insurance at construction firm Grupo San José. “And the risk of supply chain disruptions has also emerged as one of those that require more vigilance from companies since the start of the Ukraine war,” he continued.

Daniel San Millán, president of Spanish risk management association Igrea, added: “Supply chains have been broken for months in sectors like car-making and it should continue to be difficult at least for the next 12 months.” 

Feeling the heat

Supply chain disruption has been particularly felt by industries like car manufacturing, electronics and retail. But even construction companies, which are more often than not spared such problems, are now feeling the heat.

“Supply chain is not usually a problem for us, but it has become one in recent times. Previously, there was no lack of cement, concrete or wood products, but now there is,” said Iván Delgado de Robles, risk manager at construction and concessions firm ACS Servicios y Concesiones. 

“It is due to the cost of energy, the high price of commodities and, in Spain in particular, transportation disruptions. Many construction sites have been halted in Spain due to supply chain problems,” he said.

For companies that work with long-term projects resulting from public tenders, the challenges are compounded by inflation.

“If a company enters a public tender with a budget based on an estimate of commodity costs, but seven months later the prices are much higher, that is a problem,” Delgado de Robles said.

David González, director of risk and insurance at construction group Sacyr, believes that supply chain risks will remain a problem for the foreseeable future because disruptions have been caused by long-term geopolitical and economic trends, as well as events such as the pandemic and the Ukraine war. 

“More than the pandemic, it is the current situation and the future deglobalisation that will put pressure on supply chains,” he said.

“Deglobalisation has become a reality. I believe all countries will become more protectionist,” Delgado de Robles agreed.

More help needed

Risk managers would welcome more help from the insurance market in the form of covers to help mitigate the financial impact of disruption. However, most business interruption policies in the market today require physical damage to be triggered, which is not the case with many of the current problems. 

“Many clients would pay attention to non-damage business interruption covers if they were available in the market today,” González said.

“I see the market very reluctant when it comes to supply chain insurance,” agreed San Millán, who is also the risk manager at Ferrovial, the construction and concessions group.

He stressed that the factors driving supply chain disruption have impacts well beyond the balance sheet. 

“The management of inflation and energy prices is a huge challenge, a big risk for economies and companies. And the growth of inflation is fuelling social instability,” he said. “We have seen protests and strikes here in Spain, and they may spread to other countries if inflation is not dealt with in an emphatic way.”

Social unrest is firmly on many companies’ risk radars and adding to the challenges of placing insurance programmes, the Spanish buyers said. 

“In some regions like Chile, because of the protests that took place there in recent years, covers for strikes, riots and civil commotion have been excluded from our property policies,” according to Delgado de Robles. “We had to solve this problem by purchasing terrorism policies with those covers, as they are demanded by the authorities for concessions,” he added. 

ESG and systemic risks

Social discontent can also pile more pressure on companies to do their part in tackling the big issues facing societies today. This is why risk managers must pay more attention to ESG risks, the Spanish risk managers said. 

“ESG risks are now of great relevance for all companies, but especially for those that are listed on stock exchanges, as in our case,” Freiria said. “The risk management department is well familiar with those risks, their assessment and treatment, and of course we are involved both in the management and the reporting of ESG risks.”

And so are insurers, which are being urged by stakeholders to focus on sustainable underwriting practices.

“In all renewal questionnaires, be it for casualty, financial lines or cyber, insurers are asking many more questions about ESG. Companies’ internal ESG processes will be audited by insurers – it is a vital part of the future of the business,” San Millán said. “Adapting ourselves to these new questions is taking a toll. But soon we will see it as something normal, as sustainable processes will be more efficient and so will ESG reporting,” he continued. 

ESG is closely related to systemic risks like climate change, and risk managers are involved in discussions about how to better manage such threats. The pandemic and the explosion of cyber risks have highlighted, however, how hard it is to transfer these risks. 

Spain has a successful cat pool in the shape of Consórcio de Compensación de Seguros, and ideas have been floated for similar solutions to help transfer systemic risks. But little, if any, progress has been made so far.

“The management of systemic risks requires collaboration between the public and private sectors. The insurance sector cannot assume them. But for that to happen, political will is necessary and I do not see it today. It is understandable, as there are other priorities and agendas that have pushed this subject aside, but we should keep pushing in this direction,” said San Millán.

“The best way for the state to participate in the financing of systemic risks such as cyber is to devise solutions that make the risk attractive for insurers and reinsurers, for instance by fiscal or regulatory means,” González added.