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The Supply Chain: Insurance

Posted on 9 September 2021

We know that increasing numbers of losses across a broad range of business sectors are arising from supply chain issues, predominantly caused by Brexit and COVID-19.

The Supply Chain

In the context of an ever-growing global trade market, the collective consequences of Brexit and COVID-19 have given rise to significant financial exposures resulting from broken global supply chains.

We know that all manner of businesses are experiencing difficulties: farmers are being told to dump milk because a shortage of lorry drivers means that milk cannot be collected; this is against the backdrop of rising costs in animal feed, energy and labour costs. The hotel industry is also affected in many ways – for example, hotels are finding that commercial laundry companies cannot meet their delivery obligations. Marks & Spencer has reportedly also warned of a range of problems linked to food imports when Brexit rules change next month: M&S says that EU markets represent over 25% of all UK food imports. The CBI has warned that immigration rules need to be eased for lorry drivers, welders, butchers and bricklayers. These supply chain risks have the potential to cause ongoing business interruption. Ikea is reported to be struggling to supply up to 1,000 product lines – again linked to a shortage of HGV drivers.

Other emerging supply chain issues that we are now seeing include:

Pharmaceutical and Life Sciences

Disruption/delays in the production and export of raw ingredients and materials from manufacturing facilities; restrictions on exports for COVID-19 related supplies and drugs; disruption to cold-chain infrastructure and product damage/expiration.

Hospitality, Retail and Construction

Disruption/delays in receiving stock and/or services from suppliers and the knock-on effect on customers/consumers; shipping or haulage interruption; port congestion; restrictions in the movement of goods; skilled staff or labour shortages.  

Automotive

Disruption/delays in the production of key parts or components; shutdowns of key factories or assembly plants; reliance on single source suppliers or geographical regions, build-up of stock and depleted demand, workforce disruptions.

Impacted by Brexit, businesses across the United Kingdom are seriously suffering; significant labour shortages, most notably for HGV drivers is starting to impact all manner of businesses and consumers.

Insurance: Claims & Risk Management

Mapping and strengthening a supply chain beyond a company's direct Tier 1 suppliers has been a focus of risk management discussion and technology innovation for some time. Unfortunately for many businesses the current environment has brought to the forefront the potential exposures that can flow from a disruption event to its direct or elongated supply chain.

As a business, we can draw on relevant expertise from specialists across our firm to support clients in assessing sectorial risk and identifying supply chain structures to examine how potentially complex risks can be better managed, including through insurance.

Businesses may already have limited cover under existing insurance programmes for Business Interruption. However, as we know from the FCA business interruption insurance test case, for MDBI policies to respond, there usually has to be some form of physical damage, loss or destruction. That form of cover is therefore unlikely to be responsive in most cases. Subject to the specific terms of the policy, business interruption cover might also exist within broader "All Risks" or "Marine Cargo" policies, which should also be reviewed.

It is also important to consider whether those policies include any Contingent Business Interruption cover, which can indemnify losses that arise from the supply chain if a critical supplier or a major customer has suffered a business interruption event that impacts upon the business's ability to operate.  

Aside from business interruption insurance there is an increasing appetite on the part of policyholders for broader standalone supply chain interruption cover, to supplement existing insurance programmes. Such policies typically do not require a business to have suffered any physical loss or damage and they can cover a wide range of loss events (such as natural disasters, political risk, labour issues and other transportation or production disruptions), subject to the particular terms agreed for the particular business.

In advance of purchasing any standalone insurance, it is advisable for a business carefully to examine its supply chain profile, together with any potentially invisible elements of its supply chain, to avoid potential coverage disputes in the future over the location or identity of its key suppliers.

The business should also consider the likely claim loss scenarios and whether the insurance terms offered will be adequate for it in the event of a claim - after accounting for any deductibles, sub-limits, or aggregation provisions. If you are considering purchasing supply chain risks insurance, we can advise you on policy wordings and the proposed scope of cover to ensure that the cover aligns with your expectations and risk management strategy. We can also put you in touch with major brokers who may be able to assist in identifying and modelling your supply chain profile and the financial quantification of the risk, for presentation to underwriters.

For particularly nuanced or self-contained risks there are an increasing number of parametric insurance solutions available. In general terms, those solutions indemnify the probability of a pre-defined event happening by utilising real time analytics to monitor the indemnified risk. Should the monitored risk breach a pre-determined condition, then the breach will give rise to a pre-agreed claim payment. For example, parametric solutions can be built into supply chain coverage to monitor cold-chain goods which can be damaged by temperature deviations during transit, e.g., for transportation of pharmaceutical products. Ultimately, if the insured event can be remotely monitored by data, it is another useful tool to consider in hedging a future supply chain risk.

Our Insurance Team is working with clients on global supply and distribution aspects, including consideration of:

  • shipping and transportation
  • stock and/or workforce issues
  • strength and security of international supply chains
  • maintenance and monitoring of ultra-cold supply chains

Should you wish to discuss potential supply chain claims, or risk management, please contact a member of the Team to see whether we are able to assist.

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