Global supply chains – resilience against business interruption risk is weakening

As the COVID-19 pandemic experience showed, supply chains can be heavily disrupted, bringing long-lasting implications.² Supply chain resilience is preventing breakdowns in delivery value chains, and the ability to quickly recover, rearrange and/or mobilise alternative delivery routes. Safeguarding supply chains can help companies maintain market share and profits, which a narrow focus on cutting spending on supply chains cannot. Looking back at former SONAR reports, supply chain risk has been a recurring theme. The majority of the articles have focused on external risk drivers like natural catastrophes or politics (ie, disruptive events that are beyond direct influence of supply chain management). For many of these drivers the current outlook is negative.

Besides the headline conflicts like Ukraine or Gaza, the Red Sea or the future of Taiwan, the political environment in many parts of the world has become less stable. The Fragile States Index³ for 2023 indicates fragility has spread from poorer countries to the more affluent parts of the world. The inference is that key supply routes around the globe are likely to become less secure.

Data indicates that the amount of insurance property owners buy against natural perils is increasing each year.⁴ More frequent extreme weather events,⁵ earthquakes and volcanic eruptions⁶ can impact production facilities and transport routes.

While digitalisation can provide efficiency gains in supply chains, it also presents areas of systemic vulnerability. Emerging vulnerabilities require constant updates to hardware, software and procedures, and trained staff to keep systems safe and running.⁷

Supply chain operations depend on infrastructure. Energy, water and power, and also health infrastructure, which becomes especially important in the case of a man-made or natural disasters, or a pandemic. Still, according to the G20,⁸ there is a big gap between investment need and actual spend. The result could be less resilient supply chains.

Economic drivers can impact investments in supply chain infrastructure. In return, supply-chain constraints can impact the economic outlook. This is why the Federal Bank of New York created its Global Supply Chain Pressure Index.⁹ If any of the drivers cited before coincides with an already stressed supply chain, the fallout for businesses can be significant.

Given the negative outlook on many external risk drivers and the pandemic experience, one would expect that firms have supply chain resilience on the top of their agendas. According to a recent survey by PWC,¹⁰ today this is not the case. Only one-third of executives cited increasing supply chain resilience with more investment as a top objective. Instead, the top priorities of executives are operational efficiency and cost reductions.

Insurers should acknowledge this short-term view when underwriting business interruption and contingent business interruption risks. This especially as risk drivers can interact with each other. If drivers accumulate, the losses incurred by insurers can increase considerably. An example would be a pandemic coinciding with a period of drought. A lack of water and then also electricity could cause disruptions to supply chains and business operations. There could also be a decline in productivity due to absence of workers on account of ill health.