Quantifying business interruption: Risk propagation in complex supply chains
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Business interruption including supply chain disruptions have been among the top risks for most companies for over a decade.
In recent years, the COVID-19 pandemic, natural catastrophes, as well as rising global political tensions, have severely disrupted global supply chains. They prompted trends, such as re-shoring and friend-shoring, designed to shorten and simplify supply chains, which, in aggregate, have yet to prove successful. Stretched supply chains are more vulnerable to natural catastrophe risks, such as floods and drought, both exacerbated by climate change. In 2023, the drought on the Panama Canal forced a 49% reduction in shipping traffic across the canal, through which around 5% of global trade is shipped.
Whilst there have been shifts in the sourcing of goods, supply chains remain highly complex. Companies' visibility of supply chain risk, particularly beyond their first-tier suppliers, is often only partial. Companies can purchase interruption (BI) and contingent business interruption (CBI) coverages to cover supply chain risk. However, a lack of connected, reliable data, can make costing these products challenging.
In this report, Swiss Re dives deep into major supply chain loss drivers and effective risk management and protection measures to achieve more resilient supply chains. We show how, using a methodology developed by the Swiss Re Institute and the University of California Berkeley Consortium for Data Analytics in Risk (CDAR), we can better understand BI/CBI exposures and dependencies within supply chains. This allows us to more accurately measure BI risk propagation across entities and industries globally, and to subsequently develop solutions to optimise supply chain management.
For a given supply chain network, we consider the impact of a hazardous event to each production plant (nodes), using variables to determine the likelihood of a disruption and the production downtime caused by the disruption. Each impacted location will disrupt dependent locations, and the impact will propagate downstream across the supply chain to the end product (see Figure 1). With this knowledge, insurers can work with their customers to use analytics to best predict and prevent risks where possible, optimise risk management, and offer adequate risk coverage for the unavoidable risks.
To provide cedents with appropriate coverage, re/insurers must therefore undertake three steps: (1) work together with their customers to map their supply chains across multiple tiers, integrating and reconciling internal and external datasets where needed, and plug data gaps; (2) identify critical risk exposure locations and dependent nodes to develop appropriate risk mitigation and resilience strategies; and (3) accurately quantify impacted production volumes together with duration to cost indemnity and parametric re/insurance offerings.
Better quantifying supply chain risks and their propagation allows re/insurers to enhance risk costing and selection, steer portfolios, manage company-level accumulation, and allocate underwriting capacity effectively.
Swiss Re offers our customers an extensive array of indemnity and parametric re/insurance products, risk resilience and supply chain analytics solutions such as Risk Data and Services, and CatNet®, our natural catastrophe mapping solution.
