With the cost and fallout from catastrophe events rising, and climate change increasing the severity and frequency of such events, businesses are now faced with increasing risks, greater costs and losses, says Andreas Berger, Chief Executive Officer Corporate Solutions, Swiss Re.
Because of this businesses now need to identify and rethink the weak points in their supply chains, says Berger.
Berger said that some of the questions that businesses should be asking themselves surrounding supply chains include, who are their main suppliers of goods and services, are there any second-tier suppliers that may source solely to primary suppliers, what do they provide, and what are the revenues associated with it, and are there any other sources that they can use in the event of a supply chain disruption.
However, Berger has made it clear while some of the risks that are posed by natural catastrophes can be indemnified or minimised, it is impossible to remove risk altogether.
“When an event damages a widespread area and basic infrastructure is impacted, there is no getting away from the disruption this will cause,” he said.
“COVID-19 has made us more aware of how such disruptions can spread through supply chains, having cost and time implications across entire systems. Businesses were aware of the potential for a pandemic, but it has still created scenarios and affected companies in ways we couldn’t predict. And natural catastrophes will filter through supply chains in much the same way.”
In addition, Berger states that some of the biggest natural catastrophes risks for supply chains come from port disruptions.
This is down to many ports being located in areas that are high at risk to earthquakes, such as California, which is home to the busy cargo hubs of Los Angeles and Long Beach. Ports are also prone to hurricane-related storm surge flooding too.
Berger adds that there is a lot of financial interests in ports, not just from their owners and operators, but from every corporation with goods and services going through them.
“Underwriting and pricing contingent business interruption policies for these scenarios is very difficult. This financial exposure can have a huge impact on the ability of a supply chain to operate after a natural disaster.”
Furthermore, he adds that with risks continuing to rise, which often leads to higher premiums, purchasing a range of insurance products is likely to be the best approach in dealing with these broad exposures.
These instruments, which includes both traditional insurance and parametric products, enables companies to receive funds that will cover any direct physical damage, business interruption loss and any contingent business interruption losses.
Traditional products may provide the physical damage coverage that businesses heavily rely on and need, parametric products however have a fast and transparent claims process. They simplify the claims and pay out processes, as well as giving businesses the funding they need to re-establish supply chains and provide any financial support while supply chains are disrupted.
Recently, data from Swiss Re’s Institute’s latest sigma report showed that natural catastrophe events in 2021 drove total economic losses of $270 million and insured losses of $111 billion, which is the fourth highest since 1970.
Berger also states how we are increasingly feeling the effects of climate change, as it continues to drive unpredictability and intensity in our weather systems
He adds: “While Hurricane Ida was the costliest of last year’s weather events, winter storms and other secondary perils – such as flooding, wildfires and hailstorms – were responsible for 64% of total losses.”
2022 is also not looking to be much calmer, with the damage that was inflicted across Northern Europe, Scotland and Germany by Storm Nadia, which is currently estimated to be a €270 million loss for the insurance industry.
In addition, there have also been non-weather events this year that have caused mass amounts of damage, like the recent M7.3 earthquake that struck offshore from the island of Honshu, Japan, which is expected to be a loss of USD 4 billion for the insurance industry.
Berger also addresses how the hardening of the insurance market has put more pressure on risk managers to take back control of their risk, stating that the first step in getting to grips with risk is understanding it, and that here “data is crucial”.
He said: “Businesses need to collect and interpret their own data as well as use data from other sources to inform their risk approach. As the effects of climate change become increasingly apparent and everyone grapples with what it means for their business, data partnerships will become more common. Sharing information is crucial to improving transparency and understanding, and allows the co-creation of new products and solutions to solve the challenges businesses face.”
By combing probability and severity data from multiple sources, it is possible to create richer data sets, ultimately opening up the potential for more predictive and efficient risks assessments.
Data sharing will also play a key role in shaping products best suited to the growing risks.
With a clearer understanding of their risks, businesses are in a far better position to decide how much risk they want to retain, how much they can mitigate and how much they want to insure.
