A new framework designed to help both risk managers and insurers close the supply chain risk protection gap has been co-produced by the specialist Lloyd’s of London re/insurance marketplace and catastrophe risk modeller, AIR Worldwide.
A new report from Lloyd’s and AIR Worldwide, Hidden Vulnerabilities in Supply Chain Risk: A quantitative risk modelling framework, outlines a new framework which the pair claim helps insurers and risk managers narrow the protection gap before the next catastrophic supply chain disruption takes place.
According to research, in the future, insurance companies should expect claims made up entirely of business interruption and contingent business interruption losses.
The report analyses three case studies in particular, the 2011 Tohoku quake and tsunami in Japan, the 2011 Thailand flood, and a hypothetical cyber-attack on an engine manufacturer in New York. Ultimately, the analysis finds that failure of a critical infrastructure in one part of the world can have significant supply chain impacts, resulting in losses on the other side of the world.
Furthermore, Lloyd’s and AIR note that the physical impact arising from supply chain failures can have a hit on intangible assets, most notably brand and reputation. And, the increased frequency and severity of extreme weather events around the world has the potential to exacerbate risks to infrastructure, manufacturing and also distribution networks.
The report highlights a lack of historical claims data and says that this, combined with the evolution of unforeseen exposures, means there aren’t many systemic models for an insurer to quantify supply chain risks.
However, Lloyd’s and AIR state that the industry-agnostic modelling framework laid out in its study provides insurance firms with a viable solution to fill the data gaps within current modelling, while at the same time providing firms with a rich set of metrics to help them more accurately assess risks and exposures.
The study comes alongside a recent report from Airmic, which highlights that businesses are struggling to manage modern day supply chain exposures.
Head of Innovation at Lloyd’s, Trevor Maynard, said: “Our study presents a methodology that helps (re)insurers to understand risks and exposures more scientifically. We hope that this will help risk managers build resilience into their businesses, and we are urging insurers, brokers and risk managers to work together to develop solutions.”
Dr. Jayanta Guin, Executive Vice President (EVP) & Chief Research Officer at AIR Worldwide, commented: “With increasing globalisation and complex supply-chains, it is important for corporations and the insurance industry to use advanced analytics to develop a holistic view of risk and identify pockets of risk that are not otherwise obvious and visible. We’re pleased that Lloyd’s has supported this critical study on interconnected risks.”
And Julia Graham, Airmic’s Deputy Chief Executive Officer (CEO) and technical director, added: “Supply chain disruption is a consistently front-of-mind risk for Airmic members, so we very much welcome this study. Quantifying risk in a modern supply chain is exceptionally complex and a huge challenge for businesses and underwriters.
“Any development that enhances the market’s understanding of this critical exposure will be of great benefit to our members – both for improved insurance coverage as well as an enhanced understanding of this key risk.”
The increased interconnectedness of the world and a push towards a truly digital one, means that increasingly, an event on one side of the world can have significant, direct and indirect impacts on other parts of the world. In light of this, it’s important that market players understand their supply chain risks and take the correct measures to mitigate any potential impacts.