A new report from Lloyd’s and WTW says that the risks associated with food chains around the world have increased as these chains have grown in size, volume, and complexity.
The firm said that food and drink supply chains will play an essential part in facilitating global progress and building societal resilience as the world’s population increases.
However, it said that the sector’s sensitivity to changes in natural climate cycles and weather patterns also places it at the heart of global efforts to build sustainability into our economic systems. A resilient and thriving food and drink industry, it added, is therefore key to the world’s economic recovery and prosperity in the wake of successive global shocks.
Writing in the report titled From Farm to Fork: Rethinking Food and Drink Supply Chains, the firms said: “The complexity of global supply chains – alongside the absence of high-quality data for the sector – makes it difficult to ascertain the potential costs of supply chain risks, which can vary between events and industries. While the Thai floods of 2011 provided an indicator of the vast potential impacts, less visible events can be equally costly: fires in a producer’s factory; suppliers with two degrees of separation facing liquidation; or construction delays in a supplier’s new premises. However, unlike the direct impacts of natural disasters, the effects of supply chain shocks are not confined to a geographical region. The global nature of the food and drink industry means their impacts are felt much further afield.”
The pair also drew out conclusions from the ramifications of Russia’s invasion of Ukraine. The two countries, it said, are ‘significant exporters of raw food ingredients such as wheat’.
They wrote: “The impacts of the conflict on global food supplies may also be exacerbated by droughts (especially in the Americas), leading to insufficient ingredients and materials being produced. The compounded effects of the conflict and drought have led a number of food and drink organisations to invest in new supply chain risk management tools, alongside procedural changes to help their businesses adapt.”
The report goes on to outline a practical roadmap based on increased collaboration between businesses, brokers and insurers, which identifies opportunities for insurance to innovate in the protection they can offer business and how supply chain risk management technologies, including data capture and visualisation can improve resilience.
It also identifies several key factors driving risk across food and drink supply chains, including economic pressures, demand changes, labour challenges, technology, transport, geopolitical and political risk, and climate change and sustainability, and highlights the opportunity for the insurance industry to develop new products to protect against the loss of Tier 2 suppliers, notifiable pests and diseases, transit delays and commodity price volatility.
It also identifies a lack of alignment between companies’ business-critical risks and the insurance cover they have purchased. For example, the research found that while 82% of businesses have at least some insurance for extreme weather impacts to their supply chain, less than a third (31%) believe that this is sufficient to address the risk to their operations.
From Farm to Fork is the first of a three-part series exploring supply chain risk. Report two and three on semiconductors and the transport and logistics sector will be published in 2023.
