Analysts at DBRS Morningstar have suggested that recent global supply chain issues could open up new business opportunities for insurers and reinsurers as corporations look for more comprehensive coverages and risk transfer tools.
The COVID-19 pandemic posed unique challenges for supply chains globally last year, causing an imbalance in both supply and demand, as lockdowns and distancing measures combined with labour shortages to limit the supply of key products.
In this context, many companies turned to their insurance policies to try to recover some of the losses caused by the pandemic, particularly under their business interruption (BI) insurance.
But in most cases, BI coverage was not priced to cover pandemic, which meant that less than 2% of closed claims for BI losses submitted to insurers in the US were paid in 2020, with similarly rates also recorded in other countries.
Nevertheless, DBRS Morningstar notes that this has not deterred policyholders from pursuing their claims in court, forcing insurers to face increased litigation costs and reputational damage.
In contrast to BI insurance, which by extension is not adequate for covering supply chain disruptions in a pandemic, commercial policyholders with advanced risk management programs utilized a specialized coverage called supply change insurance, which is underwritten by a small number of global insurance companies.
Given its effectiveness during the pandemic, analysts at DBRS expect that this coverage could become more prevalent in the future despite its additional complexity and cost.
“In addition to BI and CBI policies, insurance companies have offered a broader coverage called supply chain insurance,” said Marcos Alvarez, Senior Vice President and Head of Insurance.
“This product is intended for a relatively small number of clients that need protection against disruption in their supply chains, not only caused by physical damage to the premises of key customers and suppliers but also by a wider range of events, including industrial accidents, labour issues, political upheaval and social unrest, the inability to enter premises, regulatory actions, and, in some cases, public health emergencies such as a pandemic,” Alvarez continued.
“In our opinion, global supply chain insurance policies, which are usually bought by large companies with relatively complex needs, could become more prevalent among a larger number of clients. The global supply chain challenges during the pandemic could open new business opportunities for insurance and reinsurance companies as corporations increase their demand for more comprehensive coverages and risk transfer tools.”
Swiss Re estimates that changes to global supply will generate approximately $63 billion in additional insurance premiums globally over the next five years.
And DBRS Morningstar likewise anticipates that increased demand for supply chain insurance and better modelling following the pandemic could bring new opportunities for global insurance companies serving large corporate accounts in the context of an enhanced multiline commercial relationship.
“If properly managed, this could improve the earnings profile of property and casualty insurance companies,” the firm concluded.
