When the Supply Chain Breaks

Here's why it's crucial to have an in-depth risk dialog between the insurer and the insured to be aware of the services provided in the area of loss prevention.

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It is not easy to take a positive view of the Coronavirus disease (COVID-19) pandemic. However, the fact that more companies are coming to realize that globalization needs better managed and more resilient supply chains is a development that industrial insurers and risk consultants can only welcome.

The extent to which supply chains came under pressure during the pandemic is illustrated by the situation faced by automotive manufacturers earlier this year. Due to a lack of semiconductors, many carmakers were threatened with production stoppages, delays in deliveries and measures such as short-time working. There were no short-term supply alternatives, and many manufacturers had to cut production. This was a further blow to the already hard-hit automotive industry.

No wonder that according to the respondents of the Allianz Risk Barometer 2021, improving business continuity management is considered the most important measure to make supply chains more transparent and resilient against incidents. This is followed by developing alternative and additional supplier connections, investing in digital supply chains, intensifying supplier selection, and where possible, specifically creating inventory and stockpiles for emergency production and delivery. More resilient supply chains do not come for free.

These findings are also in line with other surveys. For example, according to a FERMA study, 46% of respondents expect to make changes to their supply chains after a pandemic, with 70% of them planning to find alternative suppliers. A survey by Euler Hermes also found that a similar number of U.S. and European companies are considering finding new suppliers (62%), while 30% favor moving their supply chains to countries closer to home.

Supply chains put to the test

COVID-19 has further increased the existing pressure to re-think supply chains. Already during the first lockdown in spring 2020, companies around the world were affected by restrictions and had to temporarily close their operations. As a result of the plant closures, the pandemic presented global corporations with the major challenge of getting hundreds of supply links back on track.

To prepare for these developments, there are two opposing trends in supply chain strategies -- one is nearshoring, moving production to a nearby country or closer to the sales market, in the case of Germany, for example, to Eastern Europe. The other is partial reshoring, attempting to shift production back to a country and associated suppliers, particularly in the case of U.S. companies. Whichever direction it ultimately takes for companies, the increased resilience of supply chains is to be welcomed. Not only does it help with insurability of risks, but it also helps to respond more quickly to market trends.

Rethinking the contingency plans

Without a doubt, the pandemic has brought more focus not only to supply chains, but also to a company's overall business continuity management. In recent months, many companies have found that their contingency plans were quickly overwhelmed by the rapid pace of the pandemic and changes in public health measures.

Time and again, it becomes apparent that contingency plans need to be constantly updated and tested, so that they can actually be applied on Day 1. They must be cross-functional and integrated into a company's risk management and strategic processes. COVID-19 also showed that organizations need to consider a broader range of scenarios to be prepared for future extreme business disruptions. Identifying and understanding potential "black swan" events will be our collective challenge, but the central key to surviving such crises will be the ability of companies to respond quickly.

Scenario planning before the crisis knocks on the door

So, how can a company protect itself against the next crisis? Of course, not every risk can be insured. Today, many companies' risk management is well positioned when it comes to traditional risks. But, it could be even better when it comes to increasingly important intangible assets, something COVID-19 has also shamelessly uncovered. What is clear is that the insurance industry cannot take away all the challenges companies face, but we can work in partnership with customers and together try to mitigate the risks in the supply chain. In the end, it is transparency above all that makes risks identifiable, controllable, quantifiable and thus insurable.

Companies and their insurers must think ahead and consider how the business, the market, the customers and suppliers can change in a given scenario. There is no way around scenario-based business continuity planning, which critically examines the company's own set-up and the resilience of supply chains under different scenarios. Potential business impacts must be understood, action plans in place and tested before the crisis knocks on the door.

Insurers are in constant dialog with clients to find ways to quantify risks. Specifically, this is accomplished by companies focusing even more on quantifying business interruption triggers and their potential impact, rather than relying solely on overarching risk management strategies. They need to develop the tools and systems to understand business interruption triggers and make the impact measurable.

More than ever, it is crucial to have an in-depth risk dialog between the insurer and the insured and be aware of the services provided in the area of loss prevention. From the availability of seemingly unlimited information, prioritizing data, qualifying it, using it for failure analyses and translating it into a targeted risk management strategy are some of the best ways out of the crisis.