Disasters increase supply chain risks for companies: Swiss Re’s Berger
With increasing costs and fallout from catastrophic events, and climate change increasing the severity and frequency of these events, businesses now face increasing risks, greater costs and losses, says Andreas Berger , Managing Director Corporate Solutions, Swiss Re.
Because of this, companies now need to identify and rethink pain points in their supply chains, Berger says.
Berger said some of the questions companies should be asking themselves about supply chains include, who are their primary suppliers of goods and services, are there second-tier suppliers who can source only from of primary suppliers, what do they provide and what is the revenue associated with it and are there other sources they can use in the event of a supply chain disruption.
However, Berger made it clear that while some of the risks posed by natural disasters can be compensated or minimized, it is impossible to completely remove the risks.
“When an event damages a large area and basic infrastructure is affected, there is no escaping the disruption that will cause,” he said.
“COVID-19 has made us more aware of how these disruptions can spread through supply chains, having cost and time implications on entire systems. Businesses were aware of the potential for a pandemic, but it still created scenarios and affected businesses in ways we couldn’t foresee. And natural disasters will filter through supply chains in much the same way.
Additionally, Berger says that some of the greatest natural disaster risks to supply chains come from port disruptions.
This is because many ports are located in high earthquake risk areas, such as California, home to the busy cargo hubs of Los Angeles and Long Beach. Ports are also prone to flooding from hurricane-related storm surges.
Berger adds that there are many financial interests in ports, not just from their owners and operators, but from all the companies that have goods and services passing through them.
“Underwriting and pricing contingent business interruption policies for these scenarios is very difficult. This financial exposure can have a huge impact on a supply chain’s ability to function after a natural disaster.
Further, he adds that with risks continuing to rise, often resulting in higher premiums, buying a range of insurance products is probably the best approach to dealing with these vast exposures.
These instruments, which include both traditional insurance products and parametric products, allow companies to receive funds that will cover any direct physical damage, business interruption and any potential business interruption.
Traditional products can provide the physical damage coverage businesses heavily depend on and need, but parametric products have a fast and transparent claims process. They simplify claims and payment processes, while giving businesses the financing they need to restore supply chains and provide any financial support when supply chains are disrupted.
Recently, data from the latest sigma report by Swiss Re’s Institute showed that natural disaster events in 2021 resulted in total economic losses of $270 million and insured losses of $111 billion, which is the fourth highest since 1970.
Berger also explains how we are increasingly feeling the effects of climate change as it continues to drive the unpredictability and intensity of our weather systems.
He adds, “While Hurricane Ida was the costliest of the weather events last year, winter storms and other secondary perils – such as floods, wildfires and hailstorms – have were responsible for 64% of the total losses.”
2022 isn’t looking much calmer either, with the damage inflicted across Northern Europe, Scotland and Germany by Storm Nadia, which is currently estimated to have a loss of 270 million euros for the insurance sector.
In addition, there have also been non-weather events this year that have caused massive damage, such as the recent M7.3 earthquake that struck off the island of Honshu, Japan, which is expected to represent a $4 billion loss. for the insurance industry.
Berger also explains how the tougher insurance market has put more pressure on risk managers to regain control of their risk, saying the first step to controlling risk is to understand it, and that here “data is crucial”.
He said: “Companies should collect and interpret their own data and use data from other sources to inform their approach to risk. As the effects of climate change become more apparent and everyone wonders what it means for their business, data partnerships will become more mainstream. Sharing information is crucial to improving transparency and understanding, and enables the co-creation of new products and solutions to solve the challenges businesses face.
By combining probability and severity data from multiple sources, richer datasets can be created, ultimately opening up the possibility of more predictive and effective risk assessments.
Data sharing will also play a key role in designing the products best suited to the growing risks.
With a better understanding of their risk, companies are in a much better position to decide how much risk they want to retain, how much they can mitigate, and how much they want to insure.