Insurers and brokers are trying to pinpoint the risks posed by increasingly complex supply chains, writes Phil Wall, head of risk engineering UK, Ireland, Middle East and Africa at HDI Global, calling for market collaboration to signpost ways forward.
In a world of much greater connectivity, industrial and commercial activities have kept pace with increased levels of sophistication in their operating models and processes. This is especially true when it comes to the operation of supply chains on both a national and international level.
There is an increasing breadth, depth and complexity to supply chains, with constantly moving parts, a greater numbers of organisations involved and the influence they exert up and down the supplier chain. These factors all serve to make them entirely three-dimensional with a much broader range of associated risks, both tangible (physical products) and intangible (data and services). It now raises the question of whether those controlling the supply chains or the insurance providers finding the right coverage fully understand these interconnected risks in order to adequately price their mitigation or transfer.
Sadly, those tasked with developing a deep understanding of complex supply chains often fall short. It is in no way a reflection on the lack of desire by those managing them to understand the entirety of the risks complex supply chains pose, but they simply do not have the tools to fully define them or analyse deeply enough to fully appreciate their multidimensional nature.
A business may know which firm supplies it with a specifically manufactured part and may have some idea about where their tier-one supplier sources the components for it, but they often do not explore the chain any further to see where they may source from a tier-two supplier or trace that component back to its absolute origin. Likewise, it will likely pay no attention to transportation risks in supplying these components through the chain. There have been real examples of tier-three and tier-four suppliers failing because of transportation problems causing havoc throughout the supply chain.
These are material risks and, as such, need to be the driver for a change in approach. Experience tells us that full understanding of the risks might only materialise when the damage has occurred and the “this must never happen again” advisers come out the woodwork. Effective control of supply chains must become part of the business-as-usual activity within a company and its insurance providers. The entire gamut of exposures must be properly understood, risks identified, and pricing calculated accurately. How can this be achieved?
Technology has a key role to play and investment should focus on developing the right analytical tools. There are projects taking place within both the broker and carrier communities to identify the real challenges and signpost potential ways forward.
Because of their complexities, supply chains are organic; they change constantly. Therefore, it is not enough to simply create a snapshot of the chain, it must be possible to fully identify and properly analyse changes and how they may affect the various inter-dependencies within them. So these tools need to exist in an environment where they are openly accessible to the entire chain. Each part of the chain and process should be able to see and independently assess its own risks and understand how they influence the rest of the supply chain architecture. Finally, emerging intangible risks such as those related to data throw up a significant threat of aggregated losses throughout the chain.
We need to fully explore the challenges complex supply chains pose. Market collaboration will enable us to take significant steps forward to signpost the issues and create understanding of the real risks confronting us and develop something that helps us all work better for the benefit of our clients and their customers.
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