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Technical Dossier
Published in Edition 15
High impact
Insurers´ point of view on supply chain interruptions
The supply chain interruptions currently being experienced globally present increased and new risks for customers that marine insurers can help manage and mitigate.
As supply chain interruptions have impacted their business, we have identified the choices that our customers face:
- Accept the situation, with potential delays and longer storage of goods at existing and / or new locations in the supply chain;
- Seek alternative options to reduce shipping costs and / or ensure shipments arrive on-time;
- Combination of options 1 and 2 where alternatives are sought for certain markets & products, whilst for others the situation with delays is accepted;
- Not shipping the goods: it is not economically attractive to ship the goods due to costs. Keep them in a storage location until transport costs reduce and it becomes a viable venture;
- The customer decides to stop production.
Each option presents additional risk to be identified and managed accordingly.
1. Accepting the situation is not without risk. Any form of disruption must be considered, and the reality today is telling us that such disruptions are likely to occur. Whenever shipments are at rest there is an increased risk, particularly if such delay is unplanned.
Examples include:
- Delays in a warehouse can lead to unexpected accumulation of goods resulting in insurance policy limits being exceeded beyond the control of the customer. The warehouse may reach capacity leading to new, unknown locations being used. The risk of fire and theft is likely to increase.
- Containers may be stored in the warehouse yard without being emptied. Containers are not designed for long term storage: the packing of products is designed for normal transit times but not for a longer period – for instance adequacy of humidity absorption materials.
- Final mile deliveries may be delayed as drivers run out of driving hours, there is insufficient capacity in warehouses, or they are closed as out of hours. It may be that shipments are parked up in unknown locations with inadequate protections until delivery can be made.
The chance of any of these supply chain interruptions has increased significantly and an adequate risk assessment is essential to help manage and mitigate the risks presented. Purchasing additional insurance capacity is an option but is usually a result of a financial business risk decision. Additionally, Zurich’s Risk Engineering team works with customers to identify the increased risks specific to their business and then putting in place mitigation actions, for instance, warehouse surveys for additional storage locations.
“Different supply chains may be established, that introduce new partners, transit locations, geographic exposures, modes of transport and even packing methods.”
2. Seeking alternative options introduces new risks that require assessment. Different supply chains may be established, that introduce new partners, transit locations, geographic exposures, modes of transport and even packing methods. All may give rise to different threats and there is no guarantee that the risks faced in the past also apply to these newly established supply chains.
Altering the mode of transport may lead to changes in handling activities, temperature and humidity on the route, theft exposure and forces that the shipment is exposed to. There is nothing wrong with using an alternative transport mode provided that the potential new exposures are identified and actions are taken to mitigate the risks.
Examples include:
- The customer elects to change from ocean to air shipments. The customer usually loads the ocean container at his site, is familiar with the pre and post trucking as well as managing the unloading at the destination site. Now the cargo goes through a different process: it is trucked to a freight forwarder warehouse and then to an airport ground handling location for loading into an airfreight container. The shipment could be stacked with other cargoes, and spend time outside waiting to be loaded onto the aircraft. The additional handling and potential weather exposures provide new risks to be considered.
- Airfreight can be transhipped en route with associated handling, weather and theft related risks. Finally, there is the final delivery from the airport to destination premises to be considered. Often the airfreight carrier has its main location in another city from where the cargo is booked to arrive. The cargo will be flown to the main location and then transferred by truck to the airport where it is booked to arrive. This is called a Road Feeder Service (RFS). The risk assessment of a supply chain must include the RFS to derive the full benefits.
The gravity forces experienced by cargo in transit varies considerably by the type of conveyance whether it be road, rail, ocean or air. Switching modes of transport in a supply chain, exposes the cargo to new forces and potentially greater chances of damage. Examples of damage include sensitive equipment being beyond repair due to the higher shocks in rail movements, or inexperienced warehouse staff loading containers for ocean shipment without lashing the cargo - the rolling forces may cause the cargo to be destroyed if it moves in the container.
3. A combination of 1 and 2 makes sense from a customer prioritization point of view and is used frequently. A part of the supply chain continues normally, but for certain customers or products alternative solutions are used to either reduce cost or speed up the supply chain. These alternative solutions may lead to similar risk challenges described in scenario 2.
4. Electing to postpone shipments now can be an economically sensible decision, but it potentially gives rise to new risks. For instance, increased values held in store at the origin location may lead to warehouses reaching capacity. Any additional locations will require a complete risk assessment to ensure their suitability for purpose and to ensure protections against fire, theft, damage, humidity and weather and natural hazard risks.
5. Stopping production obviously eliminates the marine risk, but if production is moved to a new location then the customer needs to address the same issues as outlined in scenarios 1 to 4.
Overall, global supply chain disruptions have resulted in businesses having to consider new challenges in delivering their products to their customers. It has driven new business challenges and choices to be made. As an insurer, we have monitored developments closely and our experts are working with our customers to help manage and mitigate the changing risks they face – whether it be our underwriters providing insurance coverage or our risk engineers advising on actions to reduce risk exposures.