The Effect of Supply Chain Disruptions on P&C Insurance Carriers

Supply chain disruption and its effect on insurance carriers

The conflict in Ukraine is having a domino effect on supply chains around the world as supplies are hit, businesses close their factories and inflation rises. Russia’s invasion of Ukraine in February 2022, sent gas prices soaring because of supply chain disruptions and embargoes on Russian energy in Europe. Since only 2% of crude oil from Russia was imported to America, folks would not expect gas prices to spiral up but they did. Canada is one of our biggest suppliers and they might have found the European market more attractive because of the higher prices per barrel. To prevent that from happening, we found ourselves paying more for gas at pumps.  

It is not just the price of gas that has been affected. Ukraine makes more than 90% of the gas-phase lasers used in the chips produced by US semiconductor companies. Russia exports a third of the palladium metal used in U.S. companies for sensors and memory products. This has come on top of a year of global chip shortages, pushing the U.S automobile industry to find alternative sources. 

All of this comes after a tough two years of the Covid pandemic, the Suez canal blockage, and the blackout from Winter Storm URI in 2021. In short, the supply chain is continuously being impacted by political and natural calamities. Other factors also cause supply chain disruptions, such as a shortage of skilled workers but they might not grab headlines. Seemingly, there is nothing as volatile as the supply chain and P&C insurance is always in risk mitigation mode.

The domino effect of supply chain disruption

An Allianz 2022 Global Risk Barometer report indicated that 45% of companies have suffered a financial impact from recent supply chain issues. Supply chain risks are always interconnected and organizations bear the brunt on many levels. For example, a large multi-national corporation cannot replenish the exhausted supply of a key product because of port delays. This leads to a business interruption risk. This in turn causes reputational loss because the customer is depending on the cargo reaching in time.  This is reflected in financial risk with a loss in sales revenue. This is just one more instance of the domino effect where supply chain risks can cause a cascading impact.

U.S. business leaders ranked business interruption including supply chain disruption as the No. 1 supply chain risk for stateside companies in 2022

Businesses are analyzing all points of their supply chain and putting in place steps to mitigate risks where problems can occur. This due diligence becomes even more important when the supply chain has international operations. Often, the supply chain might include countries with less developed infrastructure and where risk management and asset protection might not be at the level of more mature markets. Some companies are leveraging artificial intelligence technology and predictive analytics to better understand these real-time risks.

Comparison of Supply Chain Disruption by Industry


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Can P&C insurance help fill the gaps? 

To minimize their financial loss most businesses turn to their insurance programs. Insurance cannot take away the risk of supply chain disruptions but it does play a major role in contributing to a business's ability to recover from interruptions. Organizations expect their insurance companies to be thought partners and provide both intellectual capital as well as specialized coverages. 

Specialized supply chain insurance and contingent business interruption insurance coverage can provide a line of defense against property damage and loss of profits from business interruption. Supply chain insurance covers risks such as labor strikes, production issues, and political or civil unrest. While business interruption insurance is normally limited to damage to property such as in a fire or flood. Then there are other insurance coverages such as trade credit, product recall, cyber insurance, and cargo insurance. However, no two supply chains are the same, which makes the advice of a knowledgeable broker invaluable as also closely reviewing any policy language to make sure the coverage fits the company’s needs.

Also read: Modern Insurance Core Platforms - Smarter, Faster, Better?

The insurer’s contribution goes beyond policy coverage 

The supply chain looks toward insurers for more than just policies and insurers are responding with a bundle of services like risk analysis, benchmarking, and mitigation advice. To be able to do this, insurers are in turn looking at technology to drive insights. Insurers are developing tools that use big data to better manage disruptions in the supply chain. This once perfected could be a game changer when the service is utilized by their clients. While this is still in the early stages, the future is not too far off. Soon company-specific scoring for supplier location will be a reality. This will lead to insurers providing risk engineering expertise where infrastructure does not meet standards. This insight and preventive action will in turn help insurers offer their clients higher limits.  

Insurers are also moving over to an automated, secure claims ecosystem that helps in faster and more cost-effective handling of claims. Risk engineering is becoming much more flexible as well. Many P&C carriers do not require their risk engineers to travel the world to make a physical inspection, instead, there is greater utilization of virtual inspections or in-country resources to better support their clients. It does not stop here. Property and casualty insurance carriers have developed sophisticated catastrophe modeling capabilities and this expertise is extended to their clients to evaluate the natural peril risk both in the supply chain as well as on supplier premises. Early warning systems EWS can come to the aid of companies to anticipate supply chain disruption, predict their potential impact, and also quickly communicate ways to solve the problem. For example, if an update is received that a supplier might fail to supply then the database recommendation engine must quickly identify alternate suppliers to move the order to.

Trucks, ships, and air cargo are the most vulnerable cogs in the supply chain. This is borne out by the fact that 84% of incidents (in the supply chain) involve these transportation modes. The three most likely causes for loss or damage are theft, rough handling, and environmental conditions. A revealing insight is that road transport cargo in the U.S. accounts for over 40% of these incidents, with 2.2 reported thefts each day. The average value of each cargo theft is $232,924.5 and that adds up to a ginormous loss from cargo crime. 

Road transport cargo in the U.S. accounts for 2.2 reported thefts each day. The average value of each cargo theft is $232,924.5. 

The supply chain tries to counter criminal attacks by using intelligence systems to identify high-risk areas and installing telematics devices on trucks and trailers. Technology though is being employed by criminals as well - they are using it to hack into supply chains and gain access to targets and not leave a trail for investigative follow-up. The International Union of Marine Insurance is working with the shipping and transport industry to put in place a number of measures that will reduce cargo theft. The report recommends the development of cargo theft information sharing programs. This is in direct response to the fact that cargo crime has a low rate of detection and imposed punishments are not deterrents to potential profits from cargo theft.

Technology is therefore the key for insurers in building positive relationships. Insurers who look after their supply chain partners will gain a competitive advantage when it comes to their value-driven customer base. 

Topics: Risk Management

Barbara Schwarz

About The Author

Barbara Schwarz

Barbara is a Business Development Manager with SImpleSolve and is a long-time insurance professional having over 35 years in the industry, beginning her career as a programmer at General Accident Insurance in Philadelphia. She has an extensive knowledge of Property and Casualty lines of business and works closely with SimpleSolve’s customers, partners and the industry. Outside of work, Barbara spends time gardening, attending concerts and enjoying time with her family and friends.

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