Stabilising the supply chain

Businesses are clearly facing a significant number of different and emerging risks post-pandemic.  This is creating a changing landscape for insurers.

One of the significant risks to businesses generally and to insurers is the robustness of the supply chain. The pandemic exposed issues with resilience in many supply chains and highlighted the supply chain as a major risk for insurers.  Any supply chain failure or delays can have significant knock-on effects on insurers, notably in terms of claims.

Supply chain issues are far wider than just industrial manufacturing processes. Anyone who has tried to undertake any DIY or building work in the last 18 months will know how hard it is to get some of the materials necessary that we would ordinarily take for granted would be in stock. This issue is not limited to individual consumers and there is evidence that construction developments are taking longer due to issues with the supply chain.

Not being able to maintain and repair property is a considerable problem not just for the owner, but for their insurer in the event of a claim. Most recently this could have been one contributing factor affecting the impact and severity of claims as a result of storm Eunice, on the UK market.

For insurers, there is a real risk of reputational damage from supplier practices as the claims supply chain is critical to the success of the claims function. Delays may increase the cost of indemnity because of the increased cost of parts, rising claims handling costs and the potential need for temporary repair or solutions, such as car hire. This in turn decreases customer satisfaction.

There are a number of factors affecting the risks associated with supply chain breakdowns:

• The ability to manufacture products at the same level throughout 2021 was taken for granted and has been adversely affected by labour shortages and national and international freight issues due to the ongoing pandemic.

• Rising costs as inflation soared to 5.5% in January in the UK this year based on the Consumer Prices Index - levels not seen in nearly 30 years[1] - and to 7.5% in the US.  This creates a potent combination that looks set to bring greater claims risk and higher claims values. All of these changing factors create difficulties for insurers looking at how much they should be reserving, especially with the likelihood that in the current circumstances, supply chain disruption could become even more prevalent.

• The additional costs and slower settlement are all adding to various emerging risks. The destabilisation of peace in Europe now that Russia has invaded Ukraine and the impact already had on global stock markets, means prices are moving at pace. Delays to claims could mean higher costs simply because world prices are spiraling upwards so quickly.

Unsurprisingly, there is no single solution that insurers can implement to minimise supply chain risks. Yet these challenges provide a perfect opportunity to readdress the robustness of the supply chain and reset the parameters under which it works.

A review and reimagining of supply chains could enable future success. This may include shortening and simplifying supply chains in a ‘back to basics' approach, which manufacturers are already addressing by bringing what they can back to the UK.

The increasing global focus on ESG, primarily because of climate change concerns, also needs to be taken into account, with supply chains meeting ESG parameters as far as possible through careful supplier selection and management. Supplier selection is key to success - careful alignment is needed with suppliers that compliment your organisations culture and ethos. This may not only help to reduce supply-chain risk, but it can boost the performance of the business and strengthen your brand values creating a win-win.

It is also vital to think about contingency planning. Providing solutions that can easily be rolled out should the primary supply chain function be compromised, or should you experience a significant surge in claims - whether that is due to a pandemic, weather event, war, or some other as yet unknown factor. Relying too heavily on a small number of providers means a concentration of risk that neither the insurer nor the manufacturer should be comfortable with.

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