Ask any large commercial insurer whether they would like to underwrite more supply chain risk and most will emphatically say yes. But they are likely constrained because supply chain risk is often hard to quantify and, therefore, hard to underwrite and sell. Ultimately, insurers need more visibility into the supply chain—which is a rapidly rising priority for many companies as well. ACE Group’s 2014 Emerging Risks Barometer placed supply chain risk at the top of a list of “emerging risks that companies believe will have the most significant financial impact on their business in the next two years.” More recently, the fourth annual Allianz Risk Barometer placed supply chain risk at the top of “major risks which occupy the attention of companies.”
Despite these and many other reports, there has been limited adoption of insurance products designed specifically to cover supply chain interruption, as opposed to traditional property or business interruption insurance. There also continues to be a disparity between the concerns companies voice about supply chain risks and the actions they take to measure and mitigate them. A 2014 report by the supply chain management faculty at the University of Tennessee found that 66% of responding companies had risk managers in their firms, either in legal or compliance, but virtually none address supply chain risk. The 2014 Supply Chain Resilience report by the Business Continuity Institute and Zurich Insurance Group actually indicated an increase of more than 7% from 2013 in top management’s commitment to this issue.
Outsourcing manufacturing to China and other countries around the world can save companies a lot of money. But as the standards of doing business change along the supply chain, will these moves end up costing companies more in the long run? Check out "The Hidden Risks of Outsourcing," also from the May 2015 issue of Risk Management.
So why is there a gap between supply chain risks and the level of concern and action taken in response? Without quantification, risk cannot become part of critical supply chain metrics, such as Total Cost to Serve or Total Landed Cost. Businesses typically espouse that “if you can’t measure it, you can’t manage it,” and investments in supply chain risk management have often suffered under that rationale. The complexity of the causes and effects of supply chain risk are immense, and the inability to quantify that risk frequently puts theory at odds with practice.
For insurers, the answer is more straightforward: More supply chain disruption insurance could likely be sold if insurers had more and better data that both allowed them to price the risks and demonstrate to clients the value of the insurance.
With a large risk pool in their sights, some insurers have been tapping supply chain expertise to adapt traditional risk aggregation models to price supply chain risk. The models used for years by insurers to predict and quantify catastrophic damage to property have been combined with the network models used to understand process risk in complex manufacturing plants. Other techniques used by insurers to understand risks associated with weather and events such as pandemics add important dimensions. The models can be used not only to price and transfer supply chain risk, but also to support supply chain operational decision-making, offering potentially significant value for supply chain managers.
More risk data is being collected and analyzed, particularly for risks that pose persistent threats to supply chains, such as political, economic, environmental and societal risks. As more data is collected on non-catastrophic daily disruptions, those models may offer even more utility for supply chain managers. What remains missing is data on supply chain networks and the goods and money flowing through them.
Parallel to insurers’ efforts to develop supply chain risk models, businesses are increasingly enhancing supply chain visibility by acquiring data about their networks and the flow of goods. The opportunity to reduce costs and attain the agility needed to sell goods both in stores and online makes improved supply chain visibility a high priority for supply chain managers.
While improvements are still needed, progress is accelerating. The 2014 KPMG Global Manufacturing Outlook report found that about 20% of respondents have complete visibility into their supply chains, up from just 9% in 2013. Those companies comprising the 20% will likely be the first to benefit from predictive quantitative risk modeling.
Forward-thinking risk managers are monitoring the development of new supply chain risk models and keeping their supply chain managers informed, bringing their collective wants and needs back to the model developers. In the same way that supply chain managers have earned a seat at the executive table, risk managers will increasingly have a seat at the supply chain table. And the more insight and visibility into risk they bring, the more likely their voices will be heard by the C-suite.
As global corporations test the new risk models, the tools will quickly improve and become a valuable resource for supply chain managers. As a result, risk managers will have better data to understand opportunities to transfer risk and have access to more willing markets for that risk transfer.