Supply chain disruptions, a major concern for businesses globally, cost organizations an average of $184 million annually, according to Swiss Re.
Recent years have highlighted the vulnerability of these networks, with COVID-19, natural disasters, and heightened political tensions affecting global supply chains. Events like the 2023 Panama Canal drought, which cut shipping traffic by 49%, underscore the pressure climate-related events are placing on trade, impacting around 5% of global commerce.
Despite some shifts toward re-shoring and friend-shoring, supply chains remain complex, and companies often have limited visibility beyond their first-tier suppliers. According to Swiss Re, this lack of transparency and reliable data complicates efforts to assess business interruption (BI) and contingent business interruption (CBI) risks effectively.
The report emphasizes the challenges businesses face in quantifying these risks and the need for comprehensive data to improve BI/CBI management.
Swiss Re's report outlines a methodology, developed with the University of California Berkeley Consortium for Data Analytics in Risk (CDAR), to analyze and quantify business interruption risk propagation across supply chains.
By mapping the impact of disruptions from production plants (nodes) through to the final product, Swiss Re aims to help insurers work with businesses to anticipate and mitigate risks. This methodology enables insurers to predict disruptions, optimize risk management strategies, and provide appropriate risk coverage for unavoidable risks.
To enhance BI/CBI coverage, Swiss Re advises that insurers take a structured, three-step approach. First, insurers and their clients should collaborate to map supply chains across multiple tiers, integrating diverse datasets to close data gaps.
Second, identifying critical risk points within the network allows companies to implement targeted risk mitigation measures. Finally, accurately quantifying the production impact enables insurers to price coverage for both indemnity and parametric re/insurance products.
Better quantification of supply chain risks, Swiss Re notes, supports improved risk selection, helps insurers manage accumulation at the company level, and allows for more strategic allocation of underwriting capacity. By refining how they assess these risks, re/insurers can enhance portfolio steering and risk-costing practices.
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