Intelligence: the supply chain crisis – why the insurance lifeboat can’t take all

This article was originally published by Insurance Post, December 2021.

Supply chain issues have made headlines recently as backlogs at ports build up and in some cases large ships are turned away. These are unprecedented times but, as Rachel Gordon finds out, insurance is only part of the solution.

Whether it’s semi-conductors, building materials or poultry, supply chain problems are holding back the UK’s economic recovery.

The UK has been hard hit, with backlogs at ports and high levels of COVID-19 cases. Felixstowe had to turn away some ships from Asia, forcing them to dock at Rotterdam in the Netherlands, with UK consignments brought here by smaller ships. Brexit is also a factor, causing more hold ups and bureaucracy.

Even so, let’s not forget that China, the US and many European countries have problems and the EVER GIVEN container ship crisis had a global impact.

When the ship ran aground in the Suez Canal, the supply of goods was disrupted around the world. Although a multi-million settlement from shipping, cargo owners and insurers was agreed, there remains a huge fall out, including for those cargo owners who were uninsured and have liability under the general average clause, as well as the many cases where cover did not respond because of delay exclusions.

Supply chain claims could also be disastrous for insurers. Given that London is such an important market for covering the global transport of goods, there are implications for the market?

The broad consensus is that there will be a rise in claims, but these are likely to be contained as in a majority of cases, delay is an exclusion. There are some exceptions however, as often for a considerably higher premium, it is possible to include some cover.

Paul Hiscoe, Chief Underwriting Officer for NMU, explains: “While we can expect to see more claim notifications, loss to goods caused by delay in transit is not normally covered by a cargo policy. Where cover is available it’s usually subject to specifically named triggers”.

As Gerry Sheehy, CEO of The Fiducia MGA, confirms: “Marine insurance policies contain various clauses and exclusions. For those with perishable foods they may well seek to have specific covers added to their policies. However what needs to be remembered is for the policy to respond it will require a specific trigger – so, physical loss or damage. It’s unlikely the majority of policies will respond simply because of delays”.

Opening the floodgates?

Chris Chatfield, Partner with law firm Kennedys, says while there has been an increase in claims activity, the floodgates have not been opened because of the exclusion. The exception is where a broker would have negotiated special terms for a client and typically this could be in sector such as pharmaceuticals or food.

He says:

If items are refrigerated, there can be damage if something goes wrong with the temperature control or if an agreed storage or carriage time is exceeded. Much can depend on whether there was service level agreement built into the contract and there can be penalties if the forwarder does not meet these SLAs or claims for damages.

When transport is largely running to schedule, supply chain issues are a rarity and as such, many would feel costly extensions to provide some cover against these exposures were unnecessary. However, as Chatfield says, those who sought to spend less on their cover may now be feeling short-changed.

Niche solutions

But given all these problems, it seems insurers are not going to develop more products where they pick up the tab. Hiscoe says: “The cargo market is a competitive space and product innovation is alive and well. But, whether this will lead to specific forms of insurance emerging to protect Just-In-Time models is doubtful at the moment, particularly as insurers can currently see the full impact of a supply chain disruption caused by both COVID-19 and Brexit.”

Ed Parker, Divisional Head of Special Risks for Tokio Marine Kiln, says specific supply chain solutions are likely to remain extremely niche. “In our experience, supply chain insurance tends to be a bespoke cover tailored to the specific needs of a client as it’s rare that two supply chains are the same. It’s also important to work any policy around a client’s existing insurance coverages and find where there are gaps that can lead to a potential loss. Given it does tend to be more bespoke coverage, there is not a vast market currently, with some markets that have offered capacity tending to retrench to more traditional coverages. The wider the perils, the fewer the markets”.

There is also a reputation aspect, but again, coverage is not readily available. When it comes to empty shelves or no fried chicken on the menu, businesses often need to suck it up.

Parker agrees customers could lose faith if their expectations are not met and it may be possible to include an indemnity for the cancellation of key contracts. This would again need to be on an individualised basis and he points out while there may be some limited scope to include crisis management, he adds “from my experience it is the client that knows their business best and how to deal with an issue”.

Steven Bands, AXA XL’s Underwriting Manager for UK Cargo, says claims are rising connected to physical loss and damage and in terms of covering the widening risks, he adds insurers will look to reflect these providing the products can be sustainable, but in the current market, the delays are largely proving inevitable and so there is no ‘fortuity’. “In terms of supply chain, we may see the development of some parametric solutions in this area as well as more captives being set up to meet large losses that cannot be insured,” he explains.

Graeme Blackie, Head of Marine and Specialty Development at Sedgwick, says it can be challenging for companies and bespoke is often the main solution. But, he adds cargo owners may also choose to sell their goods at the quayside to salvage buyers as a way of cutting their losses or make other difficult decisions.

He comments: “Cargo owners who refuse to send or accept cargo might use the services of salvage buyers, who remove packaging and sell the shipment to a secondary market, assisting in mitigating the loss. Certain cargo can still be used for something other than their intended purpose – like meats subsequently used for pet foods rather than human consumption or apples juiced rather than sold as fresh fruit on supermarket shelves”.

He continues: “Amazon caused an uproar when it recently destroyed several consignments of in-date groceries. But it’s not unusual for a supplier or retailer to give instructions to destroy cargo that’s nearing the use by or best before date. Suppliers and retailers refuse to put their brand at risk by distributing foodstuff that could potentially cause illness to the public – in some cases, there might be a ‘brands clause’ included within cover”. Even so, he points out “it’s up to the owners of the goods to prove their loss, and ‘fear of contamination’ is not proof of loss”.

One further possible insurance solution is for companies to increase their trade credit coverage, but although this can protect in terms of insolvency, which is very much on the rise, it is not aimed at transportation delays.

De-risking strategies

And overall, companies need to do as much as they can to help themselves – supermarket Asda chartered its own ship to make sure it would have plenty of stock available for Christmas. This is one solution and it is becoming increasingly prevalent, but it also shows that SMEs can be more vulnerable as they do not have such options.

As Hiscoe says: “It tends to be smaller companies that suffer as they do not have the buying power to compete with bigger companies which have sophisticated supply chains and contracts with major shipping lines and logistics companies”.

Parker says perishable goods will always be a challenge and this is why efforts are made to put more localised supply chains in place or to use airfreight. He says clients have become adaptable at finding solutions.

Bands adds AXA XL’s risk engineering service is also working closely with companies and seeking to ensure there is a flight to quality wherever possible. There have been a lot of advances in this area and insurers can provide expertise that protects companies – the development of sensor technology too is playing a part in helping protect shipments”.

 Meanwhile, Chatfield says insureds may also have benefited from better risk management and efforts made to ensure that supply routes are available before the goods are loaded in the containers.

It’s also important to consider the use of more costly active temperature control, often powered by electric power points or the vehicle’s power source. While these are a more expensive option, they are far less vulnerable to delay than passive temperature control methods such as insulation blankets and dry ice.

This all adds to cost, but in the current climate, there is no alternative for those who want responsive cover.

In quarters where there has been a lack of risk management and stress testing – and insurers can help here.

Hiscoe says: “There are several companies that offer supply chain assessments and services, but at additional cost. NMU works with BSI to manage supply chain risks. Its experience allows for a full audit of a customer’s supply chain and will identify risks and pinch points where there might be a potential issue”.

And according to Edward Leighton, Forensic Accounting Services Director – Major and Complex Loss for Crawford & Company, companies must take whatever steps they can, both in a business and insurance context, to minimise the risk of supply problems. This includes using multiple suppliers where possible to spread the risk of supplier problems, trying to grow the customer base to spread risk and increasing inventory limits – subject to coverage limits – to have a larger buffer stock.

He adds that risks can also be better managed if the insured are able to employ their own drivers and transport, to minimise reliance on third-party transporters. He adds: “For supplier and customer extension policies, specify not just the immediate supplier/customer but multi-level suppliers and customers and for general supply chain policies, specify as many potential problems as possible and ensure that ‘invisible’ elements of supply chain (for example, hauliers, ports and specialist labour) are taken into account and that potential problems with these are also covered”.

Suki Basi, Managing Director of Risk and Data Analyst Russell Group, agrees there is a protection gap and this is shown in the language used, as insurers talk about ‘perils and corporates talk about ‘risks’.

She comments: “Risks are interconnected and can hit an organisation at multiple levels. For example, let’s say a large multinational company is struggling to source a key product due to port delays. Yes, it suffers a business interruption risk because of a delayed product but also reputational damage since it cannot sell the item to the consumer. This, in turn, translate into a financial risk when it suffers a consequent fall in sales revenue.

She says risk registers can be too one-dimensional and simply a box-ticking exercise to please senior management. “They examine a risk in isolation and never take account of risks holistically. Furthermore, even if enlightened corporate risk managers understand this then they may struggle to gain traction with or recognition from the c-suite”.

Sheehy adds: “Understanding your supply chain has become ever more important in the past two years given the impact of COVID-19, and to some extent Brexit. Firms need to identify every step in their supply chain and understand where potential problems may occur, particularly as more than often parts of that supply chain will be international. That due diligence will allow you to  understand where the weaknesses are and put in place steps that can be taken if problems occur. Due diligence is extremely important”.

In partnership

Insurers are highly cognisant of the risks and current problems and they are seeking to support clients, even if they cannot cover everything.

Calvin Gray, London Market Marine Director at RSA, says brokers play a vital role for clients and they work extremely closely with underwriters and logistics experts are also assisting. Sectors seeking tailored help include food and pharmaceuticals and he adds that the fashion sector has also been under pressure because of the risk of missing crucial dates to be in time for the seasons.

Again, this is a delay issue, but he points out that insurers are protecting in many other areas – and are paying claims. “Theft is more of a concern at present. There will have been less security at ports, in fact less staff generally because of COVID-19 and with weaker controls, the risk of theft rises – and so do claims”.

As Chatfield says:

When you have backlogs with freight, there will be cargo sitting in vehicles and warehouses with the resultant increased risk of loss through theft, delay or exposure to the elements. There will also be more urgency in providing logistics services, potentially resulting in more errors and accidents. But, there is scope for mitigation and it is to be hoped that the supply chain (from the manufacturers through to the end users) will work constructively to avoid disputes. Where there are ongoing business relationships, there is likely to be an increased use of mediation.

The fall out from current supply chain issue will doubtless continue for a number of years. There are grey areas within cover and where possible, brokers will bring their influence to bear in the case of disputed claims. Of course, in these unprecedented times, there will be dissatisfaction that insurance is not always clear cut – it can only be part of the solution, and not the entire one.