Modern supply chains are becoming increasingly challenging. Amy Humphries outlines how both insurers and risk managers can mitigate the risks that make up these complex components of our global economy.
The complexity of modern supply chains is a double-edged sword, their intricacy is a necessary by-product of our globalised economy, but it is also a creeping challenge for risk managers and insurers alike. Events in the past decade have demonstrated the difficulty for insurers in tracking contingent aggregate exposures. From Fine Art & Specie, to fast-moving consumer goods (FMCG), to the smallest of components needed to assemble a product, there are underappreciated risks to be analysed and exposures to be anticipated, identified and mitigated.
Experience shows delicate supply chains are becoming more vulnerable to political changes and violence, brought on through elections, protests, or war. Recent political events have shown the destructive potential of regional disturbances to the global economy. To assume this kind of disruption is a one-off would be a mistake.
Untangling food supplies
In this context, recent events, including interstate conflicts, become even more pertinent examples of supply chain risk; especially in the aftermath of the Covid-19 pandemic and the stress already placed on the economy. Analysis from several bodies has identified commodities that have become essential to the global economy, and which have come under severe strain as a result of recent conflict.
One of the most critical, yet underestimated, commodities is fertiliser. Historically, Russia was the single largest exporter of fertiliser in the world - accounting for 15% of the global trade according to Lloyd’s - closely followed by Belarus. Since 2022, Russia has heavily restricted and even banned exports of various fertiliser products. On top of this, both countries have faced severe sanctions from western countries on their exports, further reducing supply.
This has been compounded by fluctuating weather patterns across the globe: a particularly unsettled climate has seen other major producers, including China, Turkey, and Egypt put export curbs in place on fertilisers to help secure their domestic food supplies.
Not only are fertilisers vital to global food supplies, especially in regions where agricultural land is lacking in nutrients, but ammonium nitrate is vitally important to the mining industry and 40% of the global supply of the chemical used to be sourced in Russia. Much of it makes its way to Africa, where disruption to economies and further supply chains could have significant consequences to public order and political stability.
As recently as the end of May, the Head of the UN Conference on Trade and Development visited Russia to attempt to secure further supplies of Russian fertilisers to stabilise world food markets.
All of this leads to a situation where there is increased difficulty in growing domestic crops at a time when Ukraine, widely known as “the breadbasket of Europe” and a significant agricultural producer globally, is unable to meet demand: it is reported that exports of food are down 30% compared with before 2022. Such a reduction has been hugely damaging to areas of the Middle East and North Africa, who historically have heavily depended on grain exports from Ukraine, with the UN warning that 49 million people were facing “emergency levels of hunger” immediately after the invasion.
Developed economies have also felt the effects of this disruption. Within the UK and the rest of Europe, we are seeing the consequences of the rising cost of living. Governments are continually seeking ways to rebalance their finances post Covid-19 to tackle the challenges of growing inflation and stagnating economies. Government policies worldwide are increasingly under scrutiny, and it seems that discontent with governments is growing in many regions of the world. This has brought about large-scale protests, which have often challenged Government security methods, resulting in damage to property and ensuing business interruption.
The impact of the Covid-19 pandemic on the global economic landscape was significant, and now, geopolitical events are causing severe repercussions. Whilst governments and private companies create new trading corridors and establish contracts with trading partners in lesser developed nations, new challenges can emerge.
A fine-tooth comb
While insurers have always done their due diligence when it comes to understanding the risks posed to potential clients and insureds, recent events have provided a further lesson on the steps needed to calculate their true exposures. Even companies normally deemed safe and secure must be aware of all aspects of their supply chains and their security.
Consider, for example, the humble potato crisp. Well established, profitable manufacturers were massively impacted by the drastic increases in costs for sunflower and neutral oils in the wake of the events of 2022. Though not all of their oil was sourced from Ukraine, 47% of global sunflower oil exports come from the country and, as such, prices soared around the world. Together with rapidly increasing energy prices and the rising cost of potatoes caused by a worldwide shortage, production costs increased dramatically.
Insurers and risk managers alike should carefully consider any lessons learned from such disruptions in order better to mitigate the impact of future events. Insurers and particularly reinsurers are increasing their awareness of these contingent exposures and understandably are asking more questions. Direct insurers now require further information from policyholders better to understand these exposures and as such are requesting lists of customers and suppliers, and oversight of business continuity plans.
A perfect understanding of entire supply chains can be hard to achieve, with each element potentially having its own secondary or tertiary chain. These are all challenges to which the market can adapt and overcome by insurers working in partnership with brokers and policyholders.