The COVID-19 pandemic’s impact on supply chains has had far-reaching consequences for the insurance industry. One interesting area in which insurance carriers are struggling is in evaluating client’s inventory, particularly in light of supply chain mismanagement. Due to product uncertainty and heightened demand for goods, many businesses have been ordering materials in excess of their needs and spreading those orders out across multiple suppliers. For example, a store which stocks 100 six-packs of a soda brand and normally sells 20 six-packs a day usually orders that same replacement amount from their distributor. During COVID, the retailer started selling closer to 70 six-packs and assumed that they might need as many as 100 six-packs to meet this higher demand and mitigate supply chain risks. This is known as the bullwhip effect.
Covered clients who have materially increased inventory but fail to report changes to their carrier properly, may not receive full coverage in the event of a loss. These inventory fluctuations require brokers to engage in regular discussions to ensure the coverage provided is comprehensive.
As such, brokers should also consider the bullwhip effect and its impact on how their client’s business is operating. As the pandemic has shifted supply needs, many businesses have been forced to alter their production goals and at times even pivot their production focus entirely.
How to Mitigate Global Supply Chain Risk
Global supply chains continue to feel pressure as a knock-on effect of the COVID-19 pandemic, leaving the logistics and supply chain industries operating at reduced capacity. Governments of major economies are expecting the crisis to continue for some time. There are many steps businesses can take to shore up their supply chains and insurance can play a meaningful role.
Corporate Risk and Insurance spoke with Robyn Anderson, an attorney in the insurance and recovery practice of US law firm Lathrop GPM, on how businesses can navigate the supply chain crisis.
“Initially, the massive shutdowns and quarantines meant decreased manufacturing capacity and supply,” said Anderson. “At the same time, consumer behavior changed, with many people working from home and consuming goods in private spaces. These created an immediate disconnect between supply and demand, and the disruption was felt by almost everyone. But, even as supply and demand have gradually resynced over time, there are still kinks to be ironed out in distribution. Major ports are still occasionally being shut down due to outbreaks, labor shortages persist, and operational costs are skyrocketing, all of which can add pressure and delay to a strained, global system.”
Anderson suggests that in order to avoid supply chain risks, companies must fully understand the supply chain and its vulnerabilities. Some companies harness technology such as artificial intelligence to better understand real-time risks. Anderson also suggests that businesses should simplify their supply chains wherever possible. For example, some businesses are shifting away from “just-in-time manufacturing” due to the pandemic-induced fluctuations, while others turn to temporary employees during labor shortages.
“When disruptions do occur, businesses can also try to shift risk either through contractual risk transfers or placement of insurance coverage,” Anderson said. “A classic insurance option, for example, would be contingent business interruption coverage in a property policy. That insurance applies even if the insured does not suffer direct property loss or damage. It is triggered if a supplier or customer has physical property damage that then causes disruption along the supply chain, impacting the insured’s business. This type of coverage works well when physical events such as floods or fires cause disruption in the supply chain.”
Concerning the pandemic effects, contingent business interruption coverage is not a clear-cut issue. It has often been left to courts to decide whether the coverage remains valid.
“There are other potential insurance options available to businesses, which would not require proving physical damage, but these coverages are less common, less standardized, and often costlier,” Anderson said. “As always, speaking with a knowledgeable broker and carefully reviewing any proposed policy language is key to making sure the coverage fits the company’s needs.”
Even with these precedents in place, contingent business interruption coverage during a pandemic is still largely new territory. Whether a claim may be covered, as well as the extent of compensation are still points of contention. We recommend businesses looking to protect themselves from COVID-19 inventory losses or changes should consult with a broker who can understand and evaluate multiple quotes and policy proposals from carriers.
The Limit Perspective
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