A failure of critical infrastructure on one side of the world can cause catastrophic supply chain losses on the other, according to the report, which analysed three case studies: the 2011 Tohoku Earthquake and Tsunami, the 2011 Thailand Flood, and a hypothetical cyber-attack on an engine manufacturer in New York.
Physical impacts arising from supply chain failures can also affect intangible assets, notably brand and reputation, noted the report. In addition, the increased frequency and severity of extreme weather can exacerbate risks to infrastructure, manufacturing and distribution networks.
With a scarcity of historical claims data and the evolution of unforeseen threats in value chains, there are few systematic methods for an insurer or a corporate risk manager to quantify a supply chain’s risk, according to Lloyd’s and AIR.
Insurers can expect claims made up entirely of ‘business interruption’ and ‘contingent business interruption’ losses in the future, according to the research.
The industry-agnostic modelling framework presented in this study shows insurers a plausible solution to fill the data gaps within the current modelling for both ‘business interruption’ and ‘contingent business interruption’. And provides insurers with a rich set of metrics to help to more accurately assess risks and exposures.
The method is outlined in a new report – Hidden Vulnerabilities in Supply Chain Risk: A quantitative risk modelling framework – that analyses almost one million disruption events.
Trevor Maynard, Head of Innovation at Lloyd’s, said:“We have published this research alongside Airmic’s new guide – Complex Suppl Chains in a Complex World. Our study presents a methodology that helps (re)insurers to understand risks and exposures more scientifically. We hope that this will help risk managers build resilience into their businesses, and we are urging insurers, brokers and risk managers to work together to develop solutions.”
Jayanta Guin, Executive Vice President & Chief Research Officer at AIR Worldwide, said:“With increasing globalisation and complex supply-chains, it is important for corporations and the insurance industry to use advanced analytics to develop a holistic view of risk and identify pockets of risk that are not otherwise obvious and visible. We’re pleased that Lloyd’s has supported this critical study on interconnected risks.”
Julia Graham, Airmic’s deputy CEO and technical director, commented:“Supply chain disruption is a consistently front-of-mind risk for Airmic members, so we very much welcome this study. Quantifying risk in a modern supply chain is exceptionally complex and a huge challenge for businesses and underwriters. Any development that enhances the market’s understanding of this critical exposure will be of great benefit to our members – both for improved insurance coverage as well as an enhanced understanding of this key risk.”