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Supply chains are intricate networks and processes involved in the production and distribution of goods. The supply chains are increasingly vulnerable to disruptions from cyberattacks, natural disasters, accidents, labor strikes, software failures, export controls, tariffs, regulatory interventions and armed conflicts, leading to diminished revenues and profits and making insurance a critical component of an enterprise’s business strategy.
Financial and investment considerations
National policy and security
The reliability and security of supply chains are vital for business operations and critical to national security. In 2012, the U.S. Department of Homeland Security adopted a National Strategy to address supply chain vulnerabilities and to foster resilience in the global supply chain system. The European Union has made similar enhancements through initiatives such as the Critical Raw Materials Act and the Chips Act.
Cyberattacks and supply chain vulnerabilities
The May 2021 DarkSide attack on the Colonial Pipeline, which led to significant disruptions and financial losses, underscores the importance of insurance – particularly cyber insurance – in mitigating such risks.
Types of insurance for supply chain coverage
- Contingent Business interruption (CBI) Insurance
- Covers lost profits due to physical loss or damage to third-party property in the supply chain
- Requires physical loss or damage of the type covered by the policyholder’s property insurance
- Policyholders should ensure that coverage for direct and indirect counterparties exists
- Specialized Broad Supply Chain Insurance/Trade Disruption Insurance (TDI)
- Covers loss of net profits and related costs due to supply chain disruptions
- Is usually all-risk, covering a wide range of perils
- TDI is narrower, covering only named perils
- Cyber Insurance
- Covers disruptions due to cyberattacks, including denial of service attacks and data loss
- CBI provisions may cover supply chain claims related to IT service providers
- Political Risk and Special Contingency Coverage
- Covers risks to assets and investments in politically unstable regions
- May include coverage for confiscation, regulatory changes, war and terrorism
- Marine Insurance
- Covers transportation of goods over ocean or land and damage to conveyance
- May provide indirect coverage for supply chain disruptions based on the cause of delay
- Directors & Officers Insurance
- May protect directors, officers and their companies from accusations that they failed to adequately protect the business or third parties from supply chain disruptions
- Civil Authority and Ingress/Egress Coverage
- Covers business interruption losses due to orders from authorities, such as evacuation orders and curfews
Placement tips
To ensure adequate protection from supply chain risks, policyholders should:
- Fully assess and understand all potential supply chain risks and ensure that the insurance policy includes all needed coverages
- Assemble complete copies of all applicable policies
- Determine if policies cover first-party losses, third-party losses or both
- Review limits, deductibles, coverage grants, exclusions and exceptions to coverage
- Determine the geographic scope of coverage
Regularly reviewing your insurance program will help manage the risks associated with global supply chain disruptions.