Supply-chain constraints and disruptions have been a key consideration for insurers since Covid-19. Many in the market were hopeful to see benefits from an easing of supply-chain pressure on loss costs as the residual impacts of the pandemic and Brexit lessen.
However, sources agreed that relief is not materialising as they hoped.
The factors keeping supply-chain pressures as a front-of-mind issue range from increasing geopolitical tensions to environmental pressures.
Commodity prices are also being directly impacted by supply-chain disruption, sources have observed – particularly steel and lumber – which continue to play into rising loss costs and headaches for claims managers.
These trends are resulting in increased attritional-level BI losses as physical damage takes longer to fix.
At a global level, supply-chain index data suggests pressures abated significantly in late 2022 into mid-2023, but since then, disruption has been escalating once more.
Moreover, there are some parts of the insurance value chain that sources picked out as being under particular pressure.
Because of changing economic priorities, some insurance sectors such as renewable energy are bearing a higher burden from supply-chain pressure on loss costs.
Other lines that have meaningful exposure to the disruptions are property, construction and energy.
"Energy, property and construction are where [supply-chain disruption] is most impactful,” Sarah Howell, Liberty Specialty Market's London head of first-party claims, told Insurance Insider.
Another said any lines with revenue protection built into the cover will be impacted by the disruptions.
A recent report from the Swiss Re Institute said marine and trade credit and surety lines are a few of the most impacted.
Port congestion creates accumulation risks for marine insurers, the report noted, while longer transit times raise insureds' risk exposure.
For credit and surety carriers, the report noted that shipping delays and higher prices have been manageable so far, but insured losses may rise if disruptions last longer or intensify. Stickier claims inflation is a risk too, if core goods inflation starts to tick up again.
In addition to Russia’s invasion of Ukraine, geopolitical tensions are growing ever more febrile.
Tom Upton, head of claims for marine at Markel, noted that Red Sea attacks are forcing ships to take lengthy detours, such as around the Cape of Good Hope.
"That will add some further supply-chain disruptions purely due to the time and the cost of the materials, as well the cost of the fuel to go around the Cape and the manpower."
Upton noted that this disruption is having a significant impact on both property damage and the availability of parts – not only larger, integral equipment but also smaller spare parts.
"We're having a lot of those smaller claims, where either the companies would have [typically] spares on-site, and they're very readily [available], but they now can't get them and have to ship them in," he said.
Upton explained that, in most cases, there is a 30-day indemnity waiting period before BI losses can trigger.
“So, where we previously wouldn't have seen the attritional claims actually coming to market, we're seeing much greater volumes of BI claims, even when there's not a physical-damage loss and actual breach of deductible.”
To help minimise this BI loss, underwriters are having careful conversations with their key clients and risk managers about having critical parts on site, where possible. “If it's an inexpensive but critical part and it can be safely stored, then we're suggesting insureds do that,” Howell said.
Other means of minimising these BI losses include amending wordings to implement longer waiting periods on big losses, as well as introducing higher damage deductibles, sources said.
Upton added that another method of ensuring the insured is sufficiently covered for the risk is by implementing a co-insurance structure. Upton said that, in implementing this kind of coverage, it provides more incentive for the insured to reduce both BI losses and premiums.
Renewable energy is one area of the market being significantly impacted by the disruption of supply chains, Upton noted.
As the US and Europe are looking to move away from Russian-sourced energy, there are increased construction projects in energy infrastructure, “and that demand is pushing in on an already stretched supply chain”, Upton said.
He explained that a costly and disruptive issue is the availability of construction equipment – such as vessels for offshore wind farms, or large cranes, or the onshore facilities for further energy aspects.
Sources said there are very few large vessels out there for offshore wind construction projects, all booked with contracts for about five years in the future.
This issue is exacerbated by "mega projects" underway, particularly in places such as Dubai, an example being the Neom port, which has budgets large enough to monopolise the equipment and supplies that are available.
If the wind turbines need repair or replacement, it is unlikely the equipment will be available for use for an extended period.
This could mean “huge amounts” paid for contract-frustration claims, in relation to projects the failed equipment would have moved onto next.
However, one factor that could help to limit insured losses is that many ventures might decide against repairing broken wind turbines and to operate with remaining turbines in place.
Another means of limiting the insured losses would be by sharing information. According to Liberty’s Howell, “talking about issues we're encountering and sharing that knowledge helps to educate all parties involved in the process around what we can do to mitigate this”.
As with the shortage of equipment, insurers are also noting the global rise of labour costs and lack of expert skills.
One construction underwriter explained that not only have supply-chain issues “not gone away since Covid by any stretch of the imagination”, but there is also “tremendous demand” for skilled labour.
This is mostly an impact from Covid-19, as government-enforced lockdowns put a halt to construction projects around the globe.
Post-Covid-19, construction projects that should have been completed during lockdowns are now taking place alongside the normal influx of construction projects. Both are taking labour from the same pool, leaving the supply of highly skilled workers at extremely low levels.
One head of claims added that they believe this lack of expertise also links to Brexit, at least in the UK, due to the mass migration of people back to Continental Europe. However, they noted that the lack of labour is a pertinent issue in the US as well.
According to data from the US Bureau of Labor Statistics and Office for National Statistics, wages across the whole economy,have risen more than 20% in the US and UK since 2020.
The energy sector is also vulnerable in this area. “When you're dealing with large energy losses or renewable energy, you need experts who are working on site and doing everything as they should, following the manufacturer's instructions, etc,” one source said.
Another noted that, combined with the lack of availability of machinery or parts, a lack of labour can compound BI costs already being faced on renewables construction sites.
Sources agreed that a challenge is ahead for insurance lines facing down the supply-chain issue.
On the geopolitical front, one major concern surrounds the tensions between China and Taiwan, given supply-chain reliance on Chinese manufacturing.
Disruptions in Taiwan would also have a significant impact for electronics supply chains. The country is the world’s top contract manufacturer of semiconductor chips, used in most electronics.
Despite the volatile outlook, the insurance industry is “really good at finding solutions and working through the challenges in front of us”, one source said.
Howell added: “We have a lot of strength in terms of finding solutions. That helps our insureds as well, because they want to get back up and running as quickly as they can. We want them to as well, as that mitigates the business interruption and improves their loss ratios, and it's better for everyone involved.”
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