Ports – Earthquake exposed Supply Chain Bottlenecks

Paper products, clothing, diapers and food: Just a few of the necessities that we as a society rely on that arrive in vast quantities at shipping ports and airports throughout the world. Now imagine: A major earthquake strikes one of these locations, causing immense physical damage and resulting in a cession of operations at the port or airport.

Funds for repairs and resumption of operations, from either traditional insurance or government sources, trickle in slowly, leading to a backlog of ships and planes unable to leave or piling up at other locations and slowing the unloading and transit of goods and cargo to their end destination. The supply chain and economy seizes, with individuals unable to attain necessary items, and corporates unable to generate anticipated revenue and effectively run their operations.

However, there are insurance solutions, namely parametric insurance, provided by the industry that can help shipping ports and airports manage their financial exposure to earthquake more efficiently and provide the necessary liquidity to prevent the worst-case scenario from occurring.

The above hypothetical situation is not necessarily beyond the imagination, given the current circumstances. The on-going global supply chain crunch is exposing the fragility of the manufacturing and transport of goods and services on which our economies and societies rely on. Tied to the COVID-19 pandemic in a variety of ways, including but not limited to worker shortage, outbreak-related facility closures, reallocation of manufacturing capabilities to medical equipment and a disconnect between actual and expected supply and demand for various goods, the supply chain challenges are affecting prices and inventory stock of a variety of sectors and business sizes, from car dealerships to mom-and-pop bookshops. The present disruption is expected to last for the foreseeable future, with the population told to plan for long wait times for gifts and other holiday-related deliverables in the upcoming weeks and months.

With all the inconveniences and interruptions to that which we expect at our fingertips, the major infrastructure components of the supply chain, like ports and airports, remain largely operational and continue to play a critical role in the receipt and delivery of physical goods.

The volume of goods that arrive at these ports from Asia is tremendous and the ability of cargo ships to offload containers in a timely fashion at these locations is a critical piece of the supply chain. The number of containers that the average cargo ship transports to Vancouver has increased 12% since 2019, while in Long Beach, this has increased by over 70%.

The present staffing issues mean that there are currently dozens of cargo ships, and containers full of goods, sitting idle of the west coast; both NBC's Today Show and The New Yorker reported that in early October 2021, fleets of ships were parked off the coast of Los Angeles, causing a shortage of all sorts of items in the continental US. However, the ports remain operational, with the physical ability to permit ships to come to shore and unload their cargo.

A major earthquake can obliterate or severely damage the physical port itself, as we saw in the aftermath of the 2010 Chile earthquake, the 2011 and 2016 earthquakes in New Zealand and the 2011 Tohoku earthquake in Japan. The end result of such damage would be the inability of a West Coast port to operate for weeks, months or even years, depending on the extent of the damage, and the timing and volume of various sorts of funding (FEMA, traditional insurance, rainy day funds), none of which can be sorted out quickly.  At any time, such earthquake-related closures and re-routes would be disruptive to the global supply chain.

At present time, the inability to recover from an earthquake in a timely fashion and restart operations would be catastrophic to the currently fragile global economy.

The critical nature of our ports and airports in earthquake-prone areas means that the operators need fast access to some liquidity in the immediate aftermath, to allow them to at least resume operations.  Furthermore, corporates that operate into and out of the ports need funds to protect balance sheets against contingent business interruption losses, a line of business that is notoriously difficult to insure in the traditional market, given the requirement of physical damage for insureds to make claims on their BI policies.

This is where parametric insurance can play a role. Parametric insurance settles on the intensity of the earthquake ground shaking, not the ultimate damage caused by the earthquake, and can be purchased by both the owners/operators and corporates with a financial interest in continuing operations of the asset. Settling the claim is highly transparent: the more the ground shakes, the more the parametric insurance policy pays (as determined by the terms set forth in the policy).

Since earthquake-related ground shaking intensity is published by the United States Geological Survey in the days after an earthquake occurs, the claims settlement is rapid as well – a claim filed by the state of Utah after the March 2020 Mw 5.7 earthquake was settled within a month. More recently, Hurricane Ida-related parametric claims were settled and communicated by Labor Day weekend – for a hurricane that made landfall on August 29th.

The quick and transparent claims settlement features of parametric insurance means that any port or airport that opts to buy could have cash in hand in the days after an earthquake, allowing them to resume operations much faster than expected, and not causing a bottleneck and unnecessary stress on the global economy.

The fast liquidity will not magically make the wide area damage go away, but companies get a quick cash injection that will help them to cover for all the expenses that rack up (such as, way higher cost of transportation, plus post event inflation in general – un/finished goods, labor etc.) and allow for the payment of re-routing and redirecting ships into another port.

To learn more, please visit our parametric solution website that details our QUAKE product, and learn more about the experience of the state of Utah.