Freak weather – supply chain disruption forecasted

From deep winter freezes in Texas to floods in Europe and heatwaves in Canada, 2021 was another year of volatile and extreme weather.

Natural catastrophes (Nat Cat) led to estimated global insured losses of USD 111 billion last year, the fourth highest since 1970. And they are becoming a bigger risk for businesses and their supply chains.

We are increasingly feeling the effects of climate change, which is driving greater unpredictability and intensity in our weather systems. While Hurricane Ida was the costliest of last year’s weather events, winter storms and other secondary perils – such as flooding, wildfires and hailstorms – were responsible for 64% of total losses according to our latest sigma publication on NatCats.

Things aren’t expected to be any calmer in 2022. We’ve already seen flooding in the Middle East and the damage inflicted across northern Europe by the exceptionally strong winds of Storm Eunice. In addition, there have been non-weather events like earthquakes and volcanic eruptions causing events such as the recent Tonga tsunami.

Climate change will continue to pose threats to society and economies. This adds a layer of risk and uncertainty to supply chains that are already under pressure – not least from COVID-related staff shortages. Delays in areas from manufacturing to transport as the global economy looks to recover from COVID-19 mitigation measures are also having a sizeable impact.

Natural catastrophe risk is nothing new. Hurricanes, earthquakes and floods have always caused damage to property and infrastructure. But the cost and fallout are rising.

Even with climate change increasing the severity and frequency of such events, we are putting more assets in harm’s way. And as our businesses become ever more interconnected, disruption and damage in one part of the world causes ripples that can be felt globally.

Faced with increasing risks and greater costs and losses, businesses need to identify and rethink the weak points in their supply chains. Who are their main suppliers of goods and services? Are there any second-tier suppliers that may source solely to primary suppliers? What do they provide and what are the revenues associated with this? Are there other sources, in the event of a supply chain disruption?

There are products that can help provide the answers to some of these questions. For example, Swiss Re’s CatNet solution allows companies to see their natural hazard exposure in the locations where they operate – as well as their suppliers’ exposure.

Some of the risks posed by Nat Cat can be indemnified or minimised, but it is impossible to remove risk altogether. When an event damages a widespread area and basic infrastructure is impacted, there is no getting away from the disruption this will cause.

COVID-19 has made us more aware of how such disruptions can spread through supply chains, having cost and time implications across entire systems. Businesses were aware of the potential for a pandemic, but it has still created scenarios and affected companies in ways we couldn’t predict. And natural catastrophes will filter through supply chains in much the same way.

Similarly, there are a lot of embedded pinch points that are hard to avoid. As we saw when the Ever Given got wedged in the Suez Canal, much of the world’s goods pass through – or rely on parts that pass through – one critical waterway.

In fact, some of the biggest Nat Cat risks for supply chains come from port disruptions.

Many ports are located in earthquake-prone areas such as California – home to the busy cargo hubs of Los Angeles and Long Beach – and earthquakes are often the most destructive of natural catastrophes. They come with no warning and, as well as the damage they cause, can lead to tsunamis with the potential to travel thousands of kilometres, even damaging infrastructure on other continents. In addition, ports are prone to hurricane-related storm surge flooding.

And there are a lot of people with financial interests in ports – not just the owners and operators, but every corporation, large and small, with goods and services going through them.

Underwriting and pricing contingent business interruption policies for these scenarios is very difficult. This financial exposure can have a huge impact on the ability of a supply chain to operate after a natural disaster.

With risks mounting, often leading to higher premiums, purchasing a range of insurance products is likely to be the best approach in dealing with these broad exposures. These instruments include both traditional insurance and parametric products, which enable companies to receive funds that will cover direct physical damage and business interruption loss, as well as contingent business interruption losses.

While traditional products provide the broad physical damage coverage that businesses rely on, parametric products have surged in popularity in recent years due to their fast and transparent claims process. They simplify the claims and payout process, and give businesses the funding they need to quickly re-establish supply chains, or provide financial support while supply chains are disrupted. This provides a degree of predictability that risk managers and their boards seek.

The hardening of the insurance market has put more pressure on risk managers to take back control of their risk. And the first step in getting to grips with risk is understanding it – here, data is crucial.

Businesses need to collect and interpret their own data as well as use data from other sources to inform their risk approach. Swiss Re’s Climate Risk Score Framework uses historic data and modelling to provide companies with a clearer picture of how climate change could affect them.

As the effects of climate change become increasingly apparent and everyone grapples with what it means for their business, data partnerships will become more common. Sharing information is crucial to improving transparency and understanding, and allows the co-creation of new products and solutions to solve the challenges businesses face.

By better combining probability and severity data from multiple sources, it is possible to create much richer data sets, opening up the potential for more predictive and efficient risk assessment.

Swiss Re works in partnership with its customers, combining their data with proprietary data like CatNet, as well as with claims information and third-party data sets. This creates a much richer and more granular picture that can allow companies to, for example, stress-test supply chains for different weather events, as well as see the likely recovery time and financial impact.

From an insurance perspective, data sharing will also be crucial in shaping products best suited to the growing risk.

This data-led approach has multiple benefits for customers. As well as providing better risk management insights, it is also a crucial part of protecting brands – ensuring customers can rely on getting a particular product in a shop when they need it.

With a clearer understanding of their risks, businesses are in a better position to decide how much risk they want to retain, how much they can mitigate and how much they want to insure. Swiss Re does not just provide loss coverage to clients – it also uses risk know-how to help them shape an appropriate response through loss prevention and mitigation.

The growing frequency of Nat Cat events makes getting your product into customers’ hands increasingly challenging. Global supply chain disruption is at the point of becoming almost inevitable.

Risk managers must take action to articulate the risks Nat Cat present – and ensure they have secured coverage and taken steps to limit the impact on their business.

Climate change will make natural catastrophe risk a growing burden for companies, and for society as a whole. With insured and uninsured Nat Cat losses set to increase, companies must get on the front foot to keep their products on the shelves.