We’ve heard a lot about supply chain issues since the start of the COVID-19 pandemic, and even more so since the Russian invasion of Ukraine in early 2022. Complaints about the supply chain and how it’s impacting the availability and prices of everything from new cars to diapers to cream cheese have been commonplace since we originally covered this topic a year ago.
For something that’s so essential for the functioning of our global economy, the supply chain across all industries has seen quite a few high-profile crises of late (think: the Suez Canal obstruction, the backlog of cargo ships in California, COVID-19-caused factory shortages).
These crises have a tangible impact on consumers. Maybe you love chicken wings, they’re part of your regular dietary repertoire but suddenly, due to supply chain issues, it’s both costly and challenging to get ahold of this finger-lickin’ delicacy. Or, perhaps you’ve been waiting for a bed frame for months. The furniture company you bought it from gave you a delivery date but that delivery date keeps getting pushed back. It’s frustrating.
Supply chain disruptions are even more frustrating and costly for businesses than for individual consumers. It’s no longer your personal inability to buy chicken wings: it’s a wing restaurant having to close due to lack of supplies. Or a car dealership losing customers and laying off employees because auto-plant closures leave them with no cars to sell.
Across all industries, supply chain disruption has come at a cost. One study found that around 45 percent of U.S. companies suffered a 6 to 10 percent loss in annual revenue, and another 25 percent of companies reported an 11 to 20 percent revenue hit, due to supply chain disruptions in 2020 and 2021.
What caused this supply chain crisis?
While not 100 percent responsible, the COVID-19 pandemic definitely highlighted major gaps in our supply chain systems.
In March 2020, when global offices shut down and many employees started working from home, the same could not be said for essential workers, including medical professionals, critical trade workers, and supply chain professionals (across manufacturing, distribution, warehousing, and trucking).With many of us quarantined at home, we relied heavily on supply chain professionals to continue working
But unsafe working conditions, particularly in the midst of a global pandemic, paired with a labor shortage, caused many supply chain professionals to rethink their career paths. Just as demand for imported and delivered goods increased during quarantine (groceries, puzzles, sourdough bread-making supplies), the workers necessary for getting these goods from factory to consumers were both getting sick at higher rates and leaving the logistics field for better-paying and less risky jobs.
Backlogs such as this have knock-on impacts: perishable goods perish, rushed and understaffed handling of goods result in damage, overworked truck drivers and cargo ship captains expose themselves to exhaustion and increase risk of accidents.
Types of supply chain disruptions
All supply chain disruptions aren’t created equal. There are a variety of factors that can cause a supply chain malfunction, and the years between 2020 and now have given us some of each of them. Five of the most common types of supply chain disruptions are:
- A sudden drop in demand: At the start of the COVID-19 pandemic, as most people were staying home as much as possible, the demand for gasoline and airline tickets both experienced a sudden drop. While it may seem counterintuitive, a sharp drop in demand can also impact the supply chain as products and services aren’t flowing like they normally would.
- A sudden rise in demand: Like the 2020 toilet paper shortage, a spike in demand for certain products can lead to empty shelves and companies unable to produce and ship more product fast enough.
- A loss of worker productivity: Whether due to layoffs, sick employees, or other conditions that reduce output, lower rates of productivity can mean there’s less product available to sell.
- Storage and access restrictions: Imagine what happens when an entire warehouse has to be shut down due to a disease outbreak, a major storm, or other unpredictable event. Without the ability to store and access products, many companies have to cease production.
- A shortage of raw materials: When a bird-flu ravages the nation’s chickens, we can expect to see fewer eggs on our grocery shelves. An egg shortage can then lead to a shortage of other food items that require eggs.
While the COVID-19 pandemic exposed faults in our fragile supply chain system, it’s only one of many reasons why supply chain disruptions are becoming more common. U.S. industries’ supply chains – global as they are – are particularly vulnerable to natural disasters, including global pandemics, rising sea levels, wildfires, and hurricanes. On top of that, supply chains are susceptible to transportation failures, political instability, material price increases, and cyberattacks.
How does insurance help supply chain disruptions?
Businesses purchase insurance to protect against the financial costs of a number of possible events, including supply chain disruptions. Whether the supply chain disruption is caused by something as mundane as a trucking accident that leaves a large number of items destroyed in shipment, or from something as monumental as a pandemic that forces factories to shut down assembly lines, insurance policies can come to the rescue.
In many cases, what may look like a supply chain issue is easily covered by commercial property & casualty (P&C) insurance. For example, “motor truck cargo insurance,” an industry standard for trucking companies, covers damages to cargo if a truck catches fire or has a collision. Customers will have to wait a bit longer to receive their items, but the owner of the cargo and the company transporting it won’t be out any money.
On the other hand, many of the supply chain disruptions we’ve seen in the past couple of years have been caused by less straightforward circumstances. Thus, they have less straightforward insurance answers.
Business interruption insurance and supply chains
During the height of the COVID-19 pandemic, many businesses were unable to keep up normal operations because the things they needed just weren’t available. Unlike items destroyed in a trucking accident that can simply be re-ordered and replaced, COVID-related supply chain issues had more to do with manufacturing shutdowns as factories became hotbeds of the virus. Even when materials made it through manufacturing, there were often no truckers available to transport goods to their next destination.
These same issues applied across the board from food processing plants to microchip manufacturing and semiconductor factories. Many businesses hoped their business interruption insurance policies would reimburse their lost revenue, however, this has been highly variable based on the details of each policy.
Over the past two years, there have been a lot of lawsuits between businesses and their insurance companies, as businesses fight for coverage while insurers maintain a virus isn’t covered under the types of business interruption insurance they sold. The University of Pennsylvania Law School has kept a comprehensive list of suits and where each one stands, in case you’d like to go down a COVID-19 business interruption lawsuit rabbithole.
The future of supply chain disruptions and insurance
Unfortunately, there’s no end in sight for the types of risks that impact supply chains, which means global supply chains will continue to reckon with the challenges that accompany them.
Don’t panic, though.
Yes, supply chain backlogs will continue to plague companies in the years to come. But that doesn’t mean it’s time to throw in the towel and give up on our global economy. Insurance was built to mitigate risk – in fact, its original use-case was to mitigate supply chain risks in shipping.
As more companies look for specialized insurance to help them mitigate supply chain losses, insurers and reinsurers have an opportunity to grow into new lines of business to meet those needs. This is a win-win situation, as insurers and reinsurers grow their business and companies avoid insurmountable losses from supply chain disruptions – as long as insurers can accurately assess and price the risk and businesses can afford to pay appropriate premiums.
This also presents an opportunity for insurers to foster resilience and risk prevention. As more insurers encourage insureds to take precautions to avoid claims events, we see that innovators will have a lock on new growth. For example, advances in artificial intelligence (AI) and machine learning (ML) can help insurers use advanced predictive models to find and minimize risks before they turn into losses.
The key to pivot
We know what you’re thinking: Growing into new lines of business, particularly specialized lines of business, can cause major headaches. Innovation isn’t easy.
Among the challenges for insurers and reinsurers are licensing obstacles, both in terms of regional licensing variations and getting producers licensed in new lines of business. Tracking and managing these licensing requirements for producers across different states can be expensive and labor-intensive.
Fortunately, we built AgentSync to solve just that problem. By automating producer licensing, we help carriers, agencies, and MGAs/MGUs grow their business by seamlessly expanding into new lines of authority and onboarding the producers they need to support that growth.
Check out our demos to learn more about how AgentSync supports carriers, agencies, and MGAs/MGUs in their growth efforts.