An old American car drives past waves crashing against the Malecon promenade in Havana due to the passage of Hurricane Milton on October 9, 2024. (Photo by YAMIL LAGE / AFP)
NEW YORK: Supply chains for corporate America will likely be vulnerable to disruptions from natural disasters, geopolitical strife and labour strikes in the year ahead, heightening companies’ dependence on insurance to manage their risks.
Failures in supply chains rank among the top current risks to businesses, a survey of executives, risk managers and finance professionals by insurer Aon Plc showed.
Major supply chain threats in 2024 alone included the CrowdStrike software glitch that paralysed airports, banks and others running Microsoft Windows; hurricanes Milton and Helene that hit industrial sites in the Southeast; strikes by union dockworkers and Boeing Co employees; and shipping bottlenecks spurred by the Baltimore bridge collapse and Houthi attacks on vessels in the Red Sea.
US President-elect Donald Trump’s threatened tariffs and immigration crackdown could lead to more disruptions in the year ahead.
Insurance can provide balance sheet protection in the event of a disruption, industry professionals say, compensating for lost profits and making funds available to address the interruptions.
Additionally, “when you invest in insurance, it’s basically building in rigour into the way that you’re thinking about a particular risk,” said John Minor, who leads Aon Risk Services’ structured credit and political risk practice.
But insurance should be the second line of defence, said Stephen Penwright, Zurich North America’s technical director for property insurance.
“Being prepared and having contingency plans is really the best defence.”
Any business with operations that rely on a supply chain should be looking into insurance coverage to manage risks, said Jorge Aviles, an attorney at Hunton Andrews Kurth LLP who advises corporate policyholders.
The primary – and most common – form of insurance is an extension of property policies known as contingent business interruption (CBI) or contingent time element coverage.
CBI responds when a covered risk affects a supplier and causes the corporate policyholder to suffer losses, including lost profits.
Companies relying on such coverage should keep in mind the tiers of suppliers, Aviles said. A policy might offer coverage for a direct supplier, for example, but not an indirect supplier that’s disrupted, he said.
That might be because CBI is a difficult risk to underwrite, according to Penwright.
While insurers subject their policyholders to a high level of scrutiny that informs the coverage they can offer, there’s far less control and information when they’re providing coverage for losses to a third party, Penwright said. — Bloomberg
