The global supply chain crisis has exposed the limits of business interruption insurance - DBRS Morningstar

The COVID-19 pandemic has posed unique challenges for supply chains globally, causing an imbalance in both supply and demand.

It has exposed the limitations of business interruption insurance and will likely lead to much greater demand for supply chain covers, according to a new report from DBRS Morningstar.

“In addition to BI and CBI policies, insurance companies have offered a broader coverage called supply chain insurance,” said Marcos Alvarez, senior vice president and head of Insurance. ”This product is intended for a relatively small number of clients that need protection against disruption in their supply chains, not only caused by physical damage to the premises of key customers and suppliers but also by a wider range of events, including industrial accidents, labour issues, political upheaval and social unrest, the inability to enter premises, regulatory actions, and, in some cases, public health emergencies such as a pandemic.”

“In our opinion, global supply chain insurance policies, which are usually bought by large companies with relatively complex needs, could become more prevalent among a larger number of clients.”

”The global supply chain challenges during the pandemic could open new business opportunities for insurance and reinsurance companies as corporations increase their demand for more comprehensive coverages and risk transfer tools.”

The introduction of lockdowns and social distancing measures, together with labour shortages, limited the supply of key products during most of 2020 and well into 2021, while consumers and businesses increased their demand for a wide range of products during the pandemic.

The supply chain woes were exacerbated by other disruptive events in 2021, including the massive winter storm in Texas, the blockage of the Suez Canal, and the cyberattack on the Colonial Pipeline Company.

In this context, many companies turned to their insurance policies to try to recover some of the losses caused by the pandemic, particularly under their business interruption (BI) and contingent business interruption (CBI) insurance.

Although BI insurance is aimed at covering losses arising from physical damage, the pandemic triggered a large number of BI claims in many countries, increasing litigation for insurance companies and creating a number of challenges for the industry as this product was not priced to cover pandemic losses.

Key highlights of the report include:

  • Global supply chains are increasingly pressured by both lower supply and higher demand for certain products owing to the pandemic.
  • Most income loss claims resulting from the pandemic are excluded from standard BI and CBI policies. However, there is significant pressure on insurers to retroactively assume some of these losses, which were not adequately priced or reserved to serve this purpose.
  • The short-term challenges relating to BI and CBI claims remain manageable given the strong capitalisation and earnings performance of insurance companies.
  • Over the long term, demand for supply chain insurance could significantly rise given inadequate protection from standard BI and CBI policies amid the coronavirus pandemic.