Allied World Underwriters Share Top Tips for Supply Chain Risk Management

As a consequence of the ongoing disruption caused by the pandemic, supply chains have become a common topic of public discourse. Many of our partners and clients are asking for information about the types of risks they can expect to see in 2022 and are actively looking for ways to protect themselves from these risks.

We’ve asked members of our Allied World team in Australia to share their thoughts on current supply chain issues and what they see as the main risks for companies. The team has also provided helpful advice about the ways that casualty, construction, property and professional lines insurance could potentially mitigate these risks.

Karsten Buescher, Construction & Engineering
The Risks
The construction industry is experiencing a period of strong growth fueled by an unprecedented investment pipeline in infrastructure and renewable energy. The current global supply chain has been hit hard, which presents some challenges for these industries. The impact ranges from a shortage of materials at the local hardware store to the availability of talent to adequately staff large infrastructure projects. The talent and skills gap has been exacerbated by prolonged border closures. This is seen by insurers as a key risk factor in the delivery of a project and is being closely monitored. The ongoing shortage of construction materials and supplies has also caused projects to exceed their cost and time budgets, as well as created delays and increased cost when it comes to repairs or replacement works in the event of an insurance claim.

My Advice
While many of these problems are outside of an insured’s control, it’s crucial to be aware of them and factor these risks into the delivery of a project. This can mean adding extra allowances or float in a project’s schedule, more detailed contingency plans and pre-approvals for materials and suppliers etc. It can also help to have emergency and recovery plans in place for specific events, built around a shortage of resources. The recent flooding along Australia’s east coast is a good example of this, anticipating that resources for clean-up, repairs and recovery will be stretched to the limit. Contractual parties will often appreciate the concerns and even the potential cost implications, as they may be facing the same or similar issues.

Looking further towards the future, measures may also include ramping up a contractor’s own training and trainee programs to help combat the talent shortage, as this will continue to impact the industry for some time to come.

Jonathan Schroeder, Professional Indemnity
The Risks
Over the next 12 months a major worry for our clients is the consequential loss incurred by contractors who are suffering from lack of building materials and labour force. This will cause delays in the remediation or reparation of projects that have incurred errors.

My Advice
I would suggest being extremely diligent when it comes to negotiating contractual liabilities. This includes pushing for limitations in force majeure provisions, delays, liquidated damages and consequential loss. Secondly, ensure that the scope of works is clearly defined and strong contingencies are in place, particularly in building material supply. Unless exclusions are specifically placed on the policy, Design and Construct Professional Indemnity coverage will often extend to cover elements of consequential loss and delays in projects, along with negligent procurement of certain building materials.

To support our clients we will continue to monitor the contingency plans our insured’s have in place to source alternative materials and labour, and how their contracts are managed to deal with potential delays. Allied World will underwrite to the exposure presented based on the underwriting information provided. Therefore, our team can certainly help clients reduce these risks and mitigate exposures should they experience business interruption.

Christopher Sheather, D&O
The Risk
There has been a in shift in the last few decades to ‘just-in-time’ supply chains, which revealed itself as problematic in the face of COVID-19. The unwinding back to normality has a high level of timing uncertainty, which has now been compounded by international conflict. This has left companies having to reconsider the fundamental structure of, and their approach to, supply chains. As companies navigate this period, it is imperative that a business has the ability to meet or outlast such challenges. How a company can financially absorb and pass through higher costs will be a key risk, and therefore a key underwriting consideration in 2022. This will require an understanding of how contracts are structured, and the speed at which they can offset increases that may affect their business. In turn, this will bring a focus on supply chain management by maintaining a clear line of sight over inventory levels and a company’s control of supply. Those companies more susceptible to supply chain issues may see greater stress on areas that can lead to a D&O claim, namely a company’s balance sheet solvency and how their Continuous Disclosure Policy operates.

My Advice
D&O insurance provides companies and their Directors and Officers with both balance sheet and personal protection to allow them to navigate the challenges of running a business, particularly in times of such uncertainty. While supply chains and rising costs present as one issue, there is a groundswell of emerging risks such as ESG and Cyber that are creating challenges on multiple fronts for Australian companies and their executives. In recognition, clients should be closely considering their purchase of Side A and Side A DIC insurance. Allied World has the expertise to offer clients Primary capacity through its Executive Forcefield wording and excess of loss cover in this space.

Vienna Kwan, Casualty
The Risks
One of the major issues for our clients would be the uncertainties surrounding major delays in shipping and delivering caused by the pandemic. Some companies have been unable to procure the necessary components for manufacturing their products. If they do not maintain an alternate source of suppliers there could be severe business interruption should a key component be unavailable.

In this situation, some companies might choose to select a new supplier. However, selecting a new supplier can introduce new risks into the manufacturing process, especially if the company has not been able to conduct rigorous quality and process checks on the new parts and supplier. Businesses are heavily reliant on component quality to ensure the products they manufacture are free from defects to avoid product liability claims.

My Advice
It is crucial for a company to be very careful when selecting a new supplier. It is vital to ensure that the suppliers have obtained all their relevant certifications, QC etc. It is also important to ensure the new supplier maintains their own Product Liability Insurance, with appropriate limits for the territories where the end products will be sold. Ideally, our insured should also be named as an additional insured and maintain rights of recovery on the suppliers’ policy.

Andrew Lester, Property
The Risks
In the Property insurance space, the current high inflation environment will have significant impact on an already stretched supply chain, and the trend of “just in time” distribution models. The tragic and devastating impact of the East Coast Low that recently affected NSW and QLD is also a timely reminder of the impact of post loss inflationary pressure. One of the key components of all insurers costing and pricing methodology is annual expected loss (AEL) burden, which is essentially an average of losses anticipated to a portfolio. This, along with the considerations of internal and external expense and required margin for the return on equity of the business, are essential for building long term stability into insurer capacity and pricing.

The consumer trend for immediate delivery has changed a number of business models globally, with a switch to “just-in-time” distribution. The switch has, in general, reduced the stockpiling of goods and increased the reliance on the availability of goods from a global marketplace. This could result in a trend to retain and store more reserves of product to meet customer supply. With this could come greater fire load at distribution centres and storage within manufacturing sites. Careful planning would be required to ensure that the fixed fire and fire brigade response with be sufficient for enhanced risk.

My Advice
Allied World aims is to build sustainable long-term partnerships with our clients. We look to establish clear business continuity plans (including supply chain management) and strike the balance between retained and transferred risks to ensure clients are protected.

Allied World Risk Management Support
As always, if you have any questions about supply chain, insurance, or strategies for reducing associated risks please don’t hesitate to reach out to one of our underwriters. At Allied World we have a committed Risk Management team who can help clients reduce the likelihood of a disaster. Click here to access our Risk Management resources.