Hidden Vulnerabilities in Supply Chain Risk: A quantitative risk modelling framework
Lloyd’s and the risk modeler AIR Worldwide have co-produced a new framework to help risk managers and insurers close the protection gap before the next catastrophic supply chain disruption occurs.
The method is outlined in a new report – Hidden Vulnerabilities in Supply Chain Risk: A quantitative risk modelling framework – that analyses almost one million disruption events. Insurers can expect claims made up entirely of ‘business interruption’ and ‘contingent business interruption’ losses in the future, according to the research.
A failure of critical infrastructure on one side of the world can cause catastrophic supply chain losses on the other, according to the report, which analysed three case studies: the 2011 Tohoku Earthquake and Tsunami, the 2011 Thailand Flood, and a hypothetical cyber-attack on an engine manufacturer in New York.
Physical impacts arising from supply chain failures can also affect intangible assets, notably brand and reputation, noted the report. In addition, the increased frequency and severity of extreme weather can exacerbate risks to infrastructure, manufacturing and distribution networks.
With a scarcity of historical claims data and the evolution of unforeseen threats in value chains, there are few systematic methods for an insurer or a corporate risk manager to quantify a supply chain’s risk, according to Lloyd’s and AIR.
The industry-agnostic modelling framework presented in this study shows insurers a plausible solution to fill the data gaps within the current modelling for both ‘business interruption’ and ‘contingent business interruption’. And provides insurers with a rich set of metrics to help to more accurately assess risks and exposures.
Trevor Maynard, Head of Innovation at Lloyd’s, said:
“We have published this research alongside Airmic’s new guide – Complex Supply Chains in a Complex World. Our study presents a methodology that helps (re)insurers to understand risks and exposures more scientifically. We hope that this will help risk managers build resilience into their businesses, and we are urging insurers, brokers and risk managers to work together to develop solutions.”
Dr. Jayanta Guin, Executive Vice President & Chief Research Officer at AIR Worldwide, said:
“With increasing globalisation and complex supply-chains, it is important for corporations and the insurance industry to use advanced analytics to develop a holistic view of risk and identify pockets of risk that are not otherwise obvious and visible. We’re pleased that Lloyd’s has supported this critical study on interconnected risks.”
Julia Graham, Airmic’s deputy CEO and technical director, commented:
“Supply chain disruption is a consistently front-of-mind risk for Airmic members, so we very much welcome this study. Quantifying risk in a modern supply chain is exceptionally complex and a huge challenge for businesses and underwriters. Any development that enhances the market’s understanding of this critical exposure will be of great benefit to our members - both for improved insurance coverage as well as an enhanced understanding of this key risk.”
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About AIR Worldwide
AIR Worldwide (AIR) provides risk modelling solutions that make individuals, businesses, and society more resilient to extreme events. In 1987, AIR Worldwide founded the catastrophe modelling industry and today models the risk from natural catastrophes, supply chain, terrorism, pandemics, casualty catastrophes, and cyber incidents. Insurance, reinsurance, financial, corporate, and government clients rely on AIR’s advanced science, software, and consulting services for catastrophe risk management, insurance-linked securities, longevity modelling, site-specific engineering analyses, and agricultural risk management. AIR Worldwide, a Verisk (NASDAQ:VRSK) business, is headquartered in Boston, with additional offices in North America, Europe, and Asia. For more information, please visit www.air-worldwide.com
The leading UK association for everyone who has a responsibility for risk management and insurance for their organisation, Airmic has over 450 corporate members and more than 1,300 individual members. Individual members include company secretaries, finance directors, internal auditors, as well as risk and insurance professionals from all sectors. Airmic supports members through: training and research; sharing information; a diverse programme of events; encouraging good practice; and lobbying on subjects that directly affect our members. Above all, we provide a platform for professionals to stay in touch, to communicate with each other and to share ideas and information.