Cargo Insurance: Risk “multiples” on the rise

The World Economic Forum’s “Global Risks Report 2016” finds that supply chain vulnerability is on the rise this year. Furthermore, there’s evidence that the inter-connections between risks are becoming stronger.

According to Nick Wildgoose, global supply chain product leader at Zurich Insurance Group, these are likely to be “multiplied” when logistics managers examine their overall supply chain.

“The failure of climate change mitigation and adaptation is the number one global risk in terms of impact,” says Wildgoose. “To some extent, this risk can be viewed as a consequence of globalization, but then these supply chains themselves are increasingly vulnerable to adverse climate events.”

According to the report, large-scale involuntary migration topped the list of risks in terms of likelihood, and is the fastest rising in terms of both impact and likelihood. “This has implications for the flow of labor and talent that needs to be considered when you’re looking at the resilience of your supply chain overall,” says Wildgoose. “Cyber attacks are also seen as a major risk, and it is to be noted that many of these could come through key suppliers who may be the weak link in your data security.”

Wildgoose points to a recent PwC study that shows that failures in a shipper’s supply chain has a significant impact on financial performance—and on an organization’s reputation.

“For example, PwC showed that a supply chain disruption can result in at least a 10% drop in market value relative to a benchmark group,” he says.

Many organizations tend to deal with supply chain risk on a reactive basis, Wildgoose adds. As the “Global Risk Report” indicates, this is no longer appropriate. Logistics managers, he says, need to be proactive to ensure that they can deal adequately with the increased pace of change and the “interconnected” nature of risk.

Zurich maintains that logistics managers can bolster sup¬ply chain resilience by adhering to new initiatives.

Aligning business and supply chain objectives. For example, finance should not be encouraging a reduction in inventory holding if this causes disruption or undue exposure to a shipper’s most profitable product.

Black box thinking. The leading organizations in supply chain risk management have an appropriate risk culture in place that encourages transparency. This means that employees are willing to openly share supply chain disruption events and near misses so that lessons can be learned and corrective actions can be put in place.

New sourcing/product development. Managers must ensure that their engineering, product development, and procurement teams are fully integrated into the new service or product development process.

Understanding your value at risk. It’s important to understand—at least in approximate terms—the overall value at risk a shipper has to a particular country or other single point of failure, such as a key port or distribution center.

Linking corporate social responsibility/supply chain risk. Ensure that there’s joint planning and actions where appropriate in respect of supply chain sustainability issues. For example, the logistics and sustainability teams can also work together to monitor labor practices within the supply chain.

Legislative issues. Governance risk and compliance approaches need to account for the growing importance of supply chains and the increasing interconnected nature of risk illustrated in the “Global Risk Report.” There is a growing body of legislation relating to transparency and issues within the supply chain.

Resource requirements. Finally, the issues caused by supply chain disruptions or reputational issues are likely to be very substantial, with costs running into the millions of dollars.

“It is important that resources are made available to put appropriate resiliency measures in place,” says Wildgoose. “It’s vital to realize that these will produce cost benefits in the medium term.”