May 1, 2020 by Jason Contant
COVID-19 has highlighted the concerns associated with clustering suppliers in one region, such as China.
Supply chain risk is one area of insurance that will see changes in the post-pandemic world, according to Tracy McLean, senior vice president of global logistics insurance at brokerage NFP. For example, the pandemic really brought to light for supply chain management the risk factors of how materials are sourced and supplied.
“Companies are starting to realize when they look at their supply chain that their real risk factor is their dependency on one particular supplier in one geographic region,” she said in a recent interview, “and what they can do to ensure they can change their policies or procedures or business operations to reflect, let’s say inventory, where they can source different materials from different places.
“I think that’s what people are going to start thinking about in their business continuity plans going forward.”
McLean was responding to a question from Canadian Underwriter about what effect clustering suppliers in one region (such as China) has on supply chain risk. Zurich Canada said earlier this month in a podcast that by clustering suppliers in one region, a single event like COVID-19 can have an even broader insurance impact than typically expected.
China is a major contributor to manufacturing and the entire world depends on the country for very specific parts and components. So if supply chain clients become very dependent on one region in particular, “then when something like what we are now experiencing happens, they need to understand what are my options in the supply chain to be able to outsource and go to other places and get what I need to get,” McLean said.
How do your clients look outside one region if their supply chain clients are clustered? They can turn to the federal government. They work with Export Development Canada for companies that are in Canada that need to either source supplies from other countries or they themselves need to be matched with buyers in other countries, McLean reported.
“What we’re finding is the conversation is around understanding how [supply chain clients] can look to get out there in more of a regional [aspect].”
Navigating local, provincial, state and international regulations is another challenge. For example, the U.S. Customs and Border Protection agency recently announced a deferral on certain taxes. “They didn’t do it in a blanket [way] for all duties and taxes, where Canada did.”
And COVID-19 will forever change supply chain lines of business (and many others), just like past disasters have done.
“Will insurance change tomorrow? Absolutely. Just like it did after September 11, like it did after SARS,” McLean said. “It repeatedly over time and history has had to evolve and that will come into play with different insurance policies. We won’t see that effect for quite a number of years, just like we did after September 11.”
Policies were designed with a different environment in mind, McLean said, so in the case of 9/11, there were triggers in those policies that had to be investigated and interpreted. “Was it a one-event or was it a two-event?” McLean said as an example. “All these things were tested.”
For the supply chain side, there’s going to ripple effects from the economy “and how quickly we can manage and get moving some of the products and services,” she said.
“Everything we thought was the norm yesterday, we now have new risk factors we have to deal with tomorrow. I think a lot of times from past history, we’ve also learned it takes unfortunate situations to help us see correction is necessary and that’s exactly what’s happening now.”