Supply chain and logistics
Fragile networks
Businesses rely on extensive, highly interconnected global supply chains to source materials, manufacture components, and distribute products across international borders. These networks depend on sophisticated logistics and real-time tracking mechanisms to operate efficiently and meet consumer demand worldwide. But since the start of the decade, geopolitical disruption has undermined these networks – restricting access to critical supplies, driving labour shortages, and making transit impossible in parts of the globe. As such, supply chain has transformed into a major source of organisational risk.
Maritime networks are case in point. Global commerce is heavily reliant on the free movement of goods and energy through a limited number of maritime chokepoints. When access to these corridors is constrained even temporarily, shipping routes must be diverted, insurance and freight costs rise sharply, and delivery times become increasingly unpredictable. This dynamic has been starkly illustrated by recent events in the Middle East, where Iranian forces have moved to weaponise the vital Strait of Hormuz in response to the joint US-Israeli military operation (Operation Epic Fury). Accounting for approximately 20 per cent of global energy exports pre-war, the cessation in safe passage through the Strait has crippled trade within the region, and triggered an acute global energy crisis.
Delays, supply shocks, and lost revenue
For businesses, this can create various challenges. Those most vulnerable to disruption will share common vulnerabilities, including reliance on centralised sourcing, ‘just-in time’ manufacturing, specialist components, or exposure to key chokepoints. For example, many automotive and electronics businesses are highly dependent on specific microchips and semiconductors, the vast majority of which are produced by Taiwan Semiconductor Manufacturing Co. (TSMC). A potential conflict between Taiwan and neighbouring China would likely drive a catastrophic supply shock, causing manufacturing to halt, introducing substantial delays, and severely impacting revenues.
Similarly, pharmaceutical manufacturers are highly exposed to the concentration in production of active pharmaceutical ingredients (API), with China and India responsible for the majority of global output. Any disruption to production could induce critical shortages of potentially impact life-saving drugs and medicines. Like other perishable goods – including food and agriculture supplies – pharmaceutical products are also highly dependent on strict temperature controls. Delays or breakdowns in shipping routes may lead to cold-chain failures, compromising whole batches and driving significant financial loss. Should spoiled goods find their way to market, it could trigger costly recalls, regulatory investigations, and even public health emergencies.
These fragilities are a known problem. But reconfiguring these complex networks is difficult, and not without risk of its own. To avoid the Strait of Hormuz, many cargo ships and tankers have opted to detour around the Cape of Good Hope at Africa’s southern tip. But in doing so, those ships must travel a substantially greater distance. Businesses will likely face surcharges to reflect the additional fuel consumption. Nor does this solve the problem of delays. Meanwhile, regional weather threats such as strong currents and heavy winds can increase the likelihood of damage to goods during transit.
Volatile commodities
Even where organisations’ own supply chains remain unscathed, they remain exposed to broader shifts in the pricing of key commodities. In March 2022, following the immediate aftermath of the Russian invasion of Ukraine, oil prices underwent significant spikes, climbing to nearly $130 per barrel. For businesses around the globe, this increased the cost of doing business, dampening consumer demand, and compressing profit margins. Although prices later settled, ongoing geopolitical tension continues to prolong uncertainty – as recent events in the Middle East have proved.
The effects of volatility are not felt uniformly. The surging price of oil may deliver short-term windfalls to energy producers, for instance, but it places significant strain on consumer-facing sectors, such as aviation and manufacturing. Where businesses have a large footprint in countries with significant imports of scarce commodities, they will likely be hit harder. In the case of the Strait of Hormuz, around 80 per cent of oil and 90 per cent of typical gas exports are bound for Asian markets, including India, Pakistan, and Japan. Meanwhile, European nations – already contending with the closure of the Nord Stream pipelines – are increasingly reliant on expensive liquified natural gas (LNG) imports, placing heavy pressure on industrial output and competitiveness. Governments may seek to implement subsidies or price controls to insulate businesses against the worst effects. But not all have the fiscal headroom.
Inflationary effects are also felt through another commodity: food. Both the ongoing war in Ukraine and Middle East conflict have severely constrained global fertilizer supplies. Nations in Africa and South America are deeply dependent on these supplies for crop yields to sustain their growing populations. A dearth in fertilizers jeopardises reliable food supplies and drives up prices. For businesses, this introduces an accretive risk of riots, violence, and widespread civil unrest, which may in turn cause further disruption and damage to key assets and inventory.
KEY COVERAGES
Contingent Business Interruption (CBI)
Covers income loss and extra costs when business operations are interrupted due to a disruption at a third-party property or entity (such as suppliers or customers).
Trade Disruption Insurance (TDI)
Protects businesses against financial losses from supply chain interruptions. Unlike traditional business interruption insurance, TDI covers lost profits and extra expenses without physical damage to property.
Cargo Insurance
Protection for goods in transit and storage, covering physical loss, damage, and financial risks across global supply chains.
Stock Throughput Insurance (STP)
Broader protection than cargo insurance, including continuous covers for inventory from raw materials to finished goods, spanning all global transits, manufacturing, and storage.
Product Recall Insurance
Provides financial protection where product need to be withdrawn from the market or supply chain due to safety concerns, quality incidents, contamination, mislabelling, or regulatory issues. It covers the cost of recall, replacement, customer notifications, and even crisis public relations services.