COVID-19 Disruption to the Global Supply Chain Could Continue to Challenge Insurers for Some Time
COVID-19 has created bottlenecks in ports and disrupted supply chains, thereby creating challenges for marine insurers and reiterating the need for communication and building close relationships with suppliers.
- Lori Chordas
- December 2021
SUPPLIES ON THE WAY: Container ships wait to enter and unload at the Port of Long Beach, California, in October. Photo by Qian Weizhong/VCG via Getty Images
As COVID-19 continues to weigh heavily on the economy, it's also impacting many areas of the shipping and freight industries. Port congestion, supply shortages and labor scarcity are just a few of the many challenges caused by current disruption to the global supply chain.
As insurers, manufacturers, suppliers and others ponder when there may be an end in sight to the crisis, some recent reports paint a bleak picture with the anticipation of supply chain issues becoming a long-term challenge that will likely continue well into the new year and possibly into 2023.
As companies wade through the tides, it’s imperative that they understand their potential exposures and know where their cargo resides, said Andrew Kinsey, formerly senior marine consultant for Allianz Global Corporate & Specialty who is now with Liberty Mutual. “It’s a rather trite phrase, but one that we continue to fall back on: Cargo at rest is cargo at risk.”
Kinsey spoke with AM Best TV about how the pandemic is disrupting ports and supply chains, creating volatility and capacity issues and bringing about challenges for the marine insurance market. Following is an edited transcript of the interview.
How is the pandemic causing constraints on capacity and major congestion at ports throughout the United States?
The pandemic continues to impact the entire supply chain. It's not just U.S. It's, of course, all the ships anchored off our coast right now that are a stark reminder of it.
It wasn't that long ago that all these ships were sitting laid up in the second quarter and third quarter of 2020 when the supply chain was idle. It continues to impact overall. The thing about the vessel sitting off the coast—those boxes aren't getting back into the supply chain, too, because at the end of the day, container shipping uses a reusable container.
That's what a TEU, or a 20-foot equivalent unit, is. It's a reusable container that needs to be put back into the supply chain. It's an overall loop.
I believe the key to all of this is communication. Understand what your clients have and start that regular conversation.
What is causing much of this disruption?
It's a fascinating overall global impact, because it goes back to the root of how our supply chain is currently developed. This supply chain was developed for cost savings and just-in-time delivery. It was not predicated around robustness or survivability and it's not a one-size-fits-all.
If you're looking at what challenges there are, it's the overall structure of it. The Achilles' heel right now is the single-source procurement model that many people are following.
How is the increasing use of megaships straining port infrastructure and further complicating supply chains?
As I've said in the past, the ultra-large container vessel is an economy of scale for the ocean shipper. It's not an economy of scale or savings for the rest of the supply chain. What's happening with these ultra-large container vessels is you're limiting the availability of locations to discharge.
You need the ports with the cranes, air draft as well as depth. As soon as you start to limit your options, or when those options start to drop off the board, it creates serious congestion problems.
According to reports, global supply chain delays and congestion in ports like Los Angeles and Long Beach in California are causing concerns for the upcoming holiday seasons and have some of the largest U.S. retailers like Walmart and Target now starting to charter their own cargo ships to import goods. Are there opportunities or perhaps risks for the insurance market to come about from that?
Yes, there are. The first thing is that while it sounds like a great idea, the availability of tonnage to charter right now is severely limited and it's expensive. In addition, just because you get the ship, doesn't mean that you have the infrastructure, the crew, or the shore-side support staff to support that.
You have to man them and manage them, not just load them. They still have yet to identify how this is going to help on the discharge. Just because you get the boxes on board, how and where are you going to discharge those?
From a marine insurance standpoint, any time you change or adjust the normal course of transit, it's a concern.
Speaking of marine insurance, what will all this disruption to the global supply chain mean for the market?
I can tell you, personally, it's led to a lot more phone calls and late-night meetings because we have to identify what our insureds are experiencing. The insureds have to then take a long, hard look at their supply chain.
They have to know where their suppliers are getting their supplies in order to identify and try to get ahead of these disruptions, which will continue. There's no magic bullet. Just because we decide to open terminals for 24/7 operations in the U.S., that's just going to then change that stressor to the trucking, the railroad, or the warehousing capabilities.
It's going to be a long and bumpy road until this evens itself out.
What will this all mean for insurance claims?
Any time that we modify or adjust the normal course of transit, we have additional exposures for both cargo and hull. It's not just the cargo that's at risk. As you start to change what the vessel does or where it calls, these are increased potentials for adverse reaction.
We all need to get on board and understand what's going on. The key to that is communication.
What can companies do to mitigate the risk of supply chain disruption in the current climate, and how can they prepare for a heightened period of disruption?
First, the key is that the companies need to understand what their current supply chain is and how it's predicated. What are its weak links in it?
Also, identify your suppliers and work towards making a more robust model. After that, when you can bolster those risk areas, then you can make it more efficient in that you are more resilient.
Another key to this is knowing where your cargo is. Understand where your cargo is currently underway and where it's residing. From the standpoint of risk, we're better off having it be on container ships waiting to discharge than to be waiting on a roadside or in an unsecured warehouse location after discharge.
Finally, follow up.
The key to all of this is that it's a constantly changing landscape. Just because it was this way last week, it doesn't mean it will be this way the following week. Have a plan A and a plan B, and then understand that those plans will change.
What can insurers do to help their clients?
I believe the key to all of this is communication. Understand what your clients have and start that regular conversation. At Allianz, we have found one of our most successful tools in supporting our insureds is regular meetings. Have those meetings, start them up when things are going well, not just when things go wrong.
If you get more people involved and you help to identify potential weak points, you can bolster them before you get a failure.
President Biden recently outlined steps that his administration will be taking alongside some ports and retailers to help alleviate supply chain issues, including longer port hours and moving more products during off-peak hours. Are there any insurance implications to come about from those efforts?
There's the potential because we need to make sure that when that cargo is getting to that last mile that it has secure locations to stay. Cargo theft is something that continues to be a concern, as is lost cargo.
As we start to work outside normal hours and outside normal protocols, we have to make sure we have the same supports, the same checks and balances in place as during normal operations.
When might we see challenges to the global supply chain start to improve, and do you see disruption getting worse before it gets better?
Yes, I do. We've been very fortunate right now in that it's been a rather benign hurricane season. We continue to have the challenges of a worsening global weather scenario, including last year when we had a very bad season for lost containers in North Pacific transits.
We have to look at it holistically, and also look at the overall supply chain. Until we start to get a more robust model of that supply chain, we will continue to have disruptions.