Global supply chain changes yield new opportunities: sigma

Global supply chains are undergoing fundamental and accelerated restructuring, according to the latest Swiss Re Institute sigma study, “De-risking global supply chains: rebalancing to strengthen resilience”.

According to the study, the disruption to the flow of intermediate goods and services during the COVID-19 lockdowns has made governments and manufacturers ever more aware of the risks inherent in today’s increasingly complex, specialised and global production processes.

Manufacturers, meanwhile, are speeding up their development of parallel supply chain operations in new host markets alongside existing production bases as a means to diversify and strengthen their operational resilience.

Markets in south east Asia will be the preferred destinations as new host locations. There will also be some re-shoring of activities back to the US, the euro area and advanced markets in Asia.

“Global supply chain restructuring has become a key macroeconomic trend and the COVID-19 experience has accelerated changes,” Jérôme Jean Haegeli, Swiss Re group chief economist, said.

“During the pandemic, lockdowns brought international exchange to a near halt, making businesses, and governments increasingly aware of the impacts that disruptions in today’s very complex and specialised global supply chains can have.”

There had been some tempering of globalisation fervour even before COVID-19 severely curtailed the movement of goods and people. A number of natural catastrophes over the last decade, such as the earthquake and tsunami in Japan in 2011, and widespread flooding in Thailand in the same year, inflicted costly supply chain interruptions across different industries.

Rising political risks, such as new tariffs and a looming threat of global trade war, also prompted manufacturers to rethink their globalised production and sourcing strategies.

Managing the supply chain
The report says supply chain restructuring will have important implications for insurers, by generating new demand for risk protection covers and providing new opportunities for the industry to underpin global economic resilience.

Insurance plays a key role in supply chain risk management: supply chain, contingent business interruption and non-physical damage covers can compensate for losses resulting from incidents at suppliers.

“For insurers seeking to cover business disruption exposures, the more transparency there is on supply chain flows, the more insurable the risk becomes,” said Gianfranco Lot, head of global reinsurance at Swiss Re.

“To this end, the industry is extending its digital technology capabilities, to better process and understand all the structured and unstructured data out there.”

He added that Swiss Re’s Digital Market Center, the product of its strategic alliance with Microsoft, has a key role to play.

“The idea behind the Swiss Re Digital Market Center is to develop large-scale tools to predict and manage exposures, to facilitate the development of innovative risk protection solutions,” Lot said.

The sigma report estimates the overall income effect from the higher growth created by supply chain restructuring will generate additional global premium volumes of around $63 billion cumulatively during the five-year transition period.

This includes a one-time boost of $1.2 billion arising out of new demand for engineering covers during the construction phase of manufacturing facilities and associated infrastructure, and $ 9 billion for commercial insurance in the operational phase of the new facilities.