Scenario planning for future disruptions

“The best way for businesses to approach these types of situations is through BCP scenario planning that challenges working environments and supply chains under various eventualities,” says Varney. “Moving forward, a pandemic scenario should be added to a company’s planning. The ability to understand and proactively handle potential business impact scenarios is better resolved when the crisis is not directly upon the business.”

In future, businesses will need to consider more and better scenarios in order to prepare for future disruptions. Identifying and understanding potential triggering events is a significant challenge, but the central key to survival is quick response times. The problem isn’t just traditional risks like fire or flood, but increasingly important intangible risks – something Covid-19 has uncovered.

“What is clear is that the insurance industry cannot take away all the challenges companies face, but we can work with customers to identify, comprehend and mitigate risks in the supply chain,” says Varney. “AGCS’ global network of risk experts can review a company’s basic risk awareness and management, compare risk management systems of different companies and identify approaches for further development. Scenario planning should be constantly updated and tested, so it can be applied when needed. It must be cross-functional and integrated into a company’s risk management and strategic processes for it to be effective.”

The pandemic’s impact on business-as-usual will be felt for a long time. It forced companies to depend on new or increased digital approaches, as travel and face-to-face interaction was discouraged and remote working increased proportionally – a 2020 Deloitte survey found that 48% of respondents had been forced into at-home working due to the pandemic [1]. However, new working scenarios also bring the potential for new disruption scenarios. The move toward digital dependence and remote working has exacerbated cyber and business interruption vulnerabilities from threats such as system failures, phishing, compromised emails and the rising number of ransomware attacks. For example, on average, a ransomware attack can result in 16 days of downtime. Maintaining secure backups can significantly reduce losses but a dedicated BCP outlining what a company needs to do in the event of a ransomware attack to minimize disruption could prove invaluable.

The pandemic has added to existing climate, reputational and compliance pressures to rethink supply chains which have become increasingly global and complex. Over the last four decades, a large part of the world’s production has been organized in global value chains with a high degree of division of labor. Raw materials and intermediate products from different countries are shipped around the globe for processing and then assembled at another location. The finished products are in turn exported to end-users in both industrialized and developing countries. In recent years, insurers have experienced a significant increase in the severity of business interruption claims, particularly in the automotive, electronics and manufacturing sectors, where reduced stock levels and increased reliance on fewer suppliers have driven up the costs associated with fires and natural catastrophes.

During the first lockdown, companies around the world were affected by restrictions and temporary closure of operations. There was a flurry of assembly line shutdowns in the automotive industry. As a result of plant closures, the pandemic presented global corporations with the major challenge of getting hundreds of supply links back on track. This was the most difficult task for production planners in the spring of 2020. And the concern about renewed shutdowns is driving the boards of many companies.

“Companies increasingly understand that more resilient supply chains need to be built. This is a development that we as industrial insurers and risk consultants can only welcome,” says Varney. “And one that we have been discussing with our customers in risk dialogues for years.”

“In reaction to the pandemic we are seeing clients make changes including near-shoring (bringing production to a nearby country) and some re-shoring and changing the locations of supplies, particularly for US companies. Companies are increasingly thinking about the consequences of events like natural catastrophes and civil unrest, and how quickly they will be able to find alternative suppliers,” says Philip Beblo, Global Practice Group Leader Utilities & Services, IT Communication at AGCS.

“Clients are looking to de-risk their supply chains to achieve operational resilience. Covid-19 shows just how vulnerable global supply chains have become and highlights how the most agile companies and those that were quickest to react to the pandemic were those that had an adaptive and embedded risk management approach,” adds Beblo.

Post-pandemic, a lot of work remains to be done on business continuity and business resilience. In order to manage the risks and develop solutions, businesses will need to collect data, utilize analytics, and then consider what is insurable. Risk management today is very good at insurable risks, but could do better when it comes to non-insurable risks, like intangible assets, supply chains and reputation.

“However, increased resilience of supply chains will not only help with insurability of supply chain exposures, it will also help businesses react faster to market trends,” concludes Georgi Pachov, Head of Portfolio Steering And Pricing at AGCS. “It’s not just about limiting insurance claims, more resilient supply chains should translate to more successful companies.”