Industries
Insurance
Reinventing the Insurance Industry with a Digital-first Strategy
Highlights
- Factors such as rising inflation, increasing energy prices, and geopolitical tensions are expected to disrupt global supply chains in the medium term.
- This will cause an increase in the number of business interruption claims faced by insurers.
- Data insights and a collaborative ecosystem are important for improving supply chain resilience. Insurers will play a pivotal role in orchestrating such an ecosystem.
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Abstract
Business interruption and supply chain disruption risk ranks second in the list of risks for businesses according to the 2023 Allianz Risk Barometer report.
Furthermore, rising inflation, increasing energy prices, geopolitical tensions, and economic volatility are set to disrupt supply chains in the medium term. For instance, the Russia-Ukraine conflict has impacted grain production and export from Ukraine, which is bound to have a bearing on food prices, globally.
Such disruptions are unarguably a major cause for concern for businesses as well as insurers who are besieged by an increasing number of business interruption claims. In such a precarious environment, building supply chain resilience has emerged as an imperative to ensure business continuity. We highlight the importance of data insights and a collaborative ecosystem in improving supply chain resilience and the role insurers can play in orchestrating such an ecosystem.
Introduction
In March 2021, the Suez Canal blockage disrupted global supply chains, leading to massive business interruptions across sectors.
A significant proportion of global seaborne trade passes through the canal, and the choking delayed shipment of cargo worth billions of dollars. The impact was felt across sectors such as surgical and medical equipment, semiconductors, plumbing, general warehousing, storage, sports and so on. To add insult to injury, contingent business interruption (CBI) insurance policies failed to cover losses caused by cargo delays as there was no physical damage involved, which means that businesses had to bear the loss themselves. Consequently, many businesses have begun to question the value of buying contingent business interruption insurance.
However, this does not mean that insurers escaped unscathed—businesses have filed lawsuits against the lack of coverage. Additionally, insurers are facing huge litigation costs, reputation risk, and massive claims (related to third-party liabilities), and rising operating expenses in claims processing. Moreover, with businesses now demanding coverage for similar future incidents, insurers are under pressure to address this protection gap. Accomplishing this will require insurers to understand insureds’ business, their supply chain ecosystem, including suppliers (both direct and indirect) and logistics, consumer behavior as well as natural catastrophe (NatCat) events and shocks that can disrupt supply chains. In our view, insurers must embrace an integrated risk management mindset and ecosystem approach driven by technologies such as cloud, artificial intelligence (AI), machine learning (ML), and analytics and resolve data challenges through data exchange platforms to better manage supply chain risks.
Toward a data ecosystem
Insurers today use critical data elements to determine coverage, limits, and premium.
These include business income, period of restoration, and continuing and non-continuing expenses. However, this data is often incomplete and fails to consider factors that affect income such as loss of key suppliers and customers. External factors such as NatCat events affecting logistics or supply chain networks (beyond property damage suffered by the insured or primary suppliers) and political risks that impact the overall supply chain are also ignored. Thus, the existing process lacks important details critical for risk selection and mitigation strategies.
- The period of restoration is arrived at by considering the time required by primary suppliers alone and fails to factor in secondary or tertiary suppliers’ restoration period. Hence, the actual restoration period may be much longer and will result in a lack of coverage during the extended period.
- Perils and events resulting in physical damage to the insured and their primary suppliers are considered by default. Other non-physical damage due to events such as labor strikes, logistic delays, and so on are not considered.
- Lack of intrinsic understanding of supply chain exposures, alternative supply strategies, and business continuity plans results in limited coverage and risk transfer. It also increases litigation, undermining business resilience.
Moreover, with just-in-time inventory management now a standard practice among manufacturing and retail players, rapid inventory depletion due to demand surge and challenges in restocking because of shortages have become par for the course. The existing linear model with a siloed view of data across demand, inventory, suppliers, logistics and so on is impairing the ability of small and medium businesses to respond swiftly to dynamic shifts and paradigm shocks, adversely impacting their business. This offers insurers an opportunity to create an ecosystem that provides visibility into supply chains and enables better risk management.
Building the ecosystem
Insurers must build key capabilities to orchestrate the ecosystem.
The enabling components of the ecosystem (see Figure 1) include:
- Digital engagement platform to enable transparency and customer experience management.
- Data exchange platforms or marketplaces for seamless exchange of data with network participants such as logistics partners, weather stations, geospatial networks, and fire stations, backed by appropriate data sharing agreements to ensure regulatory compliance.
- Cloud layer to process unstructured data from alternative sources such as internet of things (IoT) sensors, telematics, RFID tags, edge computing devices and so on.
- Modeling framework with components that enable risk modelling and scoring to estimate the resilience of firms to weather unexpected disruptions and leverage external data sets to deliver actionable insights on potential delays and interruptions in the supply chain.
- Smart contracts for quick payouts of claims on parametric insurance policies.
- Digital twin technology to map suppliers beyond primary players.
- Application programming interfaces (APIs) to facilitate free exchange of data and identify in real time bottlenecks with the potential to cause disruption.
- Analytical platform with predictive, prescriptive, and what-if simulation capabilities for demand forecasting, exposure management, and supply chain planning, and so on. This will help insurers gain insights into potential disruptions and coverage gaps, assess potential liabilities, and design mitigation strategies for the insured.
- Reward platform to incentivize ecosystem partners to initiate action to mitigate risk and share data with other participants.
Figure 1: A data-driven supply chain built on the ecosystem model
In their journey toward a data-driven supply chain ecosystem, it is critical for insurers to create a holistic blueprint of the network in order to assess business continuity and dynamically evaluate its efficacy as this is often constrained by lack of visibility and manual efforts. Digital twin technology can help create a virtual blueprint by mapping suppliers beyond tier 1 players with business aspects such as contracts, sourcing and distribution strategy, and so on. This will provide visibility into interdependencies among suppliers and their distribution networks. Such visibility will enable businesses to enter into business continuity agreements with suppliers to mitigate risk, identify alternative suppliers, and expand the scope of their policies to provide coverage to indirect suppliers. Seamless data sharing among ecosystem participants and on-demand and event-driven simulation of risk exposures through what-if scenario analyses will provide valuable insights on imminent bottlenecks with the potential to cause disruptions and associated coverage gaps in real time. This will enable insurers to assess potential liabilities and design mitigation strategies for the insured.
Creating value
Insurers as risk managers can play an important role in driving exponential growth.
Data that was previously uncharted and unconnected can now be leveraged to design innovative client-centric solutions. By leveraging insights on potential supply chain disruptions, coverage gaps, and liability exposure, insurers can develop products to address protection gaps, cede risks to a reinsurer, diversify the risk portfolio of the insured, and enable data-driven capital management. The situation offers immense potential for innovation, similar to the emergence of fire insurance after the Great Fire of London. Also, sharing these insights with the insured or brokers through a digital platform on the as-a-service model will enable them to perform on-demand risk assessment and determine the risk levels and deficiencies in existing business processes of the insured. Insurers can offer advisory services to improve insureds’ supply chain planning, demand forecasting, and distribution strategies, which can be a new source of revenue.
Consider a scenario, where a mattress firm sources its raw material from its suppliers in Texas and Louisiana and transports it to the manufacturing facility by road. The insurer can create a digital twin of this ecosystem and highlight risks such as lack of a diverse supplier network, failure to use multi-modal distribution channels, and so on. Combining this with information on imminent storms, cyber risks, contractual deadlines, and so on can help estimate probable risk accumulation and predict potential business loss. Such scenario analyses will empower insurers to offer clients insights that can help improve capital management and implement proactive mitigation measures such as identifying backup suppliers not impacted by the adverse event. In addition, data-driven scenario simulation and benchmarking using digital twin technology can improve business resilience and customer experience.
Introducing preventive oversight of the supply chain and proactive planning and forecasting will help reduce claims for insurers. Most importantly, this will drive a shift in mindset in insurers’ approach to their business—a shift from risk transfer to risk prevention and value preservation, which will go a long way in regaining customer trust. However, this will necessitate a shift to ecosystem business models with insurers as orchestrators, driving synergies and improving supply chain resilience.
In summary
Supply chain disruptions witnessed during and after the pandemic have adversely impacted the global economy.
Rising inflation, changing customer behavior, climate change, geo-political risks, and cyber threats have exposed supply chain vulnerabilities on a global scale. In our view, insurers must build data-driven digital ecosystems to oversee global supply chains and proactively act on analytical insights to prevent disruptions and mitigate risk. Insurers that act quickly will gain from the first-mover advantage.
