The global supply chain was already reordering when COVID-19 accelerated shifting trends in different geographies. The effects will drive the demand for all types of insurance, including commercial insurance.
Santa's route to distribute presents may look a little different this holiday season—but the change was far from sudden. The global supply chain was already reordering when COVID-19 accelerated shifting trends, which will result in new business, products and exposures.
“Globalization had essentially peaked at the global financial crisis, and a couple factors since then have started reshaping the global supply chain," says Thomas Holzheu, chief economist in the Americas at Swiss Re. “Essentially, the supply chain is moving toward the diversification of supplies and an increase in manufacturers in different geographies."
The myriad of factors leading to the fracturing of the global supply chain are economic, political and social.
“We've seen earthquakes and floods causing massive disruptions around the world, leading to increased awareness of natural disaster risks," Holzheu says. “The trade war and tariffs and other protectionist measures have made the international division of labor more complicated. Social values—both over the environment and labor conditions—have questioned some of the division of labor of the past as well."
“At the same time, technology has enabled more local manufacturing," he continues. “Some of the international division of labor has been enabled to become more local, facilitating what is known as 'reshoring.'"
The coronavirus pandemic exacerbated those trends, amplifying vulnerabilities in a concentrated supply chain structure.
“We've seen disruptions in the medical manufacturing supply chain in particular, a lot of which is related to government actions and mandated stops to exporting certain supplies," Holzheu says. As the pandemic squeezed supply lines, “governments have responded across the globe with adding restrictions to those strategic products, including technology—which the trade war had already been impacting," he says. “It's become very clear there are other considerations beyond making production most efficient."
What will these factors lead to? Holzheu and other Swiss Re experts ran a scenario based on a survey of manufacturers in China that indicated 30% could potentially relocate to other countries.
“That would be about $300 billion in value-added exports that would move out of the country to new countries or reshoring countries," he says. “These countries will benefit from more production creating more income, and this effect will drive the demand for all types of insurance, including commercial insurance."
The transition phase in particular—predicted to last over the next five years as countries construct infrastructure to host a geographically diversified supply chain—will significantly boost the commercial insurance market.
“The transitional phase triggers engineering risks," Holzheu explains, “and we believe this would translate to some $1.2 billion of engineering insurance premiums. For new manufacturing facilities, based on rough estimates, we expect some $9 billion of commercial insurance over the course of the five-year transitional phase."
Facing the challenges of the changing global supply chain, the commercial insurance industry has erupted with “a whole host of different products and innovations," Holzheu says. “Together with their clients, the insurance industry is innovating to invest in the data and analytics necessary to understand the complexity of supply networks and chains."
“By enhancing our understanding of the supply chain risk," he adds, “both the manufacturer and insurer are enabled to begin risk mitigation and risk transfer."
AnneMarie McPherson is IA news editor.
This article was published in the December 2020 issue of Independent Agent magazine.