Swiss Re believes that supply chain restructuring resulting from the COVID-19 pandemic could drive new demand for insurance protections, and estimates that additional global premium volumes of around $63 billion could be generated over the next five years.
The latest Swiss Re Institute sigma study explores the idea that global supply chains are set to undergo fundamental and accelerated restructuring, prompted by the disruption to the flow of goods and services during coronavirus lockdowns.
It notes that governments and manufacturers are ever more aware of the risks inherent in production processes, while manufacturers are looking to strengthen operational resilience by developing parallel supply chains in new host markets alongside existing production bases.
“Global supply chain restructuring has become a key macroeconomic trend and the COVID-19 experience has accelerated changes,” said Jerome Jean Haegeli, Swiss Re Group Chief Economist.
“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.“
Supply chain restructuring will have important implications for insurers, Swiss Re argues, because it will generate new demand for risk protection covers and provide new opportunities for the industry to underpin global economic resilience.
For example, supply chain, contingent business interruption and non-physical damage covers can compensate for losses resulting from incidents at suppliers.
Assuming a five-year transition period for restructuring, Swiss Re estimates that a further $63 billion in insurance premiums could be generated.
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.
“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 Globals 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.
From a business perspective, the driving force for accelerated restructuring of global supply chains will be manufacturers seeking to de-risk their operations, the sigma report argues.
Parallel supply chains are likely to form as firms diversify their manufacturing presence across new locations alongside existing operations in China and elsewhere, in an effort to strengthen operational resilience.
But supply chain restructuring is also a question of national resilience, with government responses to the pandemic showing that in times of crisis, international cooperation can be interrupted as countries prioritise according to their domestic needs.
Swiss Re believes markets in Southeast Asia will likely be the preferred destination as new host locations, given their strong growth potential and competitive labour costs.
Over the five-year transition period, the reinsurer estimates that gross domestic product (GDP) growth in the alternative host markets for production processes will be boosted by 0.7% annually. In the re-shore markets, growth will increase by 0.2% annually.