Tariff-linked supply chain disruptions ‘worse than Covid’ for business interruption

In the 12 months to October 2022, the UK recorded its highest-ever inflation rate of 11.1%, marking a clear post‑pandemic inflection point in cost pressures for businesses and insureds.

According to a Marsh McLennan article published in June that year, entitled Inflation implications for property and business interruption policies, this inflationary spike tested business interruption policies.

It also exposed risks of underinsurance, as rebuilding and recovery costs surged, prompting calls for companies to reassess their insured values and policy wordings.

While some businesses have strengthened operations since the pandemic, current uncertainties around material availability, equipment delays, labour shortages and tax complexities are introducing new business interruption risks and longer reinstatement periods.

And the current moment’s entangled web of geopolitical conflicts, alongside the chaotic impact of US tariffs on central banking, have triggered supply chain disruption, ushering in a new phase of volatility.

Louise Butcher, head of forensic accounting at McLarens, told Insurance Times that the unpredictability of these tariffs has acted to inflate the cost and delay the delivery of essential materials – such as steel, timber, vehicle parts and construction goods – therefore lengthening indemnity periods. 

Meanwhile, she noted that the market has also been impacted by surging oil prices, fragile supply chains and fluctuating exchange rates that have thrown the sector into uncertainty, ramping up business interruption claims as a result.

Increased costs

Inflation and elevated interest rates have raised rebuilding and borrowing costs, increasing both the severity and duration of business interruption exposures, Butcher explained.

She continued: “Following Covid, supply chains were stress tested, so businesses reacted and adapted, making them more seamless.

“With Covid everything went in one direction, so central banks could respond and then businesses could sponsor the results. What’s different with the tariffs is that there’s a differential impact worldwide.”

The impact of tariffs, based on the terms imposed, differs from one country to another. Because of this, Butcher explained that there was a “whole other layer of complexity to the issue of supply chain management” around tariffs, which is arguably “worse than Covid”.

Sarah Baker, head of forensic accounting services at Crawford and Company explained that, while the pandemic was unforeseen, once lockdowns and market labour reductions had started “there was an element of predictability to the macroeconomic environment”.

She said: “For example, once it commenced, we could see the economic slowdown in China and the subsequent inevitability of supply chain disruption caused by the pandemic.

“Disruption resulted from the inability to produce – the impact was global and, to some extent, there was an element of uniformity to the cause, even though, politically, many nations reacted differently.”

In contrast, Angus Osborne-White, head of technical development at Crawford and Company Accounting Services, noted that the current tariff volatility was a political issue and appeared to flow from the decisions of one national administration, as well as the reaction of individual businesses in the supply chain to these decisions.

He added: “The problems that these businesses are now having to solve are ones of financial and economic assessment that interfere with the supply and demand curve, rather than ones of physical production and distribution capacity.”

Managing exposures

Speed is vital in the delivery of claims, especially in areas such as property damage and business interruption. This is why supply chain management is so vital, as small interruptions in the delivery of materials or equipment can snowball into significant delays.

Butcher explained that supply chain delays and disrupted delivery timelines have exacerbated claims delay issues across the sector, causing businesses to remain non-operational for longer than expected.

Coupled with layoffs and staffing reductions, these delays have undermined business continuity across many markets and forced insurers to extend indemnity periods.

She continued: “What is being documented in the US now is that tech companies and the large banks have seen earnings soar. But for consumer facing businesses, while their sales are increasing, their gross profit margins are being dented, which shows that they’re not yet passing on the tariffs to the end consumer.”

Butcher stressed that this margin pressure will be felt “for some time going forward” as businesses have been slow to pass on increased tariff costs to consumers, creating a noticeable “time lag”.

To cope with the slower resolution of business interruption and property claims amid prolonged material delays, Osborne-White explained that Crawford and Company’s focus as a loss adjuster had shifted to delivering structured certainty.

This includes interim payments, accurate forecasting and clear communication to support clients while managing extended interruption periods.

Baker explained: “From the client side, we would hope that the examples of supply chain disruption that we are seeing are helping the broker community to sell the requirement for longer maximum indemnity periods when discussing business interruption with their clients.

“Twelve months – the default maximum that we often see – has never really been adequate and the issues that we are discussing here today only amplify this position.”

Impact on insurers and brokers

As the current president of the London Business Interruption Association, Butcher said she believes that the evolving landscape has had major implications for how insurers and brokers approach indemnity periods and quantify business interruption losses.

James Crask, managing director and global head of multinational clients at Marsh, told Insurance Times that these implications were being exacerbated by limited upstream supply chain visibility.

He explained that knowing who supplies a company’s suppliers is a critical first step in managing tariff exposures.

He said: “Most organisations will know their direct suppliers already – tier ones – but few have a strong understanding of the suppliers that supply them – tier two and above.

“These hidden suppliers have the potential to hide indirect tariff risk exposures.”

For example, Crask continued, if a tier one supplier is US-based and is shipping to the UK, but has their own upstream suppliers in places like Mexico, Canada or China, it will be exposed to tariff increases as goods are imported into the US.

Speaking to Insurance Times, Justin Linney, head of risk management solutions for UK commercial at Aviva, explained that to avoid being hit by hidden exposures, clients must consider their entire supply chain during business continuity planning, tracing the origin of products, machinery or supplies from the very start of the process.

As head of Aviva’s business interruption team, he explained that its approach was to help clients diversify and consider alternative strategies.

For example, stockpiling of key supplies was widely carried out during Covid to ensure clients could deliver their contracts.

Linney also explained that the insurer had been advising clients to consider looking at contract service level agreements, what they supply and how they supply. Additionally, Aviva has asked clients whether they could substitute products for an alternative, or rationalise and redesign product lines.

While global distribution is key, Linney said that “going back to basics” and sourcing locally could potentially make it easier for some businesses to monitor those suppliers and the chain.

He said: “When you get a true understanding of that, then you can start to look at things like indemnity periods.

“It’s using some of the tools that we’ve got, like a supply chain assessment or the business interruption calculator that’s available to brokers, where they can start to input some of their data and some of their processes. It’ll then help generate an idea of what the indemnity periods should be for that customer.”