Supply chain complexity 'a threat to the London market'

London market insurers have been told they need to better understand the complexity of global trade if they are to deliver the products that effectively meet their clients’ needs.

As Lloyd’s and the wider London market looks to the greater use of technology to speed access and reduce frictional costs, Suki Basi, managing director of specialty risk management company Russell Group, said the technology will only be effective if there is a real understanding of what the technology needs to deliver.

As such, while the London market has historically built a reputation for underwriting complex risks, that complexity is increasing. It has reached a point where there is a danger that the market will be left behind unless it gets a grip on the intricacies of their clients’ supply chains.

“Global trade is extremely interconnected as companies have built up extended supply chains spanning the world whilst also progressively moving from goods to service supply,” he told Insurance Times. “Understanding this connectivity and the exposure that flows over this, is key for decision makers wanting to quantify exposure from market entry, contagion risk, systemic failures, geopolitical tensions and natural perils.”

Growing concern

Basi added there is growing concern around the impact of supply chain failure and the ability to fully identify the threats given the complexity of interactions with suppliers and clients across the globe.

“The insurance industry, which is at the heart of global trade, now needs to fully understand this connectivity and the resultant growing connected business exposure to ensure that the right solutions are being offered to clients,” he warned.

The issue is particularly relevant to the marine insurance classes given their role in the movement of goods and service across the world and the rising scale of aggregated exposures that ever larger vessels have created. With a limited number of ports having the ability to handle the ultra-sized vessels it creates a concentration in the value of cargoes that are kept at these small number of terminals prior to their onward shipment.

The rise in extreme whether events is also a concern given the exposed nature of the world’s ports and the threat around aggressive coastal erosion, driven by climate change.

Basi said such a challenge furthers the need for the insurance industry to ensure they understand the supply chain threats to the clients they insure. This is not only to enable insurers to create products that adequately cover clients’ risks, but also aid in the risk management process by identifying areas of heightened risk that need to be addressed.

“It is a challenge the industry has to meet and a problem they need to solve.” He said. “Once they have successfully created a solution that can be accessed by the market as a whole, the industry will be more able to add value through solutions which support the client’s business objectives, a view which is echoed in the recent ‘Future at Lloyd’s prospectus, that is currently out for consultation in the market, in which Lloyd’s is suggesting an ecosystem to build client value.”