InsuranceAsia News (IAN) recently caught up with Tan Hian Hong, vice president and client service manager – FM Global Asia, to discuss the impact of outlier events like the Ever Given incident on insurance rates.

Other topics discussed include loss prevention and resilience in a post-pandemic world and the future of the insurance industry as the region begins a long recovery from Covid-19.

IAN: What does the recent grounding of the Ever Given ship in the Suez Canal say about the vulnerability of global supply chains? How do we manage the risk of an unusual event like this?

Tan: While crises or disasters are not preventable, a large extent of their impact can be. The grounding of the Ever Given and the resulting delays it caused to worldwide shipping is an example of how a one-off event can disrupt global supply chains and a reminder that many businesses have yet to diversify their supply chains to mitigate the impact of just-in-time business models. The best way to manage these risks is to go back to fundamentals: build knowledge around your supply chains, assess what you know and identify gaps.

Once risks have been identified and assessed, they can then be engineered to minimize the impact to your business and clients. Measures – such as a well thought-out contingency plan that considers alternative transportation modes or routes around key choke points or critical supply lanes, with clear responsibilities assigned to the various stakeholders involved – can then be quickly put into motion. This will minimise delays and help realise a competitive edge over peers who are scrambling to put together contingencies in real-time.

Beyond a thorough analysis of supply chains, we need an understanding of the revenue streams affected by off-shore suppliers at the macro level, to individual revenue dependencies posed by key contract manufacturers. If this is achieved – be it an individual factory that is taken down due to a single location fire, a regional catastrophe like typhoon or flood that disrupts the ability of a group of contracted suppliers, to successfully ship and meet product deadlines – the impact on a company’s business can be best understood and the risks quantified and strategically managed. The delays caused by the Suez Canal blockage would probably resemble a scenario that sits between the two, with a corresponding impact to a company’s earnings and ability to deliver.

IAN: What is the impact – positive and negative – of outlier events such as the Ever Given on insurance rates in the short and medium term?  

Tan: It is appropriate to step back and look at the market broadly, given this event came on top of the impact of the global pandemic. Overall, the market is hardening due to several trends, some of which have been exacerbated by Covid-19. Much of the market had already been negatively impacted by the major natural catastrophes around the world in recent years leading to a lack of profitability in insurers’ underwriting. Additionally, some insurers had been unable to convince policyholders to make adequate risk improvement investments in a softer market.

This has led to the market becoming more disciplined, as insurers looked to tighten up underwriting and better predict potential property losses. We see a lot more technical underwriting happening with insurers paying more attention to the overall risk, with the quality and relevance of the data and insight informing underwriting greatly improving.

Specific to cargo, rates are holding, but there remains a lot of capacity with new entrants trying to make their mark having not suffered the losses others experienced during the past couple of years. In terms of geography, it is fair to say that the London market still appears to be harder than the ones in Asia and the US. Taking active steps to understand and mitigate business risks is a differentiator that will strengthen your position to negotiate better rates with an insurer. A deeper understanding of business risk helps your insurer provide you with a customised rate that matches your risk exposure.

IAN: How has the past 12+ months changed approaches to risk management and business resilience? Where does loss prevention and resilience sit in business recovery and transformation plans?

Tan: There is no doubt that, given the experiences of the past year, the need to build greater resilience is weighing heavily on the minds of business executives. As well as property and supply chain vulnerabilities, climate risk is also being factored into current risk management conversations as its impact is increasingly felt. For example, industry trade body, Insurance Europe, is calling for ‘pre-disaster’ measures, such as updated building codes and flood defence infrastructure to be adopted by governments, businesses and communities globally. This applies to Asia too, as the region also faces frequent and intense climate disasters and risk scenarios.

As a commercial property insurer focused on loss prevention, our belief is that regardless of the risk a company faces, including those resulting from pandemic and climate change, insurance coverage alone is not enough of a solution to make it whole again following a loss. There are many intangibles for which you cannot insure – be it damaged reputation, lost marketplace or decreased investor confidence – all resulting from being unprepared for known risks.

The past year has highlighted the importance of building resilience to help mitigate the negative effects of disruption and future uncertainties. Tools such as a business impact analysis can help provide risk managers with the financial data they need, in the language of the c-suite, to make the clear the business case for capital investments in risk improvements, even in these challenging times. The pandemic has also proved that being prepared for certain situations helps you respond even when the scale is way beyond what was anticipated.

IAN: If 2020 was about taking cover, some see 2021 as being about recovery. From an insurer’s perspective, what does the future of the insurance industry hold?

Tan: Building and maintaining business resilience will continue to protect and add to the business value. This becomes even more important as economies recover and transform in response to new supply chains and climate-related or cyber risks. Our role is to apply our wealth of data and insight to help our clients anticipate and mitigate existing and emerging risks to maintain business continuity, protect their bottom lines and achieve a more resilient position.