Climbing CO2 prices have put pressure on the national and global supply chain, subsequently affecting Covid-hit SMEs 

Surging prices of carbon dioxide (CO2) have drawn attention to the lack of suitable insurance policies available to cover business interruption (BI) to companies’ supply chains.

In September 2021, the soaring price of CO2 had a knock-on effect on both the production and supply chain of meat products, beer and fizzy drinks.

In turn, this has impacted SMEs - many of which are still struggling to financially right themselves following the Covid-19 lockdowns and the FCA’s BI insurance test case, which ultimately saw tighter policy wordings and exclusions applied to commercial covers.

Simply Business’ UK chief executive Alan Thomas pointed out that SMEs across the country have already lost around £126.6bn due to following the government’s national lockdown regime.

A decade ago, insurer Zurich had a solution to these types of problems - it offered a policy that covered supply chain failure. However, this was withdrawn from the market due to a lack of interest.

Sedgwick’s director and head of financial risks Damian Glynn told Insurance Times: “I thought it was a fantastic product - it dealt with instances such as the CO2 problem. But there wasn’t enough interest in that product, so it was taken off the market. Policyholders for whatever reason didn’t display an appetite for it.”

Now, however, Glynn believes that interest in such products is “inevitable”.

Damage at the premises

In Glynn’s opinion, today’s insurance products are ”not going to respond” to the current CO2 crisis.

He explained that BI cover is typically written on the basis of damage to the insured’s premises - on top of this are various extensions that can extend the cover, such as denial of access, notification of disease and utility failure.

“One of the [available] extensions is to give cover if there is damage at the supplier’s premises - that triggers cover as if you had damage at your own premises. Of course, the CO2 crisis does not arise because of damage at anybody’s premises,” Glynn said.

There are two types of suppliers’ cover – specified and unspecified.

Specified suppliers’ cover is where the policyholder has named the supplier, whereas unspecified suppliers’ cover is more general and the supplier is not named.

However, both of these options require damage to have occurred for the policyholder to have a successful claim.

“Business interruption at its core is damage – damage at the premises generally - and the extensions are effectively extending the definitions of premises by saying the damage at the suppliers’ location triggers cover,” Glynn added.

As an example, Glynn cited the CO2 shortage in 2018, which hit pubs across the UK. This is because breweries use CO2 to make beer fizzy. Drinks brand Coca-Cola also paused some of its production lines.

At the time, Glynn was enlisted to find out if the shortage was caused by damage at any premises.

“It turned out that it wasn’t caused by damage. There was a plant [in] the north east that had an uninsured maintenance problem with its power plant,” he explained.

Glynn deemed Zurich’s discontinued supply chain cover as being “hand in glove” with the current CO2 problem. It provided insurance for a product not arriving at the insured business’ premises, therefore policyholders would have been able to make a claim in this situation.

“Supply chain will become more of an issue,” Glynn noted.

”Insurers have attempted to respond to new challenges, such as non-damage denial of access, which was a response to the Irish Republican Army (IRA) bombing in the 80s when we had the oil tankers spewing oil onto beaches – that gave rise to loss attraction cover that hotels needed,” he said.

Being prepared

Martin Lilley, director of corporate services at Broadway Insurance Brokers, added that current pressures around CO2 highlighted the complexity of the international supply chain and the importance for businesses to be prepared.

He said: “It’s something which the last year has reinforced to a lot of companies in many different business sectors. There were, after all, very few individuals who might have forecast a pandemic effectively shutting down the global supply chain for such a long period of time.

“The most critical thing for a business relying on a supply chain of any sort is understanding where the risks or weaknesses in that chain are, assessing what impact they could have on an organisation and taking suitable steps to identify how they may come under pressure.

“In a short space of time, we have seen the free movement of goods interrupted by issues relating not just to coronavirus, but problems linked to fuel supplies, personnel and extreme weather events.”

He suggested that businesses put contingencies in place internally to try and mitigate such difficulties, however it is also “hugely beneficial to insurers if businesses decide to transfer risk by obtaining cover”.

Furthermore, strained supply chains could face fresh scrutiny following January’s Supreme Court BI ruling, Lilley added.

He continued: “That judgment has, perhaps unsurprisingly, prompted a review of what commercial issues insurers are prepared to provide cover for and how they might do it - whether that’s exactly as before or using policies which function on more of a parametric basis.

“In light of possible changes, it makes even more sense for businesses and brokers to arm themselves with as much information as possible about the risk profiles of their own trades.”

Vulnerable spots

Kevin Rimmer, partner and head of cargo at McGill and Partners, named several vulnerable pressure points that are currently causing high demand for global supply chain cover.

This includes continued container shortages, port delays, congestion, increased freight costs, logistics equipment being in the wrong place and a lack of haulage options that results in delays.

Supply chains are also being targeted by cyber criminals conducting ransomware attacks, according to CyberCube’s chief growth officer Chris Methven.

Methven said: “The European Union Agency for Cybersecurity has suggested we should expect a fourfold increase in cyber attacks targeting supply chains in 2021 versus 2020.

“There have been several recent high profile attacks on the digital supply chain, such as the Microsoft Exchange Server, SolarWinds and Kaseya attacks.”

CyberCube has also observed a dramatically heightened concern from its insurer clients wanting to understand hidden single points of failure (SPoF) that may be lurking in portfolios.

For logistic and freight firms like Simarco Worldwide, their supply chain currently relies on goods from non-European Union countries, including China and the US. 

Simon Reed, chief executive of Simarco Worldwide, said: ”The irony of Brexit is that we will rely more heavily on Europe as [a] reliable source of goods, as seen with [the] huge increase in container and goods prices and [the] shortage of supply from the Far East.

”European imports are less impactful to the environment and even with Brexit restrictions, [they are] easier to access and faster [to get] into the supply chain.”

However, he predicted that there will be a move away from these ”just in time” supply chain models and instead, more stock will be held in the UK. As lead times increase, retailers will still expect their suppliers to have stock in the UK for sales through the internet and high street.

“Ultimately less choice and variety, but higher prices,” he added. 

Reed cited port congestion in China, ongoing Covid issues, lack of drivers and Brexit delays as key challenges for the supply chain sector. 

Lilley added: “Transparency about what cover is required for is arguably more important than ever.”

  What is supply chain insurance?

According to Morris and Reynolds Insurance, supply chain insurance is typically written as an “all risks” business interruption cover which is not restricted to property damage and focuses on incidents outside the insured’s control.

This allows the policyholder to transfer supply chain risks for named supplies and suppliers. The cover typically has very few exclusions.

How are insurers preparing for shortages that might impact the supply chain landscape?

Eibhlin Swan, head of supply and experts at Allianz, said: “Like most of the UK, we are all hearing of shortages of materials and resources across a number of different industries. We insure a lot of these and we are getting feedback directly from customers.

“Luckily at the moment the supply chain at Allianz has not been negatively impacted by these shortages today, but we are preparing for future ones.”

Allianz is preparing for potential shortages by making sure it has strong relationships, implementing risk management support for its suppliers and through launching a sustainability initiative.

Although the sustainability initiative was introduced in alignment with Allianz’s ESG focus, one of its aims is to look at strengthening its supply chain, for example via its “repair versus replace” strategy in motor and property.

What suitable cover is available for small businesses?

Insurtech and Lloyd’s broker Superscript launched a subscription-based insurance product for small independent shops in September 2021.

This is delivered through a monthly subscription. Key covers include:

  • Public and products liability.
  • Employers’ liability.
  • Portable equipment outside of the premises.
  • Buildings, contents and stock.
  • Terrorism.

Additional covers include business interruption caused by damage to property at the shop, shop front, glass, book debts, money, deterioration of stock, goods in transit, loss of license and theft of money by employees.