- Supply Chain
As we collectively enter our third year of the pandemic—having endured economic uncertainty, wave after wave of supply chain disruption, and a hard insurance market—we’re all asking the same question: What does 2022 hold in store for my business?
I don’t have much in the way of sunshine and roses to offer here, but an understanding of supply chain trends can help you navigate the coming challenges safely.
So, what can you expect from the supply chain industry this year? What about the transportation industry and transportation insurance market? And, what can you do to protect the future growth of your business—and that of your clients?
Here’s the unvarnished truth.
Supply chain market trends
Global supply chain bottlenecks—they aren’t going away anytime soon.
Today’s supply chain infrastructure remains ill-equipped to absorb the unprecedented convergence of disruptive forces—from the pandemic slowdown and Covid-driven labor shortages to extreme weather events and scarcity of raw materials. Further complicating matters, the backlog of vessels waiting to offload are tying up containers necessary to move those critically-needed materials.
The pain will continue in 2022. In part, because warehouse space will become constrained as businesses shift away from just-in-time models and build up stock in reaction to ocean marine shipping issues.
Unfortunately, consumers will offer the supply chain industry no relief. In a recent interview with The Wall Street Journal, Pacific Maritime Association chief executive Jim McKenna shared that his members expect cargo to continue to surge for at least six months, if not the year.
It’s why manufacturers will be exhaustively rethinking their supply chains in 2022, and some will reshore at least part of their operations.
In a recent McKinsey Talks Operations podcast, McKinsey partner Knut Alicke and Airbus senior vice president Sebastian Peters note that organizations everywhere are seeking a better balance between efficiency and resilience.
So, what changes can we expect to see in the coming year as the supply chain continues to transform?
We’ll see organizations increase their investment in data scientists and digital planning as they seek the supply chain visibility necessary to power more agile businesses. We’ll also see an increase in both material multisourcing and inventories of critical materials.
Additionally, current and planned investments to modernize and expand aging U.S. port infrastructure will bear fruit—enabling dockworkers to more efficiently load and unload larger vessels, helping ease the backlog. Just last week, the Port of Boston received the largest container ship in its history. Port expansion projects in the southeast U.S., including the Ports of Charleston, Jacksonville, and Everglades will also provide relief to shippers looking to diversify their supply chains.
Transportation industry trends
Tightening cargo capacity. A shrinking labor market. The supply chain simply can’t move freight as effectively as it once did—it can’t expedite truckers. Now, that’s not anyone’s fault—the transportation industry is simply weathering a perfect storm of shortages, and all against rising inflation.
So, what can we expect in 2022?
With supply chains remaining massively disrupted, the scarce supply of cargo containers will continue to drive up container leasing costs this year—costs that will be passed along to the consumer.
What’s more, we expect shippers’ risk exposure for physical damage and theft to spike, as well.
As you no doubt know, cargo that’s not moving is cargo at risk. And, delays caused by Covid, the global chassis shortage, natural disasters, and continued supply chain disruption are creating precisely the conditions that put cargo in peril. The rampant pilferage of California cargo trains is just one recent example.
While continued efforts to automate will help, they simply won’t be enough to offset the challenges the transportation industry faces today. As a result, logistics managers can expect to see a steady escalation of shipping rates and expenses.
Transportation insurance market trends
Assureds have faced a hard market since 2018. Extreme weather events. Natural disasters. Vessel fires and strandings. They’ve driven a marked increase in the frequency and severity of losses to goods both in transit and in storage. In fact, losses like those reported by the ONE Apus and the Ever Given have been seismic enough to make national news—bringing an eye-opening appreciation for supply chain complexity and risk to many consumers.
This is why insurance carriers pulled back from hard-to-place commodities early in the market swing. As a result, both shippers and the freight and logistics professionals who serve them found it far more difficult to access cost-effective coverage for the likes of fresh and frozen foods, livestock, and alcoholic beverages.
While there is perhaps a little relief in sight this year, shippers and freight industry professionals should temper their expectations.
For starters, the hard-to-place commodities aspect of the hard market is unlikely to change—we can anticipate that insurance carriers will take the same approach to these sorts of items this year.
What’s more, insurers will remain strict and diligent with their terms and conditions. Meaning, many assureds will maintain higher deductibles than normal to keep pricing at acceptable levels.
The good news is that there’s potential for prices to soften. However, we’ll need to wait and see if continued turmoil in the supply chain and new, large losses slows this shift. While we expect to see rates level off in 2022 (exceptions being those with challenged placements, elevated risk profiles, and accounts that have experienced losses), if thefts and other losses start to catch up with loss ratios, insurance companies could raise rates or deductibles.
Protect your business in response to rising risk—and tightening policy terms and conditions
So, the question remains: How do you protect the future growth of your business amid supply chain disruption and economic uncertainty?
Here are a few things you should keep in mind:
- Add all-risk coverage to protect against the exposure that results from relying on carrier liability coverage alone. Without an all-risk policy in place, businesses are exposed to losses outside the carrier’s control, like Acts of God and General Average.
- Review your coverage if you charter a vessel—or a large portion of one. When you do, you’ll more than likely be increasing your liability limit requirements. You may need to purchase charter liability coverage, as well.
- Take a moment to review your vessel qualification clause. In response to supply chain pressures, carriers have deployed older containerships to meet increased demand—and some of these vessels may not meet the required parameters of your policy.
- Call your insurer if you opt to move breakbulk cargo on general cargo ships. Changes to your packaging and shipping methods could otherwise leave you exposed.
- Reach out to your insurer if a logistics provider seeks to limit its liability for losses. In response to supply chain disruption, some providers are seeking to limit their liability for cargo losses and damage. Your broker can provide the sage guidance necessary to navigate this situation.
- Act quickly to mitigate the impacts of a catastrophic event. These events tax the resources necessary to quickly resolve claims. If you’re impacted, you’d be wise to mitigate the impact to your business as quickly as possible—securing undamaged cargo, storing damaged cargo for future investigation and restoring it if possible, and addressing clean-up protocols as required. Be sure to thoroughly document your efforts as you do—capturing photos, videos, financial records, signed delivery receipts, and claims letters. A well-documented loss will help your insurer expedite your claim to the best of their ability.
2022 looks to be ripe with challenges.
At the end of the day, though, one positive trend is abundantly clear. While Covid-driven disruption has revealed cracks and highlighted weaknesses in the supply chain, it’s also driving an explosion of tech innovation that holds great promise for more resilient, sustainable businesses in the years to come.