Hidden Vulnerabilities in Supply Chain Risk: A quantitative risk modelling framework

The World Trade Organisation (2017) estimated the 2016 global trade in merchandise to be around $15.46 trillion. Much of which has been facilitated by the integration of national economies into a global economic system characterised by increasingly complex supply chains. The 2011 Tohoku earthquake and the Thailand floods highlight the complex interdependencies that exist in today’s supply chains and the far-reaching consequences of their failures ($45.7 billion of economic impact by the Thai floods alone, according to the World Bank).

As supply chains have evolved and become more complex, insuring interconnected business interruption risks has grown more challenging. This report shows risk managers and insurers how failure of critical infrastructure on one side of the world can cause catastrophic supply chain losses on the other.

With a scarcity of historical claims data and the evolution of unforeseen threats in value chains, there are few systematic methods for an insurer or a corporate risk manager to quantify a supply chain’s risk. This study presents a five-step quantitative risk modelling framework to evaluate contingent business interruption risks. The industry-agnostic framework leverages probabilistic modelling and predictive methods to bridge some of the existing data and knowledge gaps in assessing supply chain risk.

This report has been published alongside Airmic’s Guide 2019 – Complex Supply Chains in a Complex World