Supply Chain Risk Management in the Food and Agriculture Sector – Keeping Flexibility and Financial Resilience

The Food and Agriculture Organization of the United Nations defines the food supply chain as consisting of all stakeholders who participate in the coordinated production and value-adding activities that are needed to make food products.

Insurance is a tool that limits financial losses when a risk has become reality and has disrupted the supply chain, resulting in a loss of net profit, an increase in its mitigation costs and contractual penalties.
 
As a rule, standard property insurance covers business interruptions, caused by physical damage to the enterprise or physical damage to its suppliers or buyers (extended coverage).   In any case, it should also contain an “on-site element”, i.e. the damage should arise at the site of the party specified in the insurance contract.
 
In order to partially fill this gap, clients are advised to consider investing in special tailor-made solutions, such as combined stock-throughput and trade disruption coverage or parametric insurance.
 
Combined stock-throughput and trade disruption covers the entire value chain: from the delivery of goods from suppliers, through their processing at the insured party’s premises, to their delivery to buyers, including both transit and storage periods. A stock-throughput placement provides compensation for material damage to the transported or stored property.
 
The additional trade disruption insurance covers loss of net profit, increased expenses and contractual penalties resulting from direct damage to property and unexpected events that impacted on logistics and/or happened to goods along the way (fire, lightning or explosion, natural disasters, blockage of waterways, harbours, airport, roads or railways; breakdown of a vessel; confiscation, expropriation, deprivation, embargoes; sanctions; political interference; strikes, riots and civil commotion, terrorism border closures; or other triggers subject to the agreement of underwriters). 
 
Parametric insurance insures a specific weather or statistical parameter, which should correlate well with the quantity or quality of the goods one buys or sells. For example, to produce a planned amount of vegetable oil, an oil-crushing plant needs seeds to be processed. The factory relies on farmers who grow such crops. In the event of a drought, there will be a shortage of harvested seeds, which, in turn, results in a reduced production of vegetable oil. To mitigate and balance such losses, the oil crushing plant will be insured against soil moisture deficiency (drought index) or an area yield index. The insurance contract is triggered when the insured index reaches a certain value.