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Managing the risk of supply chain disruption in the Middle East

  • Market Insight 18 juillet 2021 18 juillet 2021
  • Moyen-Orient

  • Droit réglementaire et enquêtes

The Middle East has historically been a focal point for international trade, driving economic growth across the region and acting as a catalyst for diversification into new markets. This trend has continued in current times with many global companies creating distribution and logistics hubs in the region to capitalise on its strategic position between Asia, Africa and Europe. However, the Middle East is not without risk and with geographical proximity to sanctioned jurisdictions and historical trading relationships going back centuries, supply chain participants have had to navigate an increasing range of environmental, legal, regulatory and geo-political risks as part and parcel of conducting business.

Supply chain disruption risks

In recent years, the region has witnessed the manifestation of a number of these risks as a perfect storm of adverse circumstances and events has caused significant disruption to the supply chain across the region forcing participants to demonstrate resilience and identify new routes and logistic models as well as manage higher insurance premiums and other costs associated with severe business interruption.

For example, in May 2019 three oil tankers and a bunkering ship were attacked off the coast of the UAE near Fujairah creating fears of potential military conflict and concerns for the security and viability of one of the world’s most critical trading routes. In the aftermath of the attack, war risk insurance premiums rose significantly as several waters and routes in the region including parts of Oman and the UAE were deemed high risk, putting pressure on margins and increasing supply chain costs.

In June 2019, two tankers were attacked in the Gulf of Oman and were reported to have suffered explosions.  The attacks caused an immediate spike in global oil prices. Set against the backdrop of already elevated tensions in the region, particularly between the US and Iran, the situation worsened when in July 2019 a British flagged tanker was seized by Iranian authorities in the Straits of Hormuz triggering fears of an all-out blockade of shipping lanes and further intensifying fears of military conflict.

Two years earlier in June 2017, the UAE, Saudi Arabia, Egypt and Bahrain terminated diplomatic and trading relationships with Qatar resulting in significant disruption to the established supply chain across the region. Qatar was forced to identify new trading partners and create new supply chain routes.

And in 2020, when the world went into lockdown as a result of the COVID -19 Pandemic, supply chains were severely disrupted as manufacturers/producers were no longer able to operate at full capacity and movement restrictions on international trade routes meant the ability to ship, import or export products was either suspended or significantly restricted. Worryingly, and despite the fact the world was in lockdown, the Transported Asset Protection Association’s (TAPA) Cargo Theft Annual Report estimated that in 2020, theft from supply chains in Europe, the Middle East and Africa region resulted in reported losses of over 172m Euros, equating to over 1m USD reported lost every other day from theft alone.

All of these events illustrate the vulnerability of the supply chain across the Middle East and provide an effective reminder of why supply chain participants should regularly assess the risks they are exposed to and consider the measures they can take to help mitigate and control those risks, including understanding the extent of their insurance coverage particularly in relation to business interruption and the scope of cover provided by supplier and customer extensions.

Any assessment of supply chain risk should also take account of legal and regulatory risks, many of which centre on the importance of knowing who you are doing business with. This is critical if the risk of sanctions violations or trading with a supplier or customer that is involved in illegal activities such as money laundering, fraud or corruption is to be avoided. Other areas of concern include companies involved in unethical or illicit activities such as wildlife trafficking, abuse of workers rights, human trafficking, slavery and illegal mining, logging, fishing or other environmental crimes.

The challenge of identifying and managing supply chain risks

Assessing supply chain risk is no different to any other form of risk assessment where identifying the range of risks to consider, their probability and likely impact is an essential first step.

However, many companies encounter difficulties assessing supply chain risk. There are a number of reasons for this including:

  • The range and variety of potential risks can be intimidating – for example geo-political risks can range from regional embargos to terrorism or even war and previously unknown risks can rapidly emerge leaving companies with inadequate mitigation plans;
  • Probability can be difficult to determine, particularly as data from suppliers in less regulated jurisdictions may not be readily available and some risks such as criminal activity or cyber-attacks are by nature, unpredictable; and
  • Impacts can range from manageable to catastrophic meaning that determining potential financial losses and putting in place adequate protections can be a very inexact science leaving companies either over or under insured.

To help address these challenges, sensible measures to take include:

  • Monitor emerging risks and factor them into your risk management process. For example, if the volume of ransomware cyber-attacks in your sector are increasing it may suggest you are more likely to suffer an attack and need to strengthen your cyber security controls.
  • Use the data already available to you to help determine the risk to your supply chain. For example, if one of your suppliers was able to continue the manufacturing and delivery of their product during the global Covid-19 lockdown, that may suggest there is a lower risk of disruption from them than from other suppliers who were unable to maintain supply. Consider also procuring commercial intelligence feeds.
  • Where relevant, consider replacing manual paper-based processes with technology driven solutions. This can help make more data available to inform risk-based decision-making and helps enable benefits such as automated alert generation and risk monitoring.
  • Develop and rehearse business continuity and response processes and procedures that enable you to respond faster and more decisively to supply chain issues.
  • Regularly assess your insurance cover to understand if it is appropriate and provides adequate protection in the areas that you think it does.

Conclusion

As the supply chain across the Middle East increases in complexity, extending further into less regulated but more economically viable jurisdictions, and geo-political risks continue to dominate the region, insurance coverage becomes increasingly more relevant.

Looking forward, one area likely to be subject to growth is cyber insurance. Globally, there has been a significant increase in cyberattacks on supply chain participants and there have been numerous high-profile ransomware incidents.  With rapid digitalization taking place in UAE, KSA and Qatar for example, the risk of more cyberattacks will only increase. Obvious targets could include ports which are becoming more automated as the Middle East catches up with the levels of IT and OT transformation seen in ports at other locations across Europe and China. A by-product of the rise in automation and hence cyber risk is likely to result in an increased appetite for standalone cyber cover which at present is lower in the Middle East than in some other regions.

The Middle East has more than its fair share of risks for supply chain participants to manage and it’s a complex challenge. Embedding a formal supply chain risk management framework, regularly assessing your insurance cover and where appropriate, embracing technology-based solutions can help.

 

 

 

This article was first published in the July 2021 edition of the Middle East Insurance Review here. 

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