Insurance as an instrument of risk management in logistics systems

Abstract

Logistics systems, like other business systems, are characterized by a large number of risks changing often in place and time. Risk management in supply chain and logistics involves identification of possible threats to the system or process, undertaking measures with the aim to reduce the possibility of their realisation and minimize any loss events in case those threats are nevertheless realised. The aim of risk management is to set up optimal control over the identified risks, which results in more stable systems, reduction in cancelled operations or failures in operations and maximising system reliability, effectiveness and profitability. One of the instruments of risk management in logistics systems is insurance. The most frequent line of insurance used for coverage of risks in logistics systems or processes is transportation insurance, including wide range of different types and subtypes within this insurance line. Insurance can cover the risks that business and logistics systems are always exposed to in those situations when their in-house management is not cost-effective. In insurance practice, it is often difficult to assess the amount of risk related to logistics systems and processes and to determine premium rate of insurance. A number of statistical methods, as well as mathematical and actuarial models, are used in the process of assessing risk of any particular insurance coverage.