Premium sharing for supply chain coordination with business interruption insurance under supply disruption

Abstract

Effective supply chain financing plays a critical role in mitigating disruption risks. However, current studies predominantly examine financing mechanisms through financial institutions or supply chain members. Research on insurance-based financing remains insufficient despite its critical importance in managing severe disruptions. This study addresses how to coordinate a supply chain under the risk of supply interruption by employing business interruption insurance. A two-echelon supply chain comprising a capital-constrained manufacturer and a retailer is modeled using the Stackelberg game framework. Business interruption insurance is implemented to mitigate losses caused by supply interruptions. Two insurance contracts, self-insuring and joint-insuring, are proposed. The findings demonstrate that the JI contract enables effective supply chain coordination under high disruption severity by significantly enhancing risk resilience. This study also reveals that transferring risk from the capital-constrained manufacturer to the retailer through a well-designed insurance cost-sharing scheme is crucial for supply chain coordination. Numerical experiments further evaluate the performance of the supply chain under different contracts and analyze how compensation for stockout, cost-sharing ratio, key parameters, and demand distribution affect the benefits of supply chain members.