A new report shows that a flawed legal framework for insurance and brokering practices in the UK mean that manufacturers cannot rely on their insurance to help them through tough times. Jane Gray reports.
“I am quite convinced we have a long tail of supply chain exposures and that most are currently unknown. I genuinely don’t think we have done any analysis at all to quantify.”
So said the group risk manager of a large UK polymers manufacturing company to Mactavish, a risk analysis and research firm which recently conducted an extensive study into the UK insurance landscape.
What Mactavish uncovered in this review was a service sector riddled with risk for customers, including manufacturing businesses. These issues are often due to increased supply chain complexity, shifting outsourcing strategies and new business models, with companies sitting on ticking time bombs of inadequate insurance.
“Before the recession companies which found they had to dispute insurance claims could go to the bank for finance to cover business continuity needs. That is not so easy to assume now” – Bruce Hepburn, CEO at Mactavish
Mactavish’s initial review of the UK insurance landscape, published in 2009, was referenced extensively by the Law Commission when this body became convinced that review of UK insurance law and brokerage practices was needed. Ensuing articles in the Financial Times and other leading broadsheets flagged up to individuals and businesses alike that, as Bruce Hepburn, Mactavish CEO put it, “the UK has some of the poorest insurance law in the world.”
The two core underlying issues, says Hepburn, are that UK insurance law massively favours the insurer, allowing them “unreasonable remedies” should the insurance bearer breach any of the obligations within their contract, however minor. Secondly Hepburn identifies exceptionally low standards of practice in insurance brokerage.
The wheels are now in motion for changes to be made to UK insurance law but it is unlikely that these changes will come into effect until around 2018. In the meantime, recognising the unusually complex risk profile of manufacturing businesses and the critical importance of protecting this sector from unwarranted challenges as Britain looks to ‘rebalance’, Mactavish undertook a study of the potential impact of flawed insurance law on this sector.
What’s being missed?
The new report High impact risk and insurance governance in UK manufacturing and engineering raised concerns around a low level of understanding regarding changing risk profiles in the sector. As the opening quote indicates, supply chain is one area where the risks of disruption, and the extent to which businesses are covered for these, are poorly understood. Companies often overestimate the scope of business interruption policies – particularly where some processes are outsourced.
Another growing insurance trap for manufacturers is appearing as companies increase service offerings, such as R&D and design as well as service and maintenance models which blur traditional sale and after-market boundaries.
These services, while allowing manufacturers to maximise in house expertise and the full life cycle value of their products, also lead them into areas of risk associated with giving advice which many are unfamiliar with. This leads to inadequate protection of professional indemnity according to Hepburn. He asserts that companies pushing forward value-add services in order to gain bigger margins “cannot rely on the incidental professional indemnity clauses included in their product liability insurance.”
“Mactavish identified that around sixty five per cent of companies with turnovers of between £50 million and £5 billion do not check what information their broker submits to the insurer about their business. This is bonkers.” – David Hertzell, CEO, Law Commission
Worst case scenario
Hepburn is concerned that manufacturers do not realise the difficult situation they could end up in as a consequence of mismatched risk and insurance coverage. “It is possible that some small action, such as moving the location of a fire extinguisher to improve process or health and safety practices in a plant, has voided your policy,” says Hepburn. “Before the recession, companies which found they had to dispute insurance claims could go to the bank for finance to cover business continuity needs. That is not so easy to assume now.”
David Hertzell, CEO of the Law Commission, agrees that claimants who find themselves turned down today are likely to find access to finance a debilitating challenge but others in the finance industry disagree. Carl Williamson of Lloyds Bank rather predictably, assures that finance is still available when dealing with these matters. “As a major finance provider, Lloyds Bank supports any client that is facing a challenge with cash flow due to slow or disputed payouts. As far as we are aware, this has not been an issue for Lloyds Bank customers,” says Williamson.
But what needs to be done to stop manufacturers having to put this scenario to the test? Hepburn says that manufacturing trade organisations, such as EEF, should be taking a stronger stance on guiding Law Commission reforms and educating their members on best practice corporate governance approaches for insurance and risk management.
EEF told TM that insurance isn’t a policy issue it has ever covered and that there were no plans to do so since members are not raising it as a concern.
Mr Hertzell says that this is unsurprising. “This is a minority interest,” he comments. “Sloppy drafting practices and insurance based on inaccurate information go unnoticed ninety five times out of a hundred because unless you have a claim you don’t have a problem.”
According to Hertzell the lack of motivation around reviewing insurance risk in businesses is exacerbated by a soft insurance market which has been in existence since around 2000. “A soft market means the price of products is low,” explains Hertzell. “So while there are cases of companies getting burnt by unexpectedly voided policies, few board members feel compelled on a cost basis to review insurance coverage as priority.”
With with “horrible inevitability”, Hertzell says the market will harden and the cost of insurance will rise. “When that happens the inadequacy of insurance cover will become a cause of outrage for the many rather than the few.” Addressing current inadequacies and aiming for a fairer insurance market, the Law Commission is proposing to alter provision in two major ways. “Firstly there will be clearer rules around who has to tell whom what on the part of both businesses and insurers,” says Hertzell. Secondly, and very importantly, the Law Commission is pushing for reforms which will make it harder for policies to be voided.
Under new law, if a problem arises whereby the insurer considers a claim to be invalid because the information they based the policy on did not accurately reflect the risks involved, they will be asked to adjust policy terms based on new information rather than voiding the contract.
This will reduce the risk of manufacturers finding themselves stranded following a business interruption, either due to physical or service related damage. However, Hertzell still urges companies to take their responsibilities in securing appropriate insurance more seriously. “Mactavish identified that around sixty five per cent of companies with turnovers of between £50 million and £5 billion do not check what information their broker submits to the insurer about their business. This is bonkers.” he exclaims.
To access Mactavish’s reports on UK insurance go to www.mactavishgroup.com