In a recessionary environment it would be reasonable to expect insurance costs to fall, given the competition among insurers for business. But there is evidence that insurance costs for manufacturers are rising. Risk management, meanwhile, should not be axed as a non-essential luxury when cash is short, say insurers. Alistair Dawber reports.
On May 12, the Office of National Statistics announced that UK manufacturing output fell by 5.5% in the first three months of this year. The figures were sweetened somewhat by March’s numbers, which showed just a small monthly decline, but while some were claiming the emergence of those much sought after green shoots, most were all too aware that between January and March manufacturing declined at its fastest rate since 1948.
The stresses and strains on manufacturers in the UK are obvious at the height of the recession.
There are of course measures that can be taken to offset the worst of the downturn long before the corporate grim reaper comes knocking. Jobs can be cut, shifts can be limited, and output can be reduced to save the money that might be vital to that company surviving the recession.
While almost every manufacturer is addressing these issues, a growing number are turning to risk management as a means of streamlining their businesses. “Risk assessments are crucial in protecting businesses in these volatile times,” says Michael Coomber, a senior consultant in the strategic risk practice at Marsh, the insurance broker and risk consultancy. “It is vital, especially in these recessionary times, that businesses identify their key risks and prioritise them. Companies need plans in place for if the unexpected happens. We have seen plenty of examples recently where regularly drawing up and revising risk strategies can help keep costs down and ensure continuity in case of the unexpected.”
The risks of making cuts
Managing directors and chief executives could perhaps be forgiven for cutting corners in some cost areas during a recession, especially if the very survival of their companies depends on it. However, seasoned risk managers warn that cutting back on investing in risk management processes is folly.
“There are certain areas you just cannot cut back on,” says Andy Marsh, general manager, safety, at Edwards Vacuum, a manufacturer of vacuum pump and exhaust management system solutions that employs of 3,000. “There is no quick fix, especially in the area of safety, and a growing number of businesses are realising that even in times of hardship, it is vital to maintain spending in the area of risk management.”
The insurance and risk management group, Marsh has identified the most common operational, financial, strategic, regulatory and hazard risks to manufacturers as being:
• Loss of key suppliers and customers as the recession continues to bite
• Breaches of regulatory requirements
• Financial risks associated with share price, borrowing and capital raising
• Inadequate monitoring systems, leading to reporting failure and disruption in supply
• Ineffective commercial venture, such as joint venture, alliance, partnership
• Rising costs of new materials
• Loss of and the ability to retain skilled personnel
The group argues that even in tough times, these are areas that require adequate attention and importantly, adequate funding.
As well as the legal implications of not having effective risk management practices in place, especially in the area of health and safety, there are also some crucial cost savings that can be made by adopting an effective risk management process.
“With ever lengthening supply chains, risk managers that have a solid risk register and can identify weaknesses in the supply chain can make contingencies as necessary,” says Coomber at Marsh. “By making these decisions, companies really can make better informed key decisions and potentially save costs.”
Another cost saving area manufacturers have identified is insurance. It is no surprise that insurance providers are offering discounts on premiums: a quick search on the internet will bring up a host of providers that are offering discounts to small-and medium-cap groups. HSBC, for example, is offering a 10% discount for manufacturers with a turnover of more than £1m. They are not alone, and while insurance is a cost that is often seen as money leaving a bank account without any tangible benefit, there are plenty of deals to minimise the cost.
Good ops management helps
And companies are increasingly seeing risk management as a key strategy in keeping insurance costs to a minimum. “It may take a number of years to get a comprehensive risk management programme in place, but those organisations that invest in safety will undoubtedly reap the benefits,” says Marsh of Edwards Vacuums.
Health and safety is of course an important area, but as significant is that manufacturers manage their operations in a way that can mitigate insurance costs. “Insurance is not necessarily seen as a tangible part of the risk assessment,” says Coomber, “but groups have to increasingly legislate for something coming out of the leftfield during a recession.”
Robert Rae, head of manufacturing at insurer RSA, and someone that spent more than 20 years running manufacturing companies, disagrees that premiums are coming down. He argues that as a result of the recession and the limited availability of capital, insurance premiums for industry are actually increasing. However, “our job is to ensure that we understand the need of the manufacturing sector and work with our clients to put specific plans in place to suit their needs. UK manufacturing is some of the most dynamic in the world and helped by companies like RSA, the insurance sector needs to develop a deeper understanding of the issues facing manufacturers.”
During recessions, however, it is not just manufacturers’ sales and profits that get hit. Many find themselves in trouble not because business plans are inadequate, but because events overtake businesses. Those that can dentify ways they will mitigate problems as these arise are viewed more favourably by insurers and are likely to see premiums fall.
According to RSA’s Rae, “companies’ boards are all too aware that having specific risk management plans in place are vital. Lots of insurance firms, including RSA, are offering to work out companies’ most effective risk management models, and over time this can bring down costs for manufacturers.”
Best practice, staff investment cuts insurance
Midlands-based Power Panels Electrical Systems is an example of a manufacturing company which has benefited from below average insurance premiums. Investment in its people, coupled with best-in-class manufacturing systems and processes have seen the company gain industry recognition as an example of best practice, it claims, while simultaneously tripling its profits.
David Fox, Power Panels’ chairman and chief executive, says, “Insurers are only too aware of the effect poorly managed companies have on their exposure to a claim. Therefore they are naturally more attracted to well-managed companies who have a proven track record, robust systems and controls coupled with a proactive attitude toward risk management. As a natural consequence, the premium and terms afforded to these companies reflect this.”
David Beck, account executive at Cobra Insurance Brokers, which provides insurance for Power Panels points out that there are several areas manufacturers can address to bring down insurance expenditure: as well as the aforementioned health and safety practices, Beck advises that companies look to other areas, such as premises security and asset protection: “In periods of economic recession, incidents of theft and malicious damage to property traditionally increase. A company that takes a proactive attitude to the security of their assets is helping to minimize their risk of being targeted and alleviates the possible exposure to an insurance claim.” Groups should also consider relations between management and staff, Beck adds, arguing that fewer industrial tribunals could lead to lower employers’ liability and employment practice liability charges.