Increasing premiums, tightening terms and conditions, higher deductibles and even a shortage of capacity for some risks, are combining to make it more challenging for many food and drink companies to renew their insurance programmes.
After a long period of falling premium rates and insurers competing hard for business, the insurance market is turning. Insurers are putting up prices and taking a fresh look at many of the clients they underwrite to assess the quality of the risks and whether, in addition to charging a higher premium, they will impose more onerous terms and conditions or, in the worst cases, decline cover.
For the food and drink industry, the shock of the Grenfell Tower fire has further exacerbated insurer caution when it comes to the use of composite panels and placed additional pressure on food and drink businesses to demonstrate they are investing in effective risk management. “The good times – cheaper rates and generous terms and conditions – that we have seen from a buyer friendly insurance market are over,” says Norman Andrew, Aon’s UK Food and Drink Practice Leader. “The detail and quality of risk and underwriting information that every food and drink business presents to the insurance market, now needs to be better than ever in order to limit price increases, and to secure cover on the best terms.”
A market under pressure
Recent years have hit the insurance market hard for several reasons. Intense competition leading to an abundant supply of capital has been pushing premium rates down since 2002/3 which, in turn, has put insurers’ margins under pressure. In addition, 2017 was the costliest year on record for weather disasters – at approximately USD$136bn of insured losses worldwide – and the second costliest overall; significantly impacting re-insurers’ earnings with a knock-on effect of increasing the rates they charge to insurers. A third issue for Lloyd’s based insurers is a mandated performance review by the Corporation to actively address those classes of business that have been underperforming, which again puts pressure on available capacity.
The consequence is not a general rate rise across the board, but targeted increases based on cover required and the industry type. “Rates are going up – by as much as 100% in some cases – in property and business interruption,” says Andrew, “and we’re also seeing increases in product recall, marine and stock throughput. In terms of liability and motor risks, provided the claims to premium ratios are performing well then buyers should not be expecting anything other than inflationary increases.”
It's against this challenging backdrop that companies in the food and drink sector need to renew their insurance programmes, with the picture further clouded by the unique risks presented by the industry, particularly in the use of composite panels. “Insurers looked at the Grenfell tragedy and thought ‘that’s not supposed to happen’,” says Mark Crawford, Aon’s Broking Director. “Given the food and drink’s industry exposure to composite panels, reinsurers have been speaking to all their insurers and asking them, ‘how well do you know your property portfolio?’” For many insurers, analysis of their risks has led to a more cautious approach when it comes to the risks they are prepared to underwrite and at what price, adds Crawford. “There has been a material contraction of capacity for food and drink risks which, in turn has pushed up rates.”
A big hike in premium can be a significant and unwelcome challenge for Food and Drink firms
A big problem for many companies in this sector is the disproportionately large impact an increase in rates can have on their profitability, particularly given property and business interruption is generally their biggest insurance spend, says Andrew. “Most food and drink manufacturers are operating on very low margins as they come under pressure from retailers to lower their prices. Insurance costs represent a large slice of their profit margin. A big hike in premium can be a significant and an unwelcome challenge which is why most businesses are keen that they get stability in their insurance pricing.” That stability however is proving harder to achieve particularly in sub-sectors of the industry like poultry processing, which often operates in large undivided premises, or any facility that involves the use of deep fat fryers.”
Of course, one way an insurer might look to reduce their exposure to a risk is to ask their client to retain more of any potential loss. “We’re seeing insurers insist that levels of deductibles increase often beyond a client’s appetite and we’re also seeing terms and conditions change. In response, a client might choose to mitigate any increased costs by reducing areas of cover such as changing a business interruption indemnity period from 36 months to 12 months. We would strongly recommend against any action that could mean, if a business has a claim, it might not have enough time to rebuild its operations and recover its lost customers,” says Andrew.
How to get the best terms
Given all these challenges in the market, what should food and drink businesses do to secure the best terms? “The key advice we give is to start early and demand to know from your broker how they will approach your renewal. Discussions should begin at least three months before renewal but, given the fluidity of the market, we are already looking at some risks nine months ahead of renewal,” says Andrew. “This also gives the business an opportunity to review its appetite for more risk retention and self-insurance which can help mitigate any price rises in cover.”
Another important factor is to improve the risk profile of the business. “Carry out the risk improvements insurers have requested and have all the information you are likely to be asked for ready and to hand. Insurers give credit to those businesses who have taken the initiative with their renewal,” advises Crawford. This means focusing on areas like arrangements for fire protection/suppression; overall investment in risk management; general housekeeping; and the management of any composite panels used throughout the premises. “Insurers are increasingly looking to engage more closely with Senior Management and the Board to understand the risk culture and its investment in fire safety systems” says Crawford.
Taking advantage of risk management bursaries – such as Aon’s Trio Risk Management, which is available under the Aon Trio Policy wording – can also help prepare the business. It is also critical that values at risk are reviewed says Andrew. “Make sure those values are correct so that you are neither over-insured or under-insured.”
The insurance market will continue to get more challenging for the food and drink sector. Given the uncertain outlook, it’s important that businesses work closely with their insurance broker to manage the volatility. “With huge price hikes on some insurance lines, higher deductibles being forced on many businesses, and some of the bigger risks unable to secure sufficient capacity in the market, it’s important to ask yourself how your business would respond to any of these scenarios at your next renewal.” says Andrew. “Investment in presenting your risk to the market in the most effective way will pay dividends in terms of limiting premium increases, but also in securing the right cover that effectively protects your business without the possibility of suffering damaging, uninsured losses.”