In-depth - commercial: Taking stock
In the uncertainty surrounding Brexit, businesses have started to stockpile supplies, but this could lead to changes in the risk they face and even underinsurance. Edward Murray investigates
When the “Beast from the East” blew into Britain last year, it only took a few snowy days for supermarket shelves to start looking threadbare. What they will look like after Brexit is anyone’s guess.
At the time of writing the Government’s proposed Brexit deal had been overwhelmingly rejected by Parliament and the final form of the UK’s departure remained unknown and mired in a bitter political maelstrom. Against this backdrop of inaction and uncertainty companies have taken matters into their own hands.
One of the biggest questions around Brexit for senior executives has been the potential impact on the availability and cost of imported goods from the European Union (EU). To counter the threat of goods sitting parked up at ports and rail terminals, UK companies have decided to stockpile necessary supplies.
Where possible, businesses in different sectors (see box below) have announced plans to squirrel away the parts, ingredients and raw materials needed to continue day-to-day operations in the event of logjams at the border.
However, for some companies like Jaguar Land Rover, which uses around 25m parts a day, the logistical practicalities of stockpiling are unworkable. For others, the strategy offers some solace, rather than a longstanding solution. And, as we will discover, it also has a significant impact on existing and future insurance programmes.
Practicalities of stockpiling
Stockpiling is not an easy or straightforward decision for any business to make. It demands access to capital and changes the nature of the financial risks borne by the company.
“You are talking about wrapping up a lot of working capital in stockpiling,” says Tim Cracknell, partner and head of risk consulting at JLT Specialty. He continues: “That potentially makes you less competitive and so there has to be a fine balance of the degree to which you do it.”
Shannon Murphy, assistant head of risk underwriting at Euler Hermes, says that while stockpiling might have become the go-to contingency plan, it is high-risk.
He explains: “This strategy involves a significant outlay and working capital facilities are being more heavily utilised. Falling demand, particularly in automotive, provides little assurance that future sales will deliver the required revenue to maintain a healthy cashflow.”
You are talking about wrapping up a lot of working capital in stockpiling… That potentially makes you less competitive and so there has to be a fine balance of the degree to which you do it
Tim Cracknell
The nightmare scenario is that companies cram their warehouse facilities to maintain output levels and avoid disruption, only to find future demand falls and they cannot quickly recoup their outlay.
Nor is buying additional supplies the only cost of stockpiling. They then need to be stored and warehouse arrangements come with their own price tag.
But the biggest cost to a business may come if it suffers a loss and finds that its stockpiling strategy has invalidated all or part of its insurance cover.
Impact on insurance
Majestic Wines is one of many companies that has announced its intention to buy in additional stock and it will add as much as £8m to the value of what it usually holds in storage.
Any businesses considering a similar strategy must ensure the uptick in stock value tallies with the sums insured and conditions set out in their insurance programme. If they breach limits or warranty conditions, policies may be wholly or partially invalidated.
Carl Day, active underwriter at CNA Hardy, comments: “From an insurance contractual peril perspective, values advised to insurers and insured against may be inadequate or breached, as the policyholder could inadvertently increase their warehouse exposure above the limit of coverage purchased. Storage conditions such as ‘stillage warranties’ for off the ground storage requirements could also be inadvertently breached, leaving the policyholder unable to claim all the costs in the event of a flood.”
Britain is bursting at the seams with Brexit stockpiling
Companies in various commercial sectors are stockpiling parts, products and raw materials to minimise potential supply chain disruption arising from Brexit.
Car manufacturers including Aston Martin, Rolls Royce and Bentley have all reported their intention to increase their stockpiles of parts. But for higher-volume manufacturers this strategy is not a viable option.
Jaguar Land Rover makes 3,000 vehicles a day. To maintain this output chief executive Ralf Speth has said the company needs about 25m parts daily. Given the volumes at play, it is simply not practical to move away from the existing just-in-time strategy and stockpile two weeks’ worth of components.
Honda has taken a different tack and said it will idle its manufacturing operations for six days at the start of April, giving it time to assess and manage any operational issues.
In the drinks sector, Majestic Wine announced it will increase stock levels in its UK warehouses by £5m to £8m in the run up to 29 March. This equates to around 1m bottles of wine from EU producers.
Premier Foods is also hoarding raw materials and ingredients. The company owns brands such as Bisto, Oxo and Mr Kipling and announced it would stockpile to counter the risk of supplies being delayed in transit. The company stated the move could create an adverse movement of up to £10m in working capital.
Food retailers Tesco and M&S announced plans to stockpile tinned and packet products but admitted there was little they could do to safeguard fresh food supplies.
While companies consider options, Shannon Murphy, assistant head of risk underwriting at Euler Hermes, says there are other options to consider. He comments: “Manufacturers should conduct in-depth reviews of their supply chains and, where possible, look to use UK-based alternatives to avoid any potential delays or cost increases that could result from the UK leaving the EU. Along with stringent financial modelling to assess the potential impact of tariffs, companies should also start planning to renegotiate contracts with overseas firms now to understand any increases in input cost and minimise the likelihood of a breakdown in the supply chain.”
For those who have not completed such exercises, time is in very short supply.
Many companies will not have sufficient additional storage space within their own business, and while using third parties may provide a solution, it also brings additional insurance cover considerations.
Damian Glynn, director at Vericlaim, comments: “Stock Insurance can be extended to cover stock with third parties, but there may be policy restrictions/warranties about how stock should be stored (usually on stillages) – the insured will not be able to ensure adherence as they would at their own premises.”
He adds: “Extending stock insurance does not extend business interruption cover per se – that requires damage at the insured’s premises to be triggered. The only exception is if there is a supplier’s extension covering the warehouse/storage business.”
Inadvertently stumbling into a non-insured or underinsured loss can be devasting for any business and avoiding such a scenario has been a central topic of conversation at industry level.
Graeme Trudgill, executive director at the British Insurance Brokers’ Association (Biba), says: “Stockpiling is an issue that is being actively discussed with our member community and at our committee meetings.”
He adds: “Members are certainly talking to clients about their sums insured and we are working hard to raise the issue.”
As part of the underinsurance conversation, there is definitely scope for brokers to explore whether clients understand the application of average principle. This applies particularly to the SME market where business owners and managers often have less technical insurance understanding than risk managers and insurance buyers within larger corporates.
“Companies might understand that if their sum insured is too low, they will not get more than that in the event of a total loss,” says Alistair Steward, director at loss adjuster QuestGates and a member of Biba’s Claims Working Group. But he adds: “What they do not understand is that the concept still applies to a partial loss. These partial losses are not so difficult when they are very small claims, but if you have a reasonably small business that suffers a claim for £300,000 and they face the prospect of only receiving £150,000 in settlement then that could be devastating.”
It would be vitally important to ensure that stock is not blocking fire escapes, creating a congested and unsafe workplace, or subject to ineffective security or protection
Mark Seaton
SME clients are not only more likely to misunderstand the potential impact of the application of average on their claim, but they are also less likely to have an insurance policy that provides any degree of flexibility around their sums insured.
Cracknell comments: “Some policies have got flexibility in them to cater for seasonality. We see this in the retail sector when there are big surges of sales in different selling seasons.”
Adding further detail, Mark Seaton, portfolio manager at Covéa Insurance, says: “While the majority of property policy wordings include seasonal stock increases, typically 25%, this can be limited to the holiday periods and periods where there is a specific season trend for the specific business, supported by trading records.”
He adds: “It will be at the insurer’s discretion should they accept additional stock under this particular extension.”
There is no suggestion or anecdotal evidence that there is a lack of insurer appetite to write additional cover or make mid-term adjustments to policies, but that can only happen if clients, brokers and insurers are in close communication.
Discussing insurer willingness to underwrite increased exposures, Day comments: “Insurers’ role is to help businesses to protect against the financial risks of unforeseen events and fortuity. Stockpiling represents an enhanced risk, but a risk that needs insurance protection nonetheless, and so insurer appetite should be largely undiminished.”
Impact on risk profile
In addition to the possibility of breaching existing policy limits and conditions, stockpiling will also change the underlying risk profile of a company.
Seaton explains: “It would be vitally important to ensure that stock is not blocking fire escapes, creating a congested and unsafe workplace, or subject to ineffective security or protection. A further consideration is to ensure that stock is not placed at a height which blocks sprinklers from working effectively, or presents a risk of falling.”
Andy Miller, loss control engineer manager at Allianz, adds: “It is crucial to review and update all risk assessments. The installation of additional equipment, the movement of and increase in existing stock levels, taking on new premises, and amendments to procedures, could have an impact on employees, fire protection and security needs.”
There are opportunities for brokers to be very proactive, but that is no different to normal and it is not different just because of Brexit
Norrie Erwin
Trudgill is confident that companies at the smaller end of the commercial scale are being well looked after by the broking sector. He comments: “Small brokers are generally very close to their local clients. They will have a good understanding of those businesses and so they will be able to get clients to notify any significant changes that are taking place.”
Further up the ladder, larger brokers have also been speaking to clients about their evolving risk profile as a result of Brexit. Cracknell says: “Each of our client executives who deal with these companies on a day-to-day basis will have had Brexit conversations over the last couple of years or so, and they will have a feel for what they are doing around these things. Where the exposures have changed, or the sums insureds need to be increased then this will be part of the conversation.”
Brexit and the confusion it continues to create, has been all-consuming over the last two years and it threatens to remain so for many years to come. But that should not take the focus away from what brokers do for their clients on a daily basis.
Norrie Erwin, director at The County Group, says: “Brexit does need to be on people’s risk registers, and they do need to examine the potential impact to their business. For some the potential impact will be virtually nil, for others there is a substantial issue.”
He concludes: “If it does have an impact, then there is a discussion to be had about the changes they have made and/or are looking to make and how this affects their insurance programme. There are opportunities for brokers to be very proactive, but that is no different to normal and it is not different just because of Brexit. This is how brokers should be operating anyway.”
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