EL nino

In recent times, UK manufacturers have been faced with a strong pound, protectionist approaches by the US market in its dealings with the European Union and an economy that has yet to start firing on all cylinders following the fallout from the technology boom and subsequent bust. On top of this they are also facing problems with their insurance costs.

Yet, insurers themselves have not been immune from economic conditions and the effects of ravaged balance sheets as a result of depressed equity incomes. Putting the two sectors together, given such conditions, was bound to cause trouble, with stories of companies failing to gain insurance or facing outrageous hikes in premium splashed across the pages of the national press.

Surely the so-called 'crisis' period for UK manufacturing, with employers' liability insurance in particular singled out for approbation, has now settled considerably as the market in 2004 has begun to soften. Does the UK manufacturing industry really still have cause to complain as it once did so vociferously?

Unfortunately, it would seem that UK manufacturers still harbour a grudge against the insurance industry. According to a recent study by the British Chamber of Commerce, the cost of EL cover has not stabilised and premiums continue to rise, increasing pressure on UK businesses.

EL cost increases

In a survey of 600 of its members, the BCC found that nearly three-quarters have experienced increases in their EL costs in the 12 months to September 2004, with one-third of those firms experiencing a rise of between 20% and 50% during this period.

According to David Frost, director general of the BCC, some 70% of those questioned have seen profits cut as a result of these increased costs and nearly one-third have been forced to cut investment. Manufacturing firms have been hit particularly hard, with 40% of companies reporting that EL costs threaten their long-term viability. Firms in this sector are already operating at the margins and EL increases threaten to tip them over the edge. The EL compulsory insurance market has clearly not stabilised.

The BCC claims that such increases have continued despite many of its members putting in place risk-assessment strategies, which have been flagged by the government and the insurance industry as the best way to combat the problem.

A spokesman for the Association of British Insurers is robust in defending the image of insurers: "We believe that the industry has reacted positively to the concerns expressed by many firms and their trade organisations on managing the cost of rising liability premiums. Higher premiums have been necessary to meet the cost of settling rising compensation claims, with the average compensation claim having risen threefold in the last five years.

"Insurers are very much aware of the impact that higher insurance costs can have on businesses, and want to work with them to manage these costs. Central to this is good risk management and, through the ABI's Making the Market Work initiative, the industry is actively encouraging firms to achieve standards of risk management that will widen their access to the liability insurance market."

He adds: "The ABI is also continuing to work on other aspects to improve the operation of the liability insurance market - this includes discussing with government how best to pay for long-term occupational disease claims and work this into possible reform of legal costs."

The insurers themselves are also keen to combat criticism that they are not acting in the best interests of UK manufacturers. According to a spokeswoman for Zurich: "Despite all of the difficulties surrounding the hard market we did not walk away from EL customers. We continued to underwrite new and existing business, and were the first insurer to guarantee to offer renewal terms on every risk. We set up Zurich Difficult Risks for businesses that were finding it difficult to acquire adequate cover in the market conditions.

"Zurich is not anticipating a sharp rise in price in the immediate future although much will depend on claims costs,"she adds, suggesting that if claims costs continue to rise they will feed into prices and that, ultimately, many of the problems affecting EL have not gone away. "The legal environment continues to evolve and this is anticipated to add to claims costs. Relatively new diseases such as stress and repetitive strain disorder, as well as things we do not yet know about, could have a severe impact on claims. Underwriters take into account a whole range of features when assessing price. The quality of risk management is considered but this is just one factor."

According to Jon Woodman, risk solutions director of Royal & SunAlliance, it is difficult to say what the 'market' is doing. He says: "In terms of rating, some lines of business are still increasing, others are flat and some lines in some segments are correcting downwards."

Woodman argues that the hard market has accentuated the difference between good and poor risk management. He says: "In the previous soft pricing environment, brokers looked for and achieved blanket reductions that had little relation to risk quality. Over the last two to three years, risk management not only became a pricing issue but a capacity issue and companies with poor risk-management records could not buy the stretch of capacity they needed. The impact has empathised the difference between good and bad and to 'decluster' pricing and conditions away from the mean.

He adds: "Companies have seen the value of investment in risk management - in a hard market the best will be able to complete their programme; in a soft market they will get the best price. It works in your favour whatever the phase of the cycle."

Best practice

Much of the responsibility for ensuring that the best practices of manufacturers are realised when it comes to premiums ultimately falls with the broker.

Brokers can know a client in much greater deal than the insurer and - in an ideal world - can provide a detailed and technical assessment of the situation.

According to David Wyatt, development director in Marsh's Risk Management Practice: "We continue to work closely with clients to build a robust risk-management plan. Benchmarking best practice is an important tool that we use to help build the framework and the metrics to enable clients to optimise the value of risk-management activity. The reduction in the frequency and severity of losses that good risk-management practice can deliver, can enable us to secure premium reductions and an improvement in the limits and cover that insurers will provide."

He cites as an example a manufacturing company that Marsh worked with and used risk-assessment techniques to target costly behavioural issues in the workplace, claiming that the introduction of procedures to reduce its absence rate from 9% to 4% drove down associated costs from £9m to £4.8m in one year. He also alludes to a chemicals company that has saved approximately £1.5m in risk-related costs by systematically identifying risks; producing a risk register to comply with stock exchange governance requirements; and centrally co-ordinating all risk-related decision-making.

Better deal for manufacturers

Wyatt is in no doubt that brokers are able to offer UK manufacturers a better deal. He said: "In terms of securing the lowest possible insurance premiums, brokers are able to articulate positive risk differentiation for companies that, for example, have a strong business continuity plan in line with the PAS 56 business continuity standards, the advantages of which include allowing companies to put downwards pressure on insurance premiums. Customers are increasingly looking for evidence that risks that could affect supply reliability are being properly managed, and this can give companies a new source of competitive advantage."

Not all are convinced, however, that brokers really are playing the part they could be when it comes to helping UK manufacturers. Such criticism is not aimed at their inclination or ability but is instead pointed at the fact that, with a changing broker demographic in the run-up to statutory regulation and the fact that many experienced brokers have retired or are looking to retire, there are simply fewer specialised brokers out there.

This is particularly true when it comes to the UK engineering sector, according to Martin Ball, underwriting and operations manager at Allianz Cornhill Engineering. "Specialised engineering brokers are very rare," he explains. "Often we do not receive sufficient information. That is because, two to three years ago, the number of specialised engineering brokers was 12 or 13. As we stand today there are only four or five; and that has not made it easy for us," he says.

He also paints a more subtle picture of the insurance market dynamic as he sees it explaining that the engineering sector is split into two sections, namely insurance and inspections, and that it is not necessarily running in tandem with the softening cycle.

"Inspection costs are rising in line with inflation in order that we can continue to provide the same level of service to our customers, which is important," he comments. "On the engineering side, however, insurance rates are generally holding up, but it is a small market as it accounts for approximately 4% of UK general insurance premiums. Certain sectors, such as computer insurance, are under pricing pressure but, for other areas such as construction and constructors' plans, prices are still holding up.

"On the manufacturing side, as clients become more risk-aware, alternative risk practices are being looked at and employed, such as increased deductibles," he adds. "But the market is not as soft as people think it is."

So what really is the truth for UK manufacturers at the moment when it comes to the purchase of insurance? The answer is almost certainly somewhere in between the claims of the BCC and the defensiveness of insurers and brokers. As underwriters accept, some lines of insurance, such as those for the construction sector, are still holding up fairly well despite what is generally perceived to be a softening market. But, as we approach another renewal season, it seems unlikely that such a discrepancy between manufacturing risks and the rest of the market can be maintained, especially as capacity continues to be plentiful after the sparseness of only a couple of years ago.

Improving conditions

As UK manufacturers may bemoan the torments that are inflicted upon them by 'greedy' insurers and brokers, their lot is actually improving. According to the Chartered Institute of Purchasing and Supply's latest survey, the rate of growth for the UK manufacturing sector has increased for the first time since July, with improvements in new business and employment the main drivers of the rise. CIPS's key activity barometer increased to 53 in October, up from an upwardly revised 52.3 the previous month, with any figure over 50 signalling growth. Although the pace of expansion is still well below that seen earlier this year, it offers more hope than official figures, with data from the Office for National Statistics recently showing a significant fall in factory output as soaring oil prices forced a surge in costs. Indeed, according to Roy Aycliffe, director of professional practice at CIPS, October was a month of 'robust growth' for the UK manufacturing sector.

With such encouraging news starting to appear, perhaps manufacturers will be less inclined in 2005 to criticise insurance costs? Well, one can always hope.