Wheels keep turning

In a speech this summer, Tony Woodley, general secretary of the Transport and General Workers' Union, said: "The UK needs manufacturing. We cannot survive as a nation of lawyers and business consultants alone."

But, Woodley says the UK is losing manufacturing jobs at a rate of more than 140,000 a year, claiming "in a generation, we risk becoming a manufacturing-free zone." However, it seems all is not lost. The government is taking notice and has set up a number of initiatives to try to boost the sector.

In 2002, it launched the Manufacturing Strategy, which sets out the actions required to create a high-value, high-skill sector capable of introducing new products and processes into the economy.

A recent initiative between The Department of Trade and Industry and the Secretary of State for Defence established the Defence Industrial Strategy. This puts a focus on promoting major defence projects to create manufacturing jobs.

The DTI's Secretary of State, Patricia Hewitt, recently announced a new manufacturing forum, which will be jointly chaired by Kevin Smith of technology and engineering firm GKN and Jacqui Smith, the Minister for Industry.

The forum will work with businesses and unions to drive manufacturing forward through an action plan.

From an insurance point of view, manufacturing remains of prime importance for most commercial brokers. Major heavy industry tends to be the domain of the nationals, while the SME sector is valuable fodder for the provincials.

But, large or small, brokers cannot expect an easy ride.

Kevin Pallett, managing director of Fusion Insurance, says manufacturing companies remain a core focus, but that brokers may well be expected to provide these clients with more advice, since insurance may only be granted subject to risk-management conditions being met.

He emphasises that the Fusion philosophy is not to underwrite by trade, but by the quality of management. And, in terms of manufacturing clients, he points out that Fusion will cover high-risk companies if they are well run. "Take the food industry. They were told to use certain materials to meet health standards, but this was a fire risk. It was an incredibly difficult situation to find cover and yet some have taken steps to improve risks and should be treated fairly by insurers," he states.

Composite panels

The composite panels issue within the food manufacturing industry has been high profile over the past two years, with most companies inflicted with massive rate rises - increases in the region of 88% have not been uncommon. To tackle the problem, the industry formed the Food Industry Panels Group, which produced a risk-management guide and this was followed by a new enabling body, the Industry Specific UnderWriting Agency. This is backed by £50m of capacity from a panel of insurers. Companies that meet prescribed safety standards will have access to these insurers.

While others have pulled out, Zurich has emphasised it will continue to underwrite food industry risks. The company has worked with the Building Research Establishment, which has been educating insurers on composite panels and their differences - some are a markedly higher risk than others.

Graham White, property manager at Zurich Commercial, says: "Not all panels perform poorly and the problem is about interpretation. We have been conducting our own investigations into risk management and passing this on to our underwriters and surveyors."

Likewise, John Woodman, for Royal & SunAlliance's Risk Solutions division, says his company has remained a provider in the food manufacturing sector.

"The costs soared because there have been a high number of total loss claims. But, there are different types of panel being used and the quality of risk management varies. We have our own team of engineers and surveyors in-house - Global Consulting - and they have helped us assess the risks. We find there are well-managed food manufacturers out there, which would be better for us than a badly managed retail client, for example."

Risk management is crucial for all types and sizes of manufacturer and has led to a growth in fee-based work for brokers able to offer consultancy services. According to David Roberts, managing director of Aon's Risk Management Services: "Underwriters will not pick up the pen unless they know how a business risk-manages itself. Insurers that insure major manufacturing concerns, such as AIG, XL, Chubb and Zurich, all demand a lot more. It is a huge opportunity for those who want to advise clients."

Martin Fessey, director of European market and business development for commercial and industrial property insurer FM Global, says that, over the past decade, companies have been forced to use their assets more effectively and have developed approaches such as supply-chain optimisation, single-source supply and centralised manufacturing. "These approaches have taken cost out of the business but often increased the risks to the organisation by making them more vulnerable to any disruption to their operations."

He says FM Global requires its insureds to focus on the following three key areas: to identify the process and locations on which the business is dependent; to identify the risks that could impact these processes and locations; and to develop risk-management solutions to prevent or reduce the potential impact from these risks.

He adds that, despite the high-profile of risks like terrorism and employee malfeasance, it is traditional risks that companies still see as posing the largest threats. The 2004 Protecting Value Study: Managing Business Risks, conducted by FM Global, found that 69% of corporate executives cited property-related hazards as posing the greatest threat to their key revenue drivers. "Properly protecting business operations not only helps maintain business operations, it can also demonstrate to insurers good risk quality. This should result in better pricing and terms and conditions of the insurance programme," he adds.

Both insurers and brokers are taking on more staff to provide risk consultancy services and Roberts says, apart from recruitment, his division is offering clients a range of integrated solutions, which include deductibles and access to captives for medium-sized in addition to large companies.

Growth areas

Business continuity planning is a further growth area. Roberts said: "Take the recent case of the fire that gutted the Premier Foods factory in Suffolk. They had plans in place to ensure that manufacture could continue by setting up arrangements with other manufacturers as well as plans to get up and running again as quickly as possible."

Although liability remains expensive, Roberts says capacity for most manufacturing risks is generally not a problem. "It has eased, although underwriters are concerned about new laws concerning product recall, which affects manufacturers and puts more pressure on them."

New EU-wide rules were introduced at the start of the year to improve the safety of consumer products. The revised General Product Safety Directive concerns safety controls for all consumer products, except food. It covers products such as sports equipment, toys, cigarette lighters and most household products such as textiles and furniture. Manufacturers and distributors are now legally obliged to inform the authorities if they conclude a product they supply is dangerous. They will then have to work with the authorities in tracing dangerous products and taking them off the market. If necessary, companies can be required to organise a product recall. Clearly, any company that fails to adhere to this could face legal action.

Philip Wright, chief engineer for Allianz Cornhill Engineering, says there are increased requirements for risk assessments, both statutory and to ensure insurance is available. "There are a number of new directives - either here or on the horizon - that affect manufacturers. These include changes to the energy performance of buildings - companies need to cut down on carbon-dioxide emissions to stop greenhouse gases. Then there are updated laws linked to working at heights, which again could affect companies. Likewise, asbestos safety rules remain an issue for many firms."

While Allianz Cornhill does carry out inspections on heavy industrial operations - Wright cites a sugar refinery as a recent example - there has been growth in the number of smaller operations being inspected.

"Many will have fork-lift trucks or lifting equipment that require checking This has probably increased when compared to pressure or electrical testing. I would not agree that the UK manufacturing sector has collapsed; certainly engineering inspection providers and insurers are busy, and my feeling is that there are a large number of firms out there in a robust state."

Current trends

Current trends in UK manufacturing are moving away from traditional heavy industry to smaller, innovative and high-quality operations. For example, there are serious problems facing automotive manufacturer Jaguar, and vacuum manufacturer Dyson moved its operations to Malaysia, with the result of 800 job losses - although it retains its small research and development operation in the UK.

Pressure from low-cost economies such as China remains, but plenty of manufacturers are surviving here. They are using lean techniques and have the intellectual property and design techniques to keep them ahead of the competition. Many operate in niche markets and sell higher-value goods - such firms are seen as a good long-term bet and may well attract overseas investment. Fashion house Prada paid back £108m in 1999 for family-run Church's Shoes, for example, which remains based in Northampton.

But, just because a manufacturer is smaller and does not have its own in-house risk managers, does not mean it can avoid having an effective risk-management strategy in place.

Pallett says one of the main problems with some smaller manufacturing concerns is the lack of documentation procedures. "Insurers are now taking liability claims far more seriously. There have been cases when they have given in too early. An employee might only have sustained a cut finger but, if the claim is exaggerated, there is little the insurer can do without proper evidence."

He says the solution has to go beyond just conducting initial surveys.

"It is about working closely with the broker and setting up the right way of working with the buy-in from managers and staff. Training is vital and we ensure our surveyors have face-to-face meetings to ensure everyone is clear about what is necessary. Too often, an insurer will send a surveyor who will simply draft a lengthy report, which will not be acted on."

Brokers play a vital role in communicating with clients. Woodman says more brokers are now providing manufacturing clients with business continuity services. "The broker is the central point and insurers will find they gain most where the broker has a continued involvement with the client. Through our broker initiatives we look to try and find out what they want from us and how we can target their markets effectively."

Although manufacturing has struggled over the years, recent figures suggest there has been some improvement of late. The Chartered Institute of Purchasing and Supply said its index, based on responses from 620 companies, rose to 53.0 from September's 52.3 on a scale where a number over 50 represents expansion. It said the expansion was driven by growth in new orders and jobs, continuing a period of expansion stretching back to July last year.

As Woodley concludes: "Manufacturing is not just an economic question; and not just an issue for the business pages. It is an issue at the heart of what we stand for - of our class, our communities and our culture. All are being put at risk by the sweep of an accountant's pen - frankly, by corporate greed. How else can it be described when profitable companies head east?"

If the UK loses more manufacturing industries overseas, the insurance industry too will lose out. Brokers and insurer staff will undoubtedly be hoping that the slight improvement that was recently indicated will be a sign of better times to come.

MANUFACTURING IN THE UK

- Manufacturing represents one-sixth of the UK's economy.

- It is responsible for around two-thirds of all UK exports.

- It generates around 3.5 million jobs directly - and millions more through the supply chain and related services.

- It is responsible for around 75% of business research and development.

- It is a key generator of productivity in the wider economy, through introducing new products and processes.

Source: Department of Trade and Industry.