Aon Risk Solutions National | Retail & Wholesale Practice
Retail and Wholesale Inperspective In this issue p3 Insurers relax on reverse credit for retail supply chain p6 Crisis consulting now a genuine option for recalls p7 US port strike highlights risks for retailers p8 Meet the experts
Issue 3 April 2015
Welcome to this Spring 2015 edition of Inperspective; Aon UK’s review of the risk and insurance issues facing retail and wholesale companies. Since our last update, the industry has experienced a continuation of the softening insurance rates at renewal which has become a recurring theme for the retail and wholesale markets. Well run businesses can expect favourable terms in key lines such as property where 35% of the industry’s premiums are spent. As our data shows, buyers typically experienced a fall throughout every quarter of 2014 and that trend looks set to continue this year after a relatively benign winter resulted in fewer weather-related losses. GBR Retail and Wholesale Trade and Property Change in Rates on Renewal 0.0% -1.0%
-0.30%
-2.0%
-1.73% -2.15%
-3.0% -4.0% -4.14%
-5.0% Q1 ‘14
Q2 ‘14
Q2 ‘14
Q3 ‘14
Source: Aon GRIP™
Perhaps more significant, is the even sharper fall in employers’ liability rates. Almost a 10% quarterly fall between October and December 2014 could indicate a climate of positive change, which is particularly welcome given risk managers’ typical challenges against personal injury claims.
Risk. Reinsurance. Human Resources.
GBR Retail and Wholesale Trade and Property Change in Rates on Renewal 2.0%
0.67%
0.0% -2.0%
-1.21%
-2.15% -4.0%
-4.14%
-4.59%
-6.0% -8.0% -10.0%
Source: GRIP™
-8.55% Property
Employers Liability/ Workers Compensation Q3 ’14
All Products
Q4 ’14
In addition to the usual Inperspective data analysis from Aon GRIP™, we have also analysed a range of challenges facing retailers and their wholesale suppliers as the market continues to reshape itself across the distribution chain. Aon Claims expert Andy King reveals how retailers that are growing fast and want to continually release new product lines, have come unstuck when they fail to calculate the cost of business interruption on their business. On the cash flow side, conditions have continued to challenge high street retail chains with corner shops and convenience stores sometimes struggling to meet their obligations. Barrie Watson, Aon Trade Credit’s Executive Client Director of Special Products, says that companies in retail distribution are increasingly using insurance market capacity secured against themselves, giving suppliers an added incentive to do business with them. Meanwhile, one of the most significant supply chain disruption stories of recent years continues as truckers and longshoremen downed tools during February and early March. The impact on UK retailers is unclear, but as Vince West, Head of Aon’s Business Continuity Practice explains, these events have highlighted a genuine need for scenario planning. And finally, product recall challenges remain front of mind for many retail and wholesale risk managers. Aon’s Kary Yates reveals the latest market dynamics and trends amongst this close-knit insurance market. We hope you find this edition of Inperspective a useful resource and invite you, as ever, to get in touch with any questions you may have.
aon.co.uk/retail-wholesale Inperspective | Retail and Wholesale | April 2015 FPNAT.113
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Insurers relax on reverse credit for retail supply chain Executive Client Director at Aon Trade Credit, Special Products, Barrie Watson explains that smart retail and wholesale firms are enhancing their credit and gaining more support from banks by implementing reverse credit schemes.
Barrie Watson Executive Client Director Aon Risk Solutions | Trade Credit
The purpose of credit has always been clear; to enhance a business by smoothing cash flow and enabling companies to borrow and grow. Credit insurance on the other hand has had a less favourable press after financial crisis scandals saw cancellations damage trust significantly. Seven years on and the tables have turned again. The relationship between credit insurance and banks’ lending facilities has become closer so banks are increasingly prepared to offer credit with the right protection in place. Sectors like retail, in which unpredictable market conditions can challenge the cash positions of both suppliers and customers, have begun to benefit from a growing trend in reverse credit insurance. This is a relatively new method in which buyers, typically in retail distribution, are approaching the insurance market to secure capacity against themselves which they can then offer to suppliers as an incentive. Historically it would have been the supplier’s decision to buy credit insurance against their customer as a protection against bad debt. But in today’s fast moving environment insurers have come round to the idea of retailers themselves offering suppliers the opportunity to ‘credit enhance’ them. The net result is that suppliers are happier to extend credit terms to their customers and retail markets where market dynamics are particularly challenging can receive some welcome protection. Insurers previously had concerns at the potential moral hazard and insurable interest implications of reverse credit insurance, but the market has relaxed its attitude. In 2015, retailers know that their supply chain has to be robust. The risk of supplier insolvency is a key exposure so the growing influence of reverse credit insurance is providing genuine benefits which at present outweigh those previous concerns. For further information contact Barrie Watson. Barrie Watson +44 (0)20 7086 0356
[email protected]
aon.co.uk/retail-wholesale Inperspective | Retail and Wholesale | April 2015 FPNAT.113
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Faster retailing demands generate BI dispute potential Consumers’ expectations of fast fashions and catwalk styles on sale ASAP, are creating business continuity challenges for retail risk managers. Inperspective talks to Andy King, Head of Claims and Risk Accounting MENA at Aon, who says nowhere is this truer than when a supply chain fails and retailers seek to cover their business interruption losses. Andy King Head of Claims and Risk Accounting | MENA Aon Risk Solutions | Global Risk Consulting
With the latest British Retail Consortium figures showing year on year increases in sales1, driven by continued double digit rises at the online checkout, the sector is responding well to consumer demand. Same day delivery and multi-channel availability mean UK consumers have quickly become used to their newfound access to the latest goods and services. However Andy King, Head of Claims and Risk Accounting MENA (Middle East & North Africa) at Aon says some fast growing retail and wholesale companies, do find themselves particularly exposed to supply chain risk; particularly those operating from single sites who rely on launching new products and new collections outside of typical seasonal cycles to stay competitive. “It’s true of any business that without careful planning you can be a victim of your own success. Retailers that build their business model around being nimble enough to get products to market quickly create an inbuilt business interruption exposure for themselves.” Andy has worked on a number of BI claims in the past year in which product launches had not been adequately defined in the original underwriting presentation. “You can only imagine what kind of pressure a delayed product launch will cause a retailer. Being first to market has never been more important, and if a supply chain failure occurs, many retailers have little to fall back on other than their BI cover. As the experts in handling supply chain losses we have also become the go-to group within Aon to handle BI reviews. Our experience in analysing policy wordings, calculating exposures and the fact that we are regulated by the FCA means we can advise on all aspects of supply chain exposure and risk transfer. We are a unique practice in this space within Aon and I am pleased to say that our colleagues have recognised this and are referring more and more supply chain reviews to us.”
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ouble-digit ecommerce growth keeps D UK retail sales positive in January: BRC – Source: Internet Retailing
Triggers for BI losses are extremely varied, and Andy says the prudent measure is to conduct a BI review which costs and monetises the total impact. “A forecast should be built into the retailer’s estimated maximum loss so that when a BI claim is brought there is no doubt as to what you’re going to be doing in the event of a claim occurring.”
aon.co.uk/retail-wholesale Inperspective | Retail and Wholesale | April 2015 FPNAT.113
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Claims preparation Similar to product recall, in which crisis consultancy is increasingly being built into retailers’ policies, Andy says claims preparation is also on the menu. “Professional advice for clients so that they don’t have to devote management time in the event of a claim is an important consideration for many retailers. By simplifying the process of quantifying and documenting losses we are guiding risk managers on what steps they should take to ensure that restoration is achieved and we deliver a satisfactory outcome.” For further information contact Andy King. Andy King
[email protected]
aon.co.uk/retail-wholesale Inperspective | Retail and Wholesale | April 2015 FPNAT.113
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Crisis consulting now a genuine option for recalls A downward push on pricing has encouraged insurers to innovate, with crisis management consulting a helpful option for retailers. Aon’s Kary Yates highlights the latest market trends.
Kary Yates Team Leader | Crisis Management Aon Risk Solutions | Global Broking Centre
Market dynamics shifted again in 2014 toward increased competition and new entrants at Lloyd’s at the beginning of 2015, while global insurers also eyed product recall as a profitable business line leading to flat and in many cases, downward pressure on prices. Where retail and wholesale company turnovers are increasing, market appetite is strong for the best accounts, while decreased rates of up to 10-20% are being seen on renewals for the most attractive businesses. Wordings vary widely and clients have to be aware of the advantages and disadvantages of moving from one carrier to another, however terms and conditions have remained quite stable across Aon’s portfolio. This has presented an opportunity for us to highlight the benefits of enhancements to market wordings which have included adding sub limits for claims preparation expenses utilising Aon’s complex claims teams and higher sub limits on rehabilitation expenses. In addition, crisis consultancy is becoming a key aspect of the product recall armoury and with a 5% standard bursary (of net premium) available for clients to spend with their insurer’s crisis consultant, risk managers can take some comfort by having that expertise available to assist them in the review of their supply chain management, business continuity and recall management plans. On the claims side there were fewer limit losses than we saw in 2013, but a general increase in the number of recalls and an associated rise in costs is being driven by more regulation, greater media attention and more stringent contractual obligations being passed down the supply chain. For further information on Product Recall contact Kary Yates. Kary Yates +44 (0)20 7086 4411
[email protected]
aon.co.uk/retail-wholesale Inperspective | Retail and Wholesale | April 2015 FPNAT.113
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US port strike highlights risks for retailers
Vince West Head of Business Continuity Practice Aon Risk Solutions | Global Risk Consulting
One of the most significant man-made supply chain disruption stories of recent years made headlines as truckers and longshoremen on America’s West coast downed tools during February. Data on the impact for UK retailers is hard to come by, but as Vince West, Head of Aon’s Business Continuity Practice explains, these events have highlighted a genuine need for scenario planning. As one of the most singularly uninsurable perils, strike action is omnipresent as an exclusion on most policies. The fact that industrial action has so many complex variables; from their potential timescales to the very real likelihood of acrimonious disputes, there is so little chance of predicting the outcome that insurers give the picket line a wide berth. Nevertheless, they are hugely impactful. On 26 February the Financial Times reported that retailer GAP was forecasting a 13% hit related to the delayed merchandise that was “sitting in West Coast ports”. With almost 40% of all imports and exports into and out of the US going through the Oakland and Long Beach Ports, the current estimated cost of this particular dispute has been calculated at $2bn per day according to reports by supply chain consultants Elementum. Of course, the fate of 20,000 longshoremen in California might seem somewhat far removed from life in the UK, but moving goods quickly around the world is the cornerstone of supply chain management. Wholesalers exporting to the US may have had little opportunity to insulate themselves from the worst. Capacity is quickly exhausted when alternative freighting options are few and far between. Some high value manufacturers in markets such as electronics have switched to air freight, but costs are prohibitive.
Lessons to learn With memories still fresh of French truckers blockading motorways on both sides of the English Channel in 1997 and 2002, the potential for distribution to come to a standstill is real. While it is unlikely businesses can negate the entire impact of that type of event, arrangements on shipping, contractual protections and flexible commercial relationships with hauliers can be the difference between a bottleneck causing asphyxia or allowing your company to breathe easy. For further information on Business Continuity Management contact Vince West. Vince West +44 (0)20 7086 0734
[email protected]
aon.co.uk/retail-wholesale Inperspective | Retail and Wholesale | April 2015 FPNAT.113
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Meet the experts David Crofts is Managing Director of ARS UK Global Risk Solutions with responsibility for bringing our consulting led broking and servicing proposition to ARS major accounts. David joined Aon in December 2010 from Cadbury where he held a number of international roles over 12 years including Group Risk and Property Director based in the UK.
David Crofts Managing Director | UK Aon Risk Solutions | Global Risk Solutions
He is based in London focusing on alignment of Aon’s risk consulting proposition with our Global broking and servicing capability in order to deliver a market leading approach towards major clients. David also acts as the Senior Account Manager for a number of clients in the UK. He is a graduate of Nottingham University and holds an FIA diploma in Actuarial Analysis and Techniques.
Andy King is a Chartered Loss Adjuster with 32 years’ experience at handling major losses both in the UK and abroad. He has been involved in some of the largest losses within the London market. He has also carried out a number of expert witness assignments in respect of both insurance and commercial disputes.
Andy King Head of Claims and Risk Accounting | MENA Aon Risk Solutions | Global Risk Consulting
Andy has gained a wide experience of dealing with large and complex insurance claims, particularly in respect of business interruption across a wide range of industries, including power, energy, petrochemical, hospitality and leisure, food and beverage, and metal industries. In addition Andy has experience in managing and calculating product recall claims and putting together proofs of loss in respect of fraud and misfeasance losses. He has appeared as an expert witness in arbitrations and court proceedings and has been involved in managing difficult and disputed claims, working closely with lawyers and other experts. Andy has been involved in managing large teams and setting strategic direction and goals. He is involved in mentoring programmes for graduates. Andy has carried out numerous lectures throughout the UK and abroad on business interruption and major loss topics. He has appeared on BBC Radio 4 commenting on insurance matters.
Barrie Watson Executive Client Director Aon Risk Solutions | Trade Credit
Barrie Watson has over 17 years’ experience working with a number of broking houses including Rattner Mackenzie Ltd and Arthur J Gallagher. Barrie has experience working with international corporations designing and placing trade credit and political risk, including structured trade credit, programmes across Asia, Europe, Latin America and the Middle East. He has also worked on projects with the Export Credit Agency PT ASEI – Indonesian, designing beneficial trade finance facilities for exporters. Barrie also places innovative surety facilities for clients including Deductible Guarantees and Deferred Consideration Bonds. He has a BA (Hons) in Risk Management.
aon.co.uk/retail-wholesale Inperspective | Retail and Wholesale | April 2015 FPNAT.113
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Vince West has considerable experience formulating and advising clients on their respective business continuity strategies and has been engaged on business continuity projects with many leading organisations. His extensive experience of business continuity management has been deployed across sectors including Retail, Petro- Chemical, Telecommunications, Banking, Finance and Insurance, Defence, IT, Publishing, Food Manufacturing, Regional Development and other Government Agencies. Vince West Head of Business Continuity Practice Aon Risk Solutions | Global Risk Consulting
Kary Yates has 29 years’ experience in producing and placing property and casualty business with emphasis on product recall and contamination since 2002. Kary has 14 years broking experience in the London market, including Lloyd’s of London and the London company market. Kary has a number of qualifications in food and drink including a Level 2 and 3 in Food Safety Supervision for Manufacturing.
Kary Yates Team Leader | Crisis Management Aon Risk Solutions | Global Broking Centre
aon.co.uk/retail-wholesale Inperspective | Retail and Wholesale | April 2015 FPNAT.113
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About Aon Aon plc (NYSE:AON) is a leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 66,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world’s best broker, best insurance intermediary, best reinsurance intermediary, best captives manager, and best employee benefits consulting firm by multiple industry sources. Visit aon.com for more information on Aon and aon.com/manchesterunited to learn about Aon’s global partnership with Manchester United. Aon UK Limited is authorised and regulated by the Financial Conduct Authority. Aon UK Limited Registered Office: 8 Devonshire Square, London EC2M 4PL. Registered No. 210725.
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Risk. Reinsurance. Human Resources.