Gavin Wren, one of Lockton’s food and beverage insurance specialists, recently presented a webinar for members of the Dairy Industry Association of Australia. This article is a recap of the conversation where he explored the top risks, their impact on dairy businesses the relevant insurance considerations.
Risk first, insurance second:
The last few years have presented the dairy industry with a myriad of challenges and risks to navigate.
Policyholders with the most proactive attitude to managing their risks will always receive the best outcomes.
There is a fundamental principle of insurance which is to act as a prudent uninsured and if this sentiment was taken in its literal sense, and risk was managed as if there was no insurance to fall back on, it intrinsically translates to more favourable insurance support from the market.
So what are some of the top risks in 2023?
Employee risks, including staff shortages and health and safety.
Supply chain risks, including lead times, competition in the market, and manufacturing and delivery costs.
Inflation risks, including increasing costs and avoiding under-insurance.
Business interruption risks, including delayed operations, planning, testing and stakeholder engagement.
Climate change risks, including natural catastrophe exposure.
Employee risks and considerations:
Employers are experiencing a wide variety of employee-based risks which should not be compromised due to workforce challenges such as shortages.
For example, employers have legal duties and obligations to maintain the welfare of their staff. This may mean ongoing health and safety training, inspections or ensuring an adequate number of staff are on the floor.
When rosters are not well-considered, it can also leave staff feeling overworked which can lead to mental health illness and physical illness or injury. Workers’ compensation claims can also arise, creating further gaps in the workforce with staff who are unable to work.
Actions to take:
Take advantage of any insurer, broker, or lawyer-led workshops on all people risk topics such as mental health trends and understand any regulatory changes in workers' compensation legislation.
Injury management processes should be well developed and continually reviewed, paying attention to changes in legislation.
To attract and retain staff, prioritise ‘soft’ employee benefits such as corporate private health and wellness programs and provide access to an independent Employee Assistance Program.
New staff, including casual/labour hire, should be taken through a thorough induction process to reinforce safety and company values.
Aside from harnessing a positive work culture, being able to demonstrate effective management of your employee risks has a notable impact on your insurance.
Supply chain risks and considerations:
The dairy industry is not immune to a number of supply chain issues such as pallet shortages, availability of transport links, and access to key machinery and production equipment.
In 2023, supply chain complexities are no doubt better understood by the industry more than any crisis management plan could ever have anticipated before COVID-19.
Whilst insurance responses to direct COVID-19 related losses continue to be subject to legal interpretation, the indirect effects of supply chain failures have had a significant impact on the insurance market.
Actions to take:
Where critical machine components are manufactured overseas, the additional lead times should be accounted for. Teams should ask if the business can afford to invest in additional key spare part components.
Ensure customer contracts and penalty provisions are reviewed. Are the force majeure clauses wide enough? Do penalties relate to areas in control? Seek legal advice on how to mitigate possible liquidated damages and/or consequential losses.
Business Continuity Planning should consider all aspects of the supply chain. Undertaking mock scenario tests is the best way of stress testing the effectiveness of your plan.
Consider if there are opportunities for diversification to avoid over-reliance on major customers/suppliers.
Inflation risks and considerations:
Every business is experiencing the impact of inflation and the dairy industry is no exception, with rising costs in materials, energy and fuel, equipment, storage facilities, and labour hire. It seems dairy producers are being squeezed from all angles.
It's important to remember that these costs are also felt by suppliers and providers in the supply chain. This poses its own risk.
Inflation risks can also expose companies to potential under-insurance following significant increases to insured values such as buildings, contents, plant, and machinery.
Actions to take:
Obtain formal professional insurance values every three years which should be professionally desktop valued intermittently to avoid the risk of under or over-insurance. Certain types of insurance such as property and business interruption policies will often contain under-insurance provisions which entitle insurers to reduce claim settlements in proportion to the degree of underinsurance. This may be called co-insurance or the Average Condition and it serves to encourage policyholders to ensure that correct values are declared, and therefore a fair premium charged. Where a robust valuation process can be demonstrated, insurers may be amenable to the removal of underinsurance provisions under their property insurance policy.
Where the impacts of inflation, coupled with rising premium rates, put an unacceptable strain on the premium spend, consider areas of priority and even compromise. As an example, if there are imminent plans in the budget to upgrade any plant and machinery which is reaching the end of life or may be rendered redundant, perhaps this can be specifically and expressly excluded from the policy. Business Continuity Plans may factor in additional costs of expediting the plant and machinery upgrade or outsourcing particular functions.
Be aware of contractual insuring requirements, where failure in whole or part of your insurance policies can result in additional contractual breach consequences (e.g., financier insuring covenants, landlord lease covenants, etc.).
It’s important to maintain strong relationships with third and fourth-party businesses to avoid being left in the dark if any financial issues were to arise.
Linking back to employee risks, have remuneration incentives kept adrift with inflation as well as market pressures?
Business interruption risks and considerations:
Vulnerabilities can arise from the loss of insurable profit following an insured property damage event or loss. For example, unforeseen additional costs post-loss and damages to maintain business operations and supply, as well as the time taken to get back to trading levels that existed prior to the damage or loss (incorrect indemnity period), can cause complications.
Actions to take:
As with many dairy industry policyholders, buildings are often constructed out of combustible materials (EPS). In the event of a building fire, business interruption would be substantial. Retrofitting sprinklers is not usually cost-effective. There are many opportunities to structure business interruption cover, depending on priorities and premium tolerance levels. Gross profit cover is often calculated incorrectly as insurance and accounting definitions and methodologies differ.
With supply chain delays and labour shortages in construction, ensure that indemnity periods for your business interruption cover are adequate. Rebuilding/reinstating substantial damage is usually significantly longer than most insureds anticipate.
Maintain a strong awareness of your risk register and continually review and update your Business Continuity Plan to ensure that risks across the business (both insurable and not insured) are anticipated and mitigated as much as possible.
Regularly (at least once annually) check in with the board and senior management. Run through a mock ‘disaster’ response scenario to stress test the effectiveness of the organisation’s continuity plan.
Record and document findings. Insurers have comfort where BCPs are not just a ‘tick box’ and premium terms offered to recognise processes in place that could mitigate insured business interruption losses.
Climate change risks and considerations:
Climate change has had a serious impact on the global insurance market with increased frequency and severity of natural catastrophe events.
Exposures in flood zones, bushfire and/or wind prone areas will likely result in limited insurance availability - and in some cases outright exclusions. Supplier premises extensions will also be impacted.
Actions to take:
Be aware of contractual insuring obligations to ensure relevant stakeholders such as landlords, financiers, etc. are advised of material changes to your policies. Force majeure definitions and limitations should be negotiated in your contracts.
Gaps in your insurance should be understood and all reasonable measures put in place for loss control and mitigation strategies. Business Continuity plans should factor in disruptions throughout the supply chain and provisions made for ‘uninsured’ eventualities made where necessary.
Alternative risk transfer options such as parametric insurance should be explored. It may be possible to purchase top-up peril limit covers.
Be sensitive to the expectations of customers, suppliers, financiers, insurers, and government bodies around your ESG strategies. Employees are often attracted to responsible businesses.
Not all policyholders have the scale to justify in-house OH&S staff to manage people risks or in-house legal teams to vet contracts or endless funds to invest in continuous risk improvement capex.
Communication is key, and your brokers should be able to offer advice on how to best navigate specific risk issues.
There is a common theme across all the risks centred around preparedness. The importance of business continuity management, crisis management and/or disaster recovery planning cannot be underestimated.