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EXCLUSIVE Where does food sector fit into Mactavish report?

03 July 2012

A new report on the UK manufacturing industry issued by insurance governance experts Mactavish highlights a dangerous confluence of increasing claim disputes, inadequate risk governance on the part of manufacturers, and the failure of brokers and insurers to provide fit-for-purpose protection to their clients. How has the food sector been affected?

Bruce Hepburn, CEO, Mactavish says the food processing sector has been disproportionately affected by insurance market difficulties in the past, for example by draconian cost increases in the early 2000s, and therefore needs to pay particular attention to the current warnings of a sharp decline in the reliability of policies.

''Our work across manufacturing points to a high incidence of innovation, which can serve to further undermine insurance cover, and the food processing sector is no exception to that – from evolving supply chains to more formalised and demanding contracting structures,'' says Bruce Hepburn.

''The challenge of addressing serious failures in the way insurance is arranged is one that food companies must take up themselves rather than rely on brokers or insurers to resolve for them – and upcoming changes to the principles of insurance law will make this increasingly demanding in the coming years. The food processing sector has been among the hardest hit in the past, and risks suffering the same fate again.''

On the day when the Law Commission publishes its final Consultation Paper for the first major shake-up of corporate insurance in a century, the report is the result of in-depth consultations with 140 manufacturing businesses across Britain over the past 12 months with examples of the individual risks, and systemic failings, which threaten the sector.

The Mactavish report is one of the Law Commission’s primary sources for its proposals.
The Mactavish report highlights the potentially critical oversights and blind spots that could see individual companies failing because an insurance claim is not paid out or is delayed longer than a company's ability to sustain its business. Confidence in the sector, and its continued recovery, would be significantly damaged by one or two high-profile failures, even as manufacturers demonstrate their ability to adapt in the face of recession.

The report states that: "The current assumption that insurance will simply respond when needed is inconsistent with the legal reality."

Some of the issues raised in the Law Commission paper are already being faced by manufacturers, the report shows, with many prominent firms’ current arrangements not standing up to scrutiny. One example is the shift in business models to include service provision as well as manufacture, thereby exposing companies to risks that are not understood or accounted for.

The Mactavish report analyses and explains the real-life impact of these legal failures on manufacturing, a sector which remains a vital part of Britain’s economy and hopes of returning to growth, and finds:
• Manufacturing & Engineering sector’s impressively innovative response to recession being let down by weak governance around risk and insurance leaving companies needlessly exposed
• Lack of proactivity from insurance industry brokers and insurers in keeping pace with change creating gaps in protection and driving an increase in disputed claims
• Insurance policies increasingly unreliable in respect of major losses with few aware of the problems or taking steps to address them
• Companies not geared up for the major coming legal reform announced today, the first to hit corporate insurance in more than a century.

The report warns that “most manufacturing businesses today remain needlessly exposed by addressable weaknesses in the insurance system, but usually do not find out until it is too late. The current economic climate has exacerbated many of the contributory factors.”

It goes on to conclude that “far more questions need to be asked by both insurance buyers in the sector and those responsible for risk at board level.”

The report details practical steps companies can take to protect themselves and meet the twin emerging demands of increased corporate governance scrutiny and the greater demands on businesses coming from insurance law reform. The Law Commission paper cautions that:
“We do not intend to produce a law which would protect businesses. Instead, we are seeking a “neutral” law that strikes a balance between the parties and which will impose reciprocal obligations on each”

Bruce Hepburn, CEO of Mactavish said: “The whole mechanism of corporate governance today neglects to recognise insurance failure as a large and increasing threat, with manufacturers facing especially dire concern as a result of its high rate of adaptation to current economic reality.”

“Legal reform is overdue, and the reliability of insurance policies in responding to major events is in sharp decline. But the law alone will not solve the problem - companies need to do a lot more to play their part and the thrust of reform is that company practices need a total rethink.”

David Hertzell, Law Commissioner, said: “The Mactavish reports are a very powerful description of the problems in today's insurance market. Policyholders, brokers and insurers all appear at times to ignore best practice. In our view this evidence highlights the need for clear up to date law to establish the parties’ responsibilities.”

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