Leading brokers Willis, Aon and JLT on managing risks in retail

Modern business theory has much to say about how co-operation and co-existence sustain some sectors. 

Retail, however, is one area of commerce where competition is brutal and where, in the fierce fight for survival, old, new, big and small operators can be pushed out of business without mercy. 

Moreover, if anything, conditions are only getting tougher.

The economic problems of recent years have reduced consumer buying power and driven an increasing focus on price. This has resulted in the rise of the discounters at the expense of the big brands – a phenomenon that seems to have become a fixture, even as conditions improve on European high streets. 

Meanwhile, technology has opened up a new frontier as internet shopping becomes increasingly crucial. Shoppers now visit stores armed with smartphones and can instantly compare prices or even make a purchase online from a competitor after having checked the goods on the shopfloor.

Despite this, the sector remains huge. According to 2010 European Commission figures, retail services contribute €454bn to the EU economy, which accounts for 4.3% of the total size and employs 18.6 million people. 

Another phase in development? 

“Retailers have always had to evolve to survive,” says Kelvyn Sampson, industry practice leader, retail, at Willis. 

“Today’s economic, social and political environment is as challenging as ever before. “The sector has weathered the economic crisis better than expected and, although growth is going to remain slow in the next two years and possibly longer, there are green shoots of recovery in the retail sector. 

“However, tough competition in all sub-sectors, pressures on corporate social responsibility, the continuing pressure of new regulation and political instability, which is always a threat to complex supply chains, make the retail sector a challenging one. 

“Technological advancements have increased exponentially in the past few years and most retailers require a sophisticated omnichannel offering. With customer experience and convenience being key themes, there is a need to have significant capital expenditure in IT and logistics infrastructure.”

However, when it comes to insurance, the needs of retailers are still – initially at least – relatively straightforward. 

“Fundamentally, retailers are interested in insuring their property, premises, their employees and the fleets of vehicles with which they transport goods,” says Steve Redgwell,
managing director, Aon Corporate.  

“In addition, retailers suffer at the hands of criminals to an increasing degree.” 

The British Retail Consortium revealed in 2013 that its membership had experienced a nine-year peak in crime and organised fraud, with 600,000 incidents reported to the police and a total industry loss of more than £500m (€608m) from its shopfloors, warehouses and increasingly at the hands of cyber criminals.

“Claimants are coming up with increasingly clever ways to claim from retailers,… such as wrongful arrest for shoplifting for example,” says Alan Midson, partner, major risk practice, at JLT. 

“The rise in ‘no win no fee’ lawyers is only increasing this [problem]. However, retailers are becoming smarter at addressing this through technology, such as telemetrics in vehicles and better, 360-degree cameras in stores.” 

However, crime is always evolving and, as more and more firms adjust to doing business online, criminals are also adapting and changing their tactics constantly.

“Risk is always changing and we can see this happening currently as ever more retailers encounter problems relating to cyber attacks on their websites and internal systems,”
says Redgwell. 

“Retail has always had a focus on footfall, and so slips and trips have always been important,” says Midson.” But as time has gone on, the risks have evolved and cyber risk has become a hot topic. Ever since the end of last year, we have had more and more conversations with major retails about their exposure. They tend to look at it in terms of business interruption – what happens if their website is down and people can’t make purchases – but also in terms of loss of data. That is really scaring retailers, particularly after the recent breach at Target in the US.”

However, retailers are still hesitant about buying policies because they do not understand fully what they are buying.
“It can be a very nebulous product, the wording is often vague and the coverage can be limited,” says Midson. “It can be hard to justify to a struggling retailer why they should buy
a product.”

However, the risk of reputation loss from a major cyber risk is serious. “The rise of social networking is only increasing this,” argues Midson. “All major retailers are very hot on this; they all want to find new ways to mine data from social media and, at the same time, are aware of the accompanying risks. Cyber attacks place retailers on the back foot in many ways because the exposures they face are both tangible – denial of service attacks can stop websites from working – causing lost sales and business interruption losses – and intangible – brands can be seriously damaged as negative PR spreads”. 

In addition to the risk of business interruption posed by cyber risk, contingent business interruption (CBI) has also become a serious issue. 

“Standard business interruption wordings were simply not designed to cope with [the growing complexity of risk] and CBI is a growing area of interest to retailers and other manufacturers that would like to insulate their bottom line from such scenarios.” 

Business interruption

Business interruption is another area of retail risk where the complexity of the issues is often far ahead of the scope of cover – and retailers need to be rigorous in the way they analyse their cover. 

As a cautionary tale, Sampson cites the example of the Tottenham riots in 2011. “These culminated in millions being paid out by insurers and the police to businesses for their physical loss or damage,” he says. “But although many retailers were also compensated by their insurers for loss of profits following physical damage, those that had not suffered any damage and were beyond the usual proximity boundaries of a prevention of access clause – for example the West End of London – were not able to claim. Yet, their loss was as a direct result of the riots.”

However, the biggest risk to business continuity can often be found far away from home, namely in the shape of supply chain interruption.

The majority of retailers rely on complex, global supply chains operating to a just-in-time delivery schedule on wafer-thin margins. 

If severe weather, political unrest or any one of a range of problems affect a business’s suppliers, this could be very problematic, as shelves empty with no prospect of new deliveries on the horizon and competitors are left at an advantage.

“Clients increasingly look to ensure the integrity of their supply chain, looking at all aspects from the procurement of raw materials such as cotton for clothing, through to manufacture and distribution, warehousing and ultimately the shopfloor,” says Midson. 

“It’s no longer a case of simply adding up their properties and saying here you go, here’s your cover. You need to get a full grasp of the entire enterprise.” 

With manufacturers of goods or components now spread around the world, a flood in Bangladesh or a typhoon in the Philippines can quickly lead to a bottleneck in the supply to retailers. 

“This was particularly the case in 2011, when the Thai floods and Japanese Earthquake and Tsunami caused global supply chain failure in electrical goods and micro processors,”
says Redgwell. 

Understanding not only where essentials come from, but how they reach their destination, is increasingly vital – and to do that, businesses have to send staff out on the ground, who will need protection. 

“A lot of retailers are globalising into markets in the Middle East, China, India and a lot of retailers are nervous about their executives travelling overseas,” says Midson. 

It is not just the locations of suppliers that need to be considered, the route the goods take from factory to container, ship, train, lorry, warehouse and finally, shopfloor, are equally important.

According to Sampson, “while IT has become the brains of the business, logistics is the pulse”. 

“Slick operational management of the supply chain is a given for any successful retailer and disruptions can have serious financial consequences,” he says. “The insurance market is fragmented in its approach to logistics risks”. 

Sampson argues that although many insurance policies cover certain aspects of the supply chain, many of these overlap, including Marine Cargo, Political Violence, Supply Chain,
Terrorism and Trade Disruption Insurance. 

“Although all of these offer protection, they do not offer a total risk transfer solution,” he says. 

“Insurers would certainly make more traction and increase revenue if they were to consider solution-led protection – a single ‘one stop-shop’ cover to protecting a retailer’s logistics operations and supply chain”. 

Correct insurance

The supply chain also needs to be flexible to demands from consumers. As anyone who has tried to run a retail business through the recent run of unseasonal European summers, the floods and the late springs can attest, businesses have to adapt to survive. 

“There is hardly an annual report that does not mention the impact of weather on revenues,” says Sampson. “Unusual – ash cloud – unseasonal – wet spring – or extremely harsh conditions – Christmas 2012 – can all cause delays in transporting goods and can also keep customers away from stores. 

“Historically, weather risk derivatives worked on an indemnity basis and claims were notoriously difficult to adjust. The new improved method includes a fixed sum payable if a certain event or events occur(s) (double or triple trigger), but the premiums are prohibitive to make this an annual mainstream programme cover.”

The risk profile of retail is incredibly complex, but some brokers argue insurers are responding to their clients’ needs. “We have one of the most sophisticated retail sectors in the world and as a result the insurance market serves its needs well,” says Redgwell. 

“Well managed businesses will find that the market is competitive. However, we are not complacent. It’s incumbent on brokers such as us to identify needs among our customer base, such as the threat from cyber criminals or CBI and to create products and services that enable them to maintain and grow their businesses.”

Others, however, believe insurers need to do more. “Insurers need to spend more time trying to understand what retailers want from, say, a cyber policy,” says Midson. “A whole host of things are important. [Insurers] need to provide products and services that meet those needs. 

“Some insurers are far ahead of the game – AIG, for example, seems to have quite an appetite. Brokers need to be the ones bringing insurers and insured together. We also encourage our clients to look carefully at their existing cover to make sure coverage is not already available under their existing policy.”

In the end, however, insurers can – and indeed will – only do so much to mitigate risk, and retailers have to accept that some risk is beyond insurance. But how much? “This is a complex question and one that depends greatly on the appetite of the individual retailer or risk manager,” says Redgwell. “For example, retailers have faced substantial claims inflation from personal injury cases in the past decade and, as a result, the management of high-volume, low-value cases such as slips and trips by employees or the public is in many cases retained beneath a deductible with help from brokers such as ourselves on risk management and putting up a strong defence against fraud. 

“Of course, if insurance rates for employers’ or public liability fall enough to render this strategy insurable from the ground up, the approach might change.” Retailers, for their part, can do more to improve their cover. Where insurance remains essential, a proactive approach to cover can help reduce costs and claims. 

“Claims defensibility is a watchword in 2014 and retailers that can show they are taking a proactive stance on risk management will find an increasingly receptive insurance market when they come to renew,” says Redgwell. “Last year, the UK Enterprise and Regulatory Reform Act was passed, which has put retailers in a unique position to benefit from programmes that improve claims defensibility. Tasks such as record keeping; speeding up the time between claims notification and response, improved manual handling training and so on.”

On all fronts, the fight is fierce. Wherever they work, retail risk managers need to get engaged across their business and help their employers obtain the insurance necessary to transfer the risks that can be transferred and get the skills in place to manage those that cannot. SR

Expert insight: Hard times for retailers

There is no doubt in my mind that these are by far the most demanding and difficult times within living memory for many retailers. 

Although individual experiences may vary, the day-to-day challenges across the sector have ramped up to such an extent that risk managers need to work smarter than they have ever done to succeed. 

Many different factors have combined to produce a period of massive and very fast-paced change.

For a start, there is currently a huge oversupply, which has led to intense competition for the pound – or euro – in people’s pockets. Something further has intensified as many retailers are trying to expand into new areas, recognising, quite rightly, that to stay still could lead to their demise. 

Business legacy factors are a definite drag on many retailers. For example, supermarkets have, in the past 20 years, followed the strategy of accumulating more and more big spaces and land banks. Now the reverse is necessary and they are moving into more, smaller stores. What to do with all that land and the large buildings?

Cost pressures are intense, from raw materials to business rates, while consumer – and political – demands seem to grow and change  year on year

All these things make the space in which risk managers operate very difficult. But they are also, in a sense, very interesting. 

As risk managers, we deal with projects that are IT-led, logistics-led, supply chain-led, international-led; we are having to face new businesses challenges and with them new risks. 

Many of us now find ourselves in a situation where the business around us is expanding far faster than might be wise from a downside risk perspective but, at the same time, the upsides are too great not to do this, either because of the competitive advantage or the need to catch up.  We just can’t afford to lose out on opportunities and need to work differently.

Faced with change you need to maintain a deep understanding of your business. You have to be involved in the projects and be part of the project team. You need to have influence and understanding of the new spheres of operations. 

The risk manager’s job is all about communication: influencing, mentoring and educating. Information is key to our jobs and, without it, we can’t do anything. 

Being at the table is essential – only then can you work through these goals – identify and evaluate the risks as they emerge and decide how to mitigate them. 

Above all recognise the fact that you can’t lead a one-man crusade.
You need your colleagues to be involved. Identify the people around you who can be your champions and make sure you get those small wins that will help show people why they need to be on board. 

In an ever more risky environment the risk manager’s role is needed more than ever – your challenge is to demonstrate that fact in all you do.

Colin Campbell, head of risk management, Arcadia Group

Expert insight: The only constant is change

Retail is a business sector undergoing rapid change and risk managers working in retail need to understand that so much of their exposure exists well beyond insurance. In fact, I doubt that any insurance company would provide cover for some of the main risks that all have the potential to affect anyone on the high street hard:

·                Delivery shortages on key products that will not just result in empty shelves but may also invoke customers to go elsewhere and hence have an impact way beyond the immediate business interruption. This cannot effectively be insured for, but rather enforces a close relation to key vendors to “get in front of the queue” for hyped products.

·                Price pressure: one that cannot be pushed back as margin pressure. Customers now have more power than ever before, for example price comparison apps on smartphones force retailers to be competitive on the price of their products. These apps are here now and are improving by the minute.

·                Competition is now totally global and international chains everywhere are changing the competitive landscape on a constant and ongoing basis as mass retailers expand into new territories/countries.

·                The growth of e-tailing and m-tailing [mobile trading] will change the retail landscape – there is no doubt about that – and retailers must ‘join or die’. Global entities such as Amazon are moving into or adding new categories on a frequent basis, while WalMart, Tesco, Migros, Carrefour and others are supplementing their bricks and mortar business with e-tailing options.

The only constant is change, and even that is changing with an ever increasing rate at which change occurs. This means that retailers must increase their adaptability to avoid ‘falling behind’. What is ‘good’ performance today may be mediocre tomorrow.

None of the above examples are currently insurance issues, they are business issues. It’s not that they cannot be insured – anything can if you are willing to pay the price – but as there is no liquid market for an insurance on, say, competitor infringement or loss of profits owing to consumer price comparisons, such insurance policies may be prohibitively expensive to hold.

The strategic choice is to focus as it becomes harder and harder for the retailers to have, maintain and build a distinctive competitive advantage while, at the same time, it becomes more and more important as more products are getting increasingly commoditised. Retailers must know ‘why’ customers should go there.

Retail businesses must be part of a new way of doing things and hence be more intelligent than ever. Risk managers should adapt and be prepared to be an active part of the solution by enabling effective uncertainty management and hence build new opportunities and manage the risks taken as strategic partners to management.

Hans Læssøe, senior director, strategic risk management, Lego