In fact, in a statement made in early May, the Bank of England warned that COVID-19 could trigger the most significant recession since records began with the latest forecast that the UK economy would shrink by 14% in 2020, assuming that lockdown restrictions can be slowly lifted as currently planned by the Government1.
The impact on UK firms is likely to be significant with loss of customers, periods of suspended trading and a growing rate of insolvency.
At the time of writing, most retailers and all non-essential businesses have closed doors due to COVID-19 and most cannot expect to recommence trading until mid-June. In these difficult times, cost control becomes a major priority. It’s more important than ever for businesses to take control of their costs to help them weather this storm. With the average profit margin in the UK at 9.3%2 for every £10,000 of lost revenue businesses will need to achieve an average saving of £1,270. A proportion of this will be achieved through savings in reductions of consumables, fuel, energy and for some, staff costs where headcount has been reduced or furloughed.
Taking short-term reactive measures are largely inevitable as businesses fight to survive. However, as the financial crisis of 2008/2009 showed, companies that deployed sustainable cost reduction programmes and implemented long-term new efficiencies significantly outperformed the competition with many emerging as strong and profitable.
It is impossible to predict with confidence how the COVID-19 crisis will unfold, with forecasts from renowned institutions and Governments changing week by week and providing little certainty. However there are practical steps businesses can consider to help protect them over the longer term.
Most UK organisations reacted remarkably quickly after the scale of COVID-19 became apparent and Governments around the world have taken decisive actions introducing a series of measures and business support packages. It is likely businesses will have realised savings in items such as travel, expense and the similar, plus workforce reductions, either on a temporary or permanent basis, but what else should a business examine?
Professional Services
Almost all organisations will have a dependency on professional advisors such as lawyers, accountants, property managing agents, HR consultants, IT, telecoms and insurance brokers. Businesses should consider what services are being utilised both during the current crisis and going forward. What changes initiated will require different advice/support?
- Are services being duplicated – e.g. helplines or document libraries? Many insurance programmes now include complementary services including legal advice/VAT & TAX/IT and HR helplines and many liability insurers provide complementary document and risk management libraries.
- What subscriptions are being paid – is the business purchasing additional and now unnecessary licences for software or service platforms (CRM, credit checking platforms), are membership fees being paid for services which are no longer needed?
- Has the business evaluated consolidating some property/facilities services in to a single contract and utilising facilities management IP/services?
- What are the break clauses in these contracts?
Examine your current insurance and risk outlay: Where can adjustments be made to contribute positively to cash flow / working capital?
Factors to consider to help reduce insurance spend
- Consider registering unused vehicles in motor fleets as off road via a Statutory Off Road Notification (SORN) declarations. In some cases, Gallagher has secured premium savings of up to 75% in vehicle rates if accidental damage is removed and cover is restricted to fire and theft only.
- Review the impact of furloughing staff in Employers’ Liability cover and consider adjusting the policies. It is preferable to agree now with insurers how policies should reflect furloughing staff.
- We would suggest that agreement is sought to exclude furlough payments from end of year declarations. Even if policies are currently non-adjustable it is worth discussing with insurers to amend the basis of cover. For example, at least one insurer has now agreed to make all policies adjustable at year-end and to exclude furlough payments from end of year declarable wage roll.
- As premium ratings applicable to manual work are generally higher, businesses should consider whether to re-categorise staff during the period that they are not performing manual tasks. If manual employees are currently unable to undertake certain duties and are undertaking clerical functions then it is worth considering re-categorising them as clerical employees during the period they are not performing their usual duties.
- Discuss with your broker the impact on policy limits, sums insured and estimates under current policy arrangements, e.g. turnover estimates. Whilst many policies are written on a flat basis it is worth discussing with your broker and insurers to see if the basis of premium can be reconsidered. In extreme circumstances it may be preferable to invoke cancellation clauses and rewrite policies on updated estimates or on an adjustable basis.
- Consider whether to adjust or temporarily remove unnecessary covers where appropriate e.g. travel insurance.
- Explore embracing technology: Telematics solutions (black box technology) can help reduce risk and therefore premiums. They can provide auditable feedback to help identify causality in the event of a claim. This access to analytics equals better claims management information and more recoveries. It also provides better intelligence for future risk management such as remedial action and driver training/identifying hotspots which leads to fewer claims and reduced premiums over time.
Many telematics solutions have also evolved to deliver feedback to the driver on driving style including aggressive acceleration, speeding, hard breaking etc. This feedback can alter behaviours and deliver:
- Premium savings due to more conservative driving and reduced accident frequency
- Reduced fuel consumption
- Reduced tyre wear
- Reduced repair and servicing intervals
Evaluate the risk in change
If your business has changed its working practices to realise new income streams/markets, adapted to changing customer needs or evolved practices to account for the restrictions imposed, have the risks associated with these changes been fully considered?
With the boom in virtual meeting platforms, many commentators anticipate a significant change for many industries with virtual meetings becoming far more common and in many instances replacing face-to-face meetings and, virtual networking becoming the new norm.
Is the business working remotely? Has new technology been acquired or developed in response to the current situation? If so, has dependency on data, systems and software and what an interruption to services, loss of data or other system compromise could do to the business and its reputation? Could cyber risk management support improve confidence in these changes and help in making future investment decisions? Would an insurance backed solution improve peace of mind and customer confidence?
Are you trading with new markets both internationally and domestically? If so, are the current insurance limits, indemnity periods and indeed estimates upon which these are based adequate, how would an interruption to the supply chain manifest in these new markets?
Do these changes create redundant protection within your current insurance cover that can now be removed to reduce premiums?
Consider your tolerance for risk
One way to control initial upfront premium costs is to increase the amount of self-insurance either by increasing deductibles or excesses or by setting up a more formal method of self-insurance funding, such as a captive/protective cell insurance vehicle. Similarly the excess or deductible levels that were agreed in the pre COVID-19 trading environment may have been tolerable and with reduced income may now be too big a burden to bare in the event of a loss.
Credit Risks
Many businesses will be looking to new markets, or new products and services to secure revenue and new customers, against the backdrop of economic uncertainty. Similarly to the need to deliver cost savings commensurate with margin, businesses being exposed to bad debt at this time can have significant consequences.
Trade Credit insurance is a financial tool to protect against a buyer’s failure or inability to pay its trade debts due to commercial reasons such as insolvency, protracted default or due to political risks that are beyond a seller’s control. Trade Credit insurance, can protect a seller by:
- Reducing the severity caused by a bad debt loss
- Preserving the balance sheet strength
- The bookkeeping burden is somewhat alleviated as this passes to the insurer
- Cash flows are protected, and loan servicing costs are reduced
Whilst there is no guarantee that insurers will accept a credit risk of a potential buyer, any decline will be based on a detailed creditworthiness assessment and this information will be provided to you as the client. This information is valuable as it serves as a key risk identifier and enables you to trade with additional insight.
Other areas to consider, whilst not having an immediate impact on premiums, include:
- Unoccupancy clauses in property programmes - ensure agreement has been sought to extend any unoccupancy warranty provision to ensure full cover remains in place.
- The impact on engineering inspections - ensure that your business remains compliant with statutory obligations (it is likely that a back log in inspections may result in delays in getting inspections carried out even after restrictions are lifted).
- Directors’ and Officers’ (D&O) – management may be under increased scrutiny during and after COVID-19 so it is important to maintain a robust D&O policy wherever possible.
Whatever the business and challenge, Gallagher has specialists globally with in depth sector knowledge and we would be delighted to assist.
1. https://www.bbc.co.uk/news/business-52566030
2. https://www.ons.gov.uk/economy/nationalaccounts/uksectoraccounts/bulletins/profitabilityofukcompanies/octobertodecember2019
