Brexit stockpiling: the risks and underwriting issues

Stockpiling goods in the build-up to Brexit will create risk and underwriting issues and we’d advise all our clients to speak to us before changing their business practices.

We understand that many of our clients are concerned about the durability of their delivery chains, the instability of the pound and unclear trade tariffs after Britain leaves the EU. We have already seen evidence of companies stockpiling goods to counteract this uncertainty.

Many companies see it as the only way to weather the ‘Brexit storm’.

According to IHS Markit, February saw pre-production inventories rise to the greatest extent ever recorded, with almost 70% of businesses attributing the build-up of stocks to Brexit.

But stockpiling in itself creates a number of underwriting and risk issues.

The most immediate and obvious concern is that stockpiling may expose a business to underinsurance due to inadequate sums insured. On top of this, housing more goods and raw materials takes up more space. It’s important that businesses aren’t resorting to keeping those goods in rooms that aren’t equipped to house them.

On top of this, extra storage solutions will create additional security risks (more materials and stock in a location makes it a more attractive prospect for thieves) and fire risks (from electrical lighting and heaters).

Stockpiling also presents safety issues, such as slips and trips or falling items of stock if stored inappropriately.

Businesses should also be aware that when they feel uncertainty, those who they supply are feeling it too. We’ve already seen large scale factory closures in industries such as motor, and stockpiling should be done with precaution of the uncertainty around demand.

It’s important that you contact Romero if there has been any changes to your standard business practices, including stockpiling.

Call us today on 0113 281 8110.

Cyber Claims – An informative handout

Take a look at this informative handout on Cyber claims, put together by our own Technical Claims Manager, Stuart Dobbins. If you need any more advice on this growing risk, contact us today using the contact button at the top of this page.

Regulatory Cases and the Importance of Risk Management

We’re often asked how effective risk management can save time and money for our clients, as well as protecting them from legal action. 

As a responsible broker, we place avoidance of claims as one of our top priorities. An efficient risk management system not only helps to prevent claims, but the checks and documentation associated with effective risk management show that the defendant company have taken the adequate precautions to prevent risk. In court, that could be the difference between a claim being rejected, and a gross negligence manslaughter verdict.

In this article, we’ll go through some real-life examples of times when proper risk management has saved clients time and money. 

But first, here’s a brief explanation of how the Health and Safety regulation landscape currently operates.

Regulatory Intervention – Enforcement Authorities

  • HSE
  • Police
  • Environment Agency
  • Local Authority
  • Other

– Civil Aviation Authority
– Inland Revenue
– HMRC
– Office of Fair Trading/Trading Standards
– Fire Authorities

HSE

  • Mission statement: “The prevention of work-related death, injury and ill-health”.
  • Business Plan for 2017-18 is to reduce government funding and therefore ensure “value for money for the taxpayer”.
  • This means that the HSE is now mostly self-funded, and therefore it is in their interest to conduct investigations and raise actions against companies/individuals.
  • The cost implications are as follows:

– Fees For Intervention (FFI): These are HSE charges for investigating breaches and taking action to put them right.
– Proactive Inspections: These are inspections that lead to a Notice of Enforcement (NoC), prohibition or improvement notices for a material breach
– HSE hourly rates for the above are £129 per hour (from April 2018)
– The average fee is £700 – but several each month are over £10,000.
– HSE income from investigations was £10.1m in 2014/15. It was £14.7m in 2015/16. It will almost certainly have increased again when the next set of figures are released.

  • The trend is for increased Notices of Prohibition/Improvement to be served, and prosecutions are increasingly dramatically. As an example, since the amendments to the sentencing guidelines, there has been a 1000% increase in prosecutions against individuals (directors, managers), along with the corresponding action against the corporate entity.

Regulatory Authorities – Priority Cases

  • Fatalities
  • Inquests

-These will have an impact due to Regulation 28 reports submitted by the coroner. A Regulation 28 report is completed when the coroner is obliged to offer a perspective on a case wherein he has a legal duty to prevent further deaths. This becomes a public document and the client has 56 days in which to put right any issues raised by the coroner.

  • Catastrophic injury
  • All sectors, not just traditional high-risk industries
  • Individual offences
  • Evidence of a poor Health & Safety record, ie:

– Previous prohibition notices
– Previous HSE or local authority investigations

  • Poor culture
  • Lack of investment in risk management

The key point is that the HSE does not have to have been alerted to a serious incident for a decision to be made to investigate a company. Multiple RIDDOR report submissions could indicate to the HSE that a client has a poor Health and Safety and therefore an investigation is warranted.

Once on site, the HSE can investigate anything they so desire and are not obliged to limit themselves to the incident(s) that gave rise to their initial approach.

Practical Consideration and Risk Management

It has been ascertained that there is an increased correlation between a proactive approach to risk management and:

  • Avoiding prosecutions
  • Reduction in penalties and costs
  • Reduction in likelihood of individual culpability

The areas which would need to be assessed post-incident as part of a risk management review would be:

  • Health and Safety policy
  • Training
  • PPE
  • Risk assessments
  • Safe systems of work/permits to work
  • Contractors and visitors
  • Workplace and workplace equipment
  • Monitoring
  • Culture

Where evidence exists that individuals have ignored the application of effective measures, they are at a heightened risk of formal action against themselves as well as the company.

Cost Impact – Example 1

  • The employee of a client suffered a head injury after falling from a gantry.
  • The client immediately brought about swift and far-reaching improvements to their Risk Management procedures, before the HSE could issue any Improvement Notice. As such, by the time that the HSE had issued an Improvement Notice, the client had not only already completed the work required, but had gone even further in strengthening all areas of their Risk Management.
  • The potential fine in this matter was estimated to be £500k.
  • The cost of the post-incident actions taken by the client was in the region of £40k.
  • In the end, the HSE chose not to prosecute the client in light of their proactive approach to Health and Safety post-incident.
  • This meant that the client saved approximately £440k due to the action that they took, not including the potential legal costs that would have accrued during the prosecution process.

Cost Impact – Example 2

  • An employee suffered a serious injury at the client’s theme park.
  • The client accepted a breach and took swift and far-reaching steps to improve their Risk Management.
  • The court chose to fine the client regardless, as there had been six previous Improvement Notices issued against the theme park.
  • The court initially set the fine at £120k.
  • However, the court then reviewed mitigating factors in respect of the value of the fine, and concluded that:

– The company operated in a modest manner financially and the directors did not take significant salaries. As such the fine was reduced by 20%.
– The company employed a large number of employees in the local area, and an exorbitant fine would have put such employment at risk and therefore negatively impacted the local area’s economy.
– The company had done a large amount of work with community groups and charities to allow disabled children to attend the park. As such, the fine was reduced by a further 10%.
– Finally, the swift acceptance of responsibility reduced the fine by one-third, mean that the final total came to £57,600.
– This reduction of over 50% was entirely due to the pro-active approach taken by the client and the presentation of this approach to the HSE and the court.

if you’d like to speak to Romero Insurance Brokers for more information on the importance of effective risk management and health and safety protocol, call us today or send us a message via the contact form at the top of this page.

Brexit – What might it mean for UK brokers and insurers?

The Current Position

Under EU law, insurers which are based and regulated in one EU country may carry out insurance in any other EU country under Freedom of Services (FOS) regulations. This extends to include insurers from countries which are part of the wider European Economic Area (EEA) – Iceland, Liechtenstein and Norway and applies to all classes of insurance, including compulsory lines such as Motor TPL.

A broker which is licensed in one EU/EEA country may place business in any other EU/EEA country.

The FOS regulations thus provide a flexible and homogenous EU/EEA wide market for insurance, regardless of specific local insurance laws which may apply in any individual country.

The country-specific premium and other insurance related taxes must be levied on the premium applicable to that country, regardless of where the insurance is placed. So, for example, if a UK-placed policy covers UK and France, UK IPT must be charged on the UK portion of the total premium and French IPT must be charged on the French portion.

Premiums paid by a client in an EU/EEA country to an insurer based in another EU/EEA country are tax-deductible.

How has this been of benefit to UK brokers and insurers?

The ability to operate under FOS rules has allowed brokers and insurers which do not have their own operations in other EU/EEA countries to place cover across those countries without legal or fiscal difficulties. This has meant that smaller brokers and insurers have not needed to develop any local presence, thus saving the costs involved in building and maintaining such resources.

What will change after Brexit?

At this stage it is unclear, but there are different scenarios:

  1. The UK continues to operate under FOS rules
  2. The UK drops out of the current EU/EEA arrangement completely and can no longer operate under FOS rules
  3. Some partial arrangement is adopted under which the UK gets some degree of access to EU/EEA markets

It is impossible to predict what any compromise deal which might fall under no. 3 might look like. Initially, hopes were high that UK financial services businesses would be able to continue to trade freely across the EU/EEA, but this optimism now seems to have been misplaced and the “Chequers” proposal for a possible future trade deal refers to “goods” and not “services”. This implies that there might be “no deal” for insurance.

In the absence of any insight into what the negotiators might agree ultimately, we should focus on the best and worst-case scenarios.

Scenario 1

If UK brokers/insurers continue to trade under FOS rules, then nothing will change. The existing ability to operate without having to establish companies in other EU/EEA countries, or enter into reciprocal partnerships with local brokers/insurers, will perpetuate unhindered competition with those brokers/insurers which already have such international reach.

It is far less obvious, however, that the absence of a local broker/insurer capability is beneficial to clients, as their local managers will not have access to a local, face-to-face, same language service and difficulties may be experienced in providing key services such as certificates of insurance, contract vetting and claims handling. 

Scenario 2

Before considering how the removal of the ability to trade under FOS rules might affect UK brokers/insurers, it is necessary first to look at how EU countries currently treat the placement of cover with insurers outside of the EU/EEA. In that context, there is an accepted definition of such insurance, which is known as Non-Admitted.

Non-Admitted (NA) insurance refers to the placing of insurance outside the regulatory system of the country in which the risk is located. A NA policy may be one that is issued abroad, or one in which the risk(s) may be included in a global master policy by an insurer that is not authorised in the country in which the risk is located.

If the UK were outside of the FOS structure, then any insurance placed in the UK for a risk located in an EU/EEA country would be regarded as NA insurance and thus subject to the laws applicable in the individual country in which the risk is located.

Such local laws vary and would thus treat NA placements in a range of ways, including:

  • Generally, throughout the EU/EEA, local laws state that insurance may be written only by insurers which are authorized in the country in which the risk is based
  • Most countries require that compulsory covers such as Motor TPL and Workers’ Compensation/EL be written locally
  • In some countries (such as Belgium, France, Ireland, Italy, Portugal and Spain) the law states that NA insurance is not allowed for non-compulsory classes, but may make some exceptions – usually for marine and aviation
  • In other countries (for example, Denmark, Greece and Netherlands), NA is allowed for non-compulsory classes
  • The law in some countries is silent on whether a local buyer is obliged to arrange any non-compulsory covers with a local insurer. In a few, however, it is made clear that a NA placement may not be made by a local broker
  • Even where NA placements are allowed (or not expressly forbidden), premiums paid to a NA insurer are usually not tax-deductible
  • Placements with NA insurers, even where allowed, do not qualify for any protection by the regulator (and thus any compensation schemes) in the country in which the risk is based.

Consequently, if brokers/insurers in the UK were no longer able to place cover for a client with exposures in one or more EU/EEA countries, they would have to ensure that any future arrangement would be compliant with all relevant local insurance and taxation laws and practices.

Even where NA insurance might be allowed, or not forbidden, it would still be necessary to consider any possible negative impact of the loss of tax-deductibility of premiums and whether this would outweigh any savings achieved by not having local policies in each country.

In this scenario, the only truly safe way to ensure that cover for a pan-European client is compliant is to issue local policies which fulfil the requirements of local laws. This does not necessarily mean that a separate policy would have to be issued in each territory, as FOS rules would still apply to the remaining EU/EEA countries after Brexit. In practice, therefore, it is likely to be acceptable to have one policy (for any non-compulsory class) issued in the UK for the UK risks and one policy issued in an EU/EEA country for the risks in all other countries.

Many insurers have already established separate EU companies, through which they plan to issue EU/EEA policies after Brexit, and UK companies for UK policies.

Brokers will either need to set up similar structures to facilitate the placement of cover and provision of service to the EU/EEA subsidiaries of their UK clients, join established broker networks or develop partnerships with local brokers across the EU/EEA.

Those brokers which cannot ensure that their clients will have compliant post-Brexit arrangements will be at a significant disadvantage to those which can. At best they will lose some or all the clients concerned and at worst they may risk being accused of negligence for not addressing the issues. In the latter example, professional indemnity insurers are unlikely to be sympathetic, especially if the broker has made little or no attempt to ensure that their customer’s cover meets local standards.

What actions should a UK broker take before Brexit?

The best advice is to assume the worst!

If it transpires that the UK may leave the EU without a deal which allows brokers/insurers to place cover for EU/EEA risks under UK policies, and you are already doing this for any client, the following actions should be considered prior to next renewal date (especially if this falls after the date of the UK’s exit from the EU):

  • Ask the current insurer(s) how they plan to issue compliant local EU/EEA policies
  • If they will not, or may not, have the facility to do so, consider switching the cover to insurers which can – possibly mid-term
  • Advise the client of the options and possible need to change insurers
  • Do not enter into any long-term agreements unless you are sure that the insurer(s) will be able to issue compliant local cover post-Brexit
  • Establish relationships with local brokers in the countries concerned, if these do not already exist, and discuss the desired action and timescale for the issuance of new local policies and the provision of local service to the client’s local managers

For any new client, or one which is opening an operation in the EU/EEA for the first time:

  • Explain that you can only work with insurers which are going to be able to issue compliant local cover outside the UK (and, by implication, throw doubt on any competitor who might suggest using an insurer which cannot do this)
  • Alert any existing client that their new risks in the EU/EEA might necessitate a change of insurer – possibly mid-term
  • Engage the local brokers in the countries concerned.

Conclusion

  • The implications of any Brexit deal on the insurance industry are not likely to become apparent for some time and possibly not until after the UK leaves the EU
  • It would not be sensible to wait for clarity about any possible Brexit deal before lining up alternative plans for each client which may be affected
  • Do not renew any current FOS placement unless you are certain that this will not need to be replaced post-Brexit
  • If you have cover placed with an insurer which is not likely to be able to offer 100% support and compliance post-Brexit, make sure they will agree not to tie the client into a non-compliant arrangement
  • If you do not have knowledge about, or experience of, the placement or management of international insurance programmes which require the issue of compliant local policies and the provision of local broker service, consult with those who do