UK retail update 2016A review of insurance market conditions for buyers and risk managers

Aon Risk SolutionsNational | Retail Practice

Risk. Reinsurance. Human Resources.

Table of Contents

Introduction – Guy Malyon Head of ARS UK Broking, London . . . . . . . . 3

Property – Is your distribution centre actually your biggest store? . . . . 5

Your employees and the public – A stable market . . . . . . . . . . . . . . . . . 7

Your vehicles – The end of whiplash? . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Your cash flow – Insurers relax on reverse credit for retail supply chain 10

Product recall and crisis management – Avoiding drama . . . . . . . . . . . 11

Cyber liability – Message getting through . . . . . . . . . . . . . . . . . . . . . . 12

The outlook for claims – Slow pace of reform . . . . . . . . . . . . . . . . . . . . 13

Aon Risk Solutions 3

Introduction – Guy Malyon, Head of ARS UK Broking, London

For a company like Aon, sectors like the retail and wholesale trade are our life blood. The industry employs 4.4 million people in the UK1 and we are proud to work with many of the trade’s leading companies.

In 2015, the Aon Global Risk Management

Survey revealed how increasing competition

remained at the top of the industry’s list of

concerns, but the potential for damage to brand

and reputation is now second, having risen up

from seventh place in the previous survey.

Like any responsible supplier, we know that the

answer to delivering a good service is to ensure

our customers are fully furnished with the facts

that may influence their buying decisions. In this

report, we consider how these factors translate

into the risk profile of UK retail and how they

may influence insurers to underwrite them at a

good price, or lower, than last time around.

Competition everywhereRetailers and insurers are to an extent navigating

the same economic waters and competition is

intense. The insurance industry is experiencing

deflation of its own as rates across motor, property

and casualty (60.7% of total retail industry

insurance spend2) have fallen on a combined

basis meaning a broadly positive picture for

buyers with many expecting stable prices in

2016 after a year in which renewals frequently

achieved discounts (see tables overleaf).

Insurers themselves are looking towards

economies of scale and 2015 was a year in which

mergers and almost-mergers took centre stage.

A surplus of capital and challenges in achieving

top line growth by insurers are considered as the

main forces which drove the likes of XL Insurance

and Catlin together in a £2.5bn takeover in March

2015. Shortly after, Ace surprised many with its

acquisition of Chubb for $28.3bn in July 2015, with

similar reasons cited as a driver for this transaction.

Arguably the most significant deal for retailers

in the UK had it happened, would have been

the acquisition of RSA by Zurich Insurance

The potential £5.4bn transaction would have

influenced the programmes of many buyers in

the UK and refreshed memories of the M&A

fever which saw names like General Accident and

Commercial Union become CGU before quickly

being swallowed up by Norwich Union (now Aviva).

Many of the same economic indicators exist today

as they did when UK insurers consolidated in the

late 1990s and early 2000s. With today’s players

struggling to push through the kinds of prices

they might prefer to charge, it seems inevitable

that partnerships will once again seem favourable.

Options for buyers?While price reductions are available, there is more

opportunity in 2016 to enhance cover and add new

products to a programme. As retailers continue to

suffer seasonal losses, these products which pay

out based on a pre-defined ‘tolerance’ to climatic

conditions are making increasing amounts of sense

to buyers and finance directors alike.

Risks on the horizonPeak period challenge

Peak period and ‘event-based’ trading have

become key issues for retailers. In 2014 Black

Friday cemented its position in the annual sales

calendar and global sporting events continued

to take on greater significance. The industry

increasingly ties its fortunes to the marketing

opportunities associated with major events

and 2016 will of course see Euro 2016 and the

involvement of four out of five home nations at

the competition in France during June and July.

One month later, Team GB will head to Rio for

the 31st Olympics.

1 Source: The retail industry: Statistics and Policy – House of Commons Library 2015

2 Source: Aon GRIP 2014

4 UK Retail market update 2016

It remains to be seen whether the government

will relax opening hours during the Brazil games,

as it did during London 2012 but sudden peaks

in demand mean a whole new collection of

stresses being placed upon retailers’ in store

operations, warehousing and logistics. Aon is

advising clients to ensure that housekeeping

remains front of mind so that everything

from the workforce and infrastructure right

through to the shop floor, is protected in

the event that something goes wrong.

The Insurance Act 2016Making a fair presentation of your risk

Our second key risk for 2016 is much closer

to home. The new Insurance Act comes into

force in August 2016 and aims to rebalance

fairness for both parties of an insurance

contract. Aon has already taken steps to ensure

that our clients have the requisite knowledge

about how the law is changing and we will

continue to work with you in this regard

Guy Malyon Head of ARS UK Broking, London guy.malyon@aon.co.uk

FY2014 - GBR Food, Agribusiness & Beverage Premium by Product

25.9%

20.7%

15.4%

10.3%

9.7%

9.7%

2.7%

5.6 %

n Automobile

n Health & Benefits

n Property

n Other

n Casualty/Liability

n Employers

Liability/Workers

Compensation

n Marine

n Other

The Insurance Act – what does it mean for you?

The Act will impose a range of new duties on us as brokers, on insurers

and also on you as buyers of insurance.

The most significant of these will require you to meet a new duty to

make a fair presentation of the risk. While the definition of ‘material

information’ has not changed, the new disclosure duty is more

prescriptive than the current law in describing from whom such

knowledge needs to be obtained and the manner of disclosure.

For example the Act states that what ”the insured knows” is deemed to

include knowledge held by the insured’s senior management (i.e. those

who make decisions about managing and organising the insured’s

activities) and individuals with responsibility for the insured’s insurance.

The definition of “senior management” is intentionally flexible so that

is suits companies of all shapes and sizes. Of course the more complex

your company structure e.g. company control is vested in several

operating divisions, the more individuals you will need to consult for

risk information.

Additionally you will be required to disclose material information

that your senior management and individuals with responsibility for

your insurance “ought to know”. This means that they will need to

carry out a reasonable search of not just information held by ‘the

insured’ but also by ‘any other person’. This includes agents and

persons covered by the insurance (e.g. a director or officer), but is

open to interpretation and may go far wider than this e.g. to include

consultants or service providers.

Finally you need to avoid data dumping i.e. providing large volumes

of information without sufficient structure. All disclosures need

to be accessible and clearly presented, structured, indexed and

sign-posted. We will of course continue to work with you in order

to achieve this.

4.0%

2.0%

0.0%

-2.0%

-4.0%

-6.0%

-8.0%Q3 ‘14

-2.7%

1.3% 1.3%

2.5%

-0.1%

-6.8%

Q4 ‘14 Q1 ‘15 Q2 ‘15 Q3 ‘15 Q4 ‘15[Forecast]

Food System, Agribusiness and Beverage – All Products Percentage Change in Rates at Renewal

Aon Risk Solutions 5

Property– Is your distribution centre actually your biggest store?

Property accounted for 15.4% of the retail sector’s overall premium spend in 2014 and according to Aon GRIP data, rates for property insurance for the United Kingdom were flat in Q3 2014 (-0.18%) and softened slightly in the same quarter 2015 (-0.59%), reflecting a continued pattern of softening which has pervaded the market in both property and casualty lines for more than a decade.

Well managed risks in the retail sector are

frequently achieving discounts in excess of 15%

and the industry’s focus on safety and resilience in

recent years appears to be bearing fruit in the form

of fewer large losses and a manageable risk profile.

Declare your profits where they’re earnedThe retail sector’s property risk profile has been

shifting rapidly in recent years as the move from

conventional high street shopping to online and

omni-channel distribution continues at pace.

While the industry maintains a strong high

street presence, Aon’s brokers will also look to

consider how other distribution channels and

peak season scenarios are contributing to a

retailer’s overall gross profit. This income figure is

key for underwriters who have traditionally used

it as a basis for their pricing but it is becoming

increasingly clear that for some retailers, different

physical assets in the property portfolio are

contributing towards that overall gross profit

number and should be considered more carefully.

Ultimately we believe the risk profile of a retailer

should reflect the broad nature of their whole

asset base. For example if distribution centres

are used increasingly to ship products directly to

individual points of sale, gross profit contributions

from that DC will be on the increase. Like most

businesses, retailers will be asked to declare

their estimated gross profit by insurers in order

for underwriters to provide terms. With ever

increasing requirements to declare accurate

data (see introduction – Insurance Act 2015),

do your insurers fully appreciate the impact and

estimated cost of a major loss during peak period?

This must be reviewed on a regular basis

to ensure you have sufficient cover and

sufficient indemnity periods to properly

protect your business going forwards.

Winter storms – a reminder of flood risk challengeAs this report was going to press, insurers and

adjusters had been on the ground across the UK

responding to a number of major losses after flood

waters inundated numerous locations. Initial estimates

of up to £5bn in total claims emerged after the

storms caused significant damage.

It remains to be seen whether these events will

become market changing and impact property

rates. However businesses with flood-prone

premises may not receive access to the same

affordable insurance homeowners have access

to under the new insurance industry scheme,

Flood Re3, which when launched will provide

homeowners with better access to affordable

insurance. Those retailers in threatened locations

could expect more of a challenge at renewal.

Improving the attractiveness of your risk• Plan and regularly test your business

continuity procedures and be in a position

to present them to insurers

• Avoid BCP with prescriptive methods

alone – ‘plan ownership’ should be placed

in the hands of site managers who understand

the local risks and emergency procedures

3 Source: Association of British Insurers, The Future of Flood Insurance, what happens next?

6 UK Retail market update 2016

• Be aware of your limits in business interruption.

Does your supply chain have flexibility to bring

production back online within normal policy

term limits (12/24 months)?

• Seek out providers with dedicated claims

adjusters and agree approach prior to any loss

• Regular documented electrical maintenance and

thermographic checks for ‘hot spots’

• Ensure spot protection and speciality

extinguishers near hazardous heat processes

• Invest in risk surveys to obtain comprehensive

underwriting data that will enable insurers to

fully appraise your risk

Aon Risk Solutions 7

Your employees and the public– A stable market

Casualty and liability underwriters remain eager to write business for UK retailers; they are target driven and as such it can certainly be classed as a buyer’s market. Casualty rates across the UK continued to fall consistently throughout 2015, with Aon GRIP data showing public liability rates at renewal averaging -3.6% in Q3 2014 and -2.3% for the same quarter in 2015. Each of the five quarters from the end of 2014 onwards reported negative changes on premiums for this class of business. On employers’ liability, the falls in 2015 were broadly similar with EL rates at renewal in Q3 2014 falling 1.3% and 3.1% in Q3 2015.

Retailers spent 19.4% of their combined premium

on public and employers’ liability programmes

in 2014, making this the third largest part

of their risk transfer budget after motor and

health and benefits. Aon’s brokers expect no

change in typical pricing dynamics for buyers

in 2016. Those with particularly well managed

risks can achieve double digit discounts and

only those with poor claims history may find

themselves subject to any premium loading.

Improving the attractiveness of your riskManufacturers who invest in liability risk surveys

have been able to approach the insurance

market with a much greater degree of certainty

about their programme over recent years.

These surveys are provided by independent

companies who will review an organisation’s

profile and feed that information back to brokers

and insurers. On-site information about exposure

to loss from premises, products, and completed

operations can be extremely influential to the

end result of a programme review, particularly for

insurers looking to understand the supply chain

process in industries such as food manufacturing

to ascertain the chain of responsibility.

Consider these points of action to increase insurer appetite• Conduct noise studies and consider installing

acoustic panels, damping materials, silencers

and other reduction remedies

• Implement rehabilitation and occupational

health programmes

• Claims analysis to identify areas of attritional loss

• Day one absence management for all injury types

• Invest in liability risk surveys

8 UK Retail market update 2016

Your vehicles– The end of whiplash?

The fleet motor insurance market has been hardening for two to three years before levelling off in 2015. The withdrawal of significant reinsurance capacity in January 2013 forced up prices in this attritional risk category, where today many insurers are looking to combine and package casualty, property and motor in order to blend and smooth out their loss ratios.

This is a major part of the retail sector’s risk

transfer spend, with more than 25% of premium

allocated to motor insurances. According to

GRIP data, rates for automobile for the United

Kingdom were flat in Q3 2014 (-0.17%) and

hardened slightly in Q3 2015 (+0.93%). Aon’s role

has increasingly been to collaborate with retailers

across all lines of business and those who analyse

and react to the data emerging from their claims

experience can expect flat rates or even reductions

into 2016. The picture for fleets with poorer risk

management is understandably more challenging

with an expected price range of +2.5%–15% at

renewal in 2016.

Autumn statement – good news for fleet ownersPerhaps the most significant piece of news to

emerge since the civil justice reforms, was in the

Chancellor’s Autumn Statement in November

2015, in which George Osborne announced plans

to increase the small claims limit to £5000 and

to withdraw the right to financial compensation

for soft tissue injuries such as whiplash.

An indication of how this news was received

is illustrated by the fact one of the UK’s

largest claimant law firms saw its share

price crash 50% in a single day4 following

the Chancellor’s announcement.

The move towards providing claimants with

recourse in the form of rehabilitation should have

the effect of removing the financial incentive for

speculative and also fraudulent whiplash claims.

If the Government’s proposals have the desired

impact, fleets which are often targeted by crash

for cash fraudsters may be less threatened.

The corollary is of course that fleet managers

themselves will have to ensure that vocational

rehabilitation becomes an essential part of their

own return to work programmes for drivers

directly employed who suffer injuries at the wheel.

Safety concernsWith the UK’s roads frequently congested,

continuing safety improvement should be

of great relief to fleet owners. Those which

regularly drive in London will have the added

complication of sharing the roads with more

than 300,000 cyclists5 and news that a scheme

to segregate them from vehicles with the

construction of new cycle paths as part of a

£913m investment should be warmly received.

Agency DriversThe availability of quality agency drivers

could be a key to success for the logistics

operations of retailers but it is essential that

they work hard to pre-empt any issues.

Reports that independent logistics firms

like Yodel hired 7000 agency drivers for the

Black Friday and Christmas periods in 20156

should serve as a reminder of the importance

played by pre-emptive risk assessment.

The task becomes harder with the appointment

of foreign nationals and EU driving licence

holders. There remains no means of adequately

checking licences for any prosecutions or

endorsements because data protection

laws prohibit disclosure across borders.

4 Source: City A.M. 26 November 2015 – Quindell buyer Slater & Gordon share price halves after George Osborne reveals plans to

overhaul personal injury law

5 Source: BBC News 4th June 2015 – Number of cyclists in London reaches record high

6 Source: The Drum

Aon Risk Solutions 9

Improve the attractiveness of your riskAon is able to support customers operating

fleets in the food and drink manufacturing

sector with its Fleet Complete solution which

is designed to provide complete visibility of

their exposures. However, all fleets should at

least observe the following advice to ensure

their profile meets the typical benchmarks.

• Conduct online licence checks for

agency drivers

• Build an auditable system of driver checks

and pre-screening – particularly for foreign

nationals and EU Licence holders

• Consider telematics, GPS and vehicle

tracking systems

• Reduce time incentivised deliveries

• Be aware of staged accident gangs

targeting liveried vehicles

10 UK Retail market update 2016

Your cash flow– Insurers relax on reverse credit for retail supply chain

Smart retail and wholesale firms are enhancing their creditworthiness and gaining more support from banks by implementing reverse credit schemes.

The purpose of credit has always been clear;

to enhance a business by smoothing cash flow

and enabling companies to borrow and grow.

Credit insurance on the other hand has had a

less favourable press after financial crisis scandals

saw cancellations damage trust significantly.

In 2015 the tables turned again. The relationship

between credit insurance and banks’ lending

facilities has become closer so banks are

increasingly prepared to offer credit with the

right protection in place.

Sectors like retail, in which unpredictable

market conditions can challenge the cash

positions of both suppliers and customers,

have begun to benefit from a growing trend

in reverse credit insurance. This is a relatively

new method in which buyers – typically in retail

distribution – are approaching the insurance market

to secure capacity against themselves which they

can then offer to suppliers as an incentive.

Historically it would have been the supplier’s

decision to buy credit insurance against their

customer as a protection against bad debt.

Now insurers have come round to the idea

of retailers themselves offering suppliers the

opportunity to ‘credit enhance’ them. The net

result is that suppliers are happier to extend

credit terms to their customers and supply

chain liquidity can be maintained.

Insurers previously had concerns at the potential

moral hazard and insurable interest implications

of reverse credit insurance, but the market has

relaxed its attitude.

In 2016, retailers know that their supply chain has

to be robust. The risk of supplier insolvency is a key

exposure so the growing influence of reverse credit

insurance is providing genuine benefits which at

present outweigh those previous concerns.

Aon Risk Solutions 11

Product recall and crisis management– Avoiding drama

A downward push on pricing has encouraged insurers to innovate, with crisis management consulting a helpful option for retailers.

Market dynamics shifted again in 2014 toward

increased competition and new entrants at Lloyd’s

at the beginning of 2015, while global insurers

also eyed product recall as a profitable business

line leading to flat and in many cases, downward

pressure on prices.

Where retail industry turnover is increasing, market

appetite is strong for the best accounts, while

decreased rates of up to 10–20% are being seen

on renewals for the most attractive businesses.

Wordings vary widely and clients have to be aware

of the advantages and disadvantages of moving

from one carrier to another. However, terms and

conditions have remained quite stable across

Aon’s UK retail portfolio. This has presented an

opportunity for Aon to push for enhancements

to market wordings which have included adding

sub limits for claims preparation expenses utilising

Aon’s complex claims teams and higher sub limits

on rehabilitation expenses.

Crisis consultancyIn addition, cover for malicious tamper and

contamination remains an important part of many

companies’ programmes. In addition to providing

for the direct recall and business interruption costs

they also put in place a range of support services

to aid in crisis management when an incident

occurs and can mitigate against the risks of supply

chain vulnerability, which have picked up so many

headlines recently. Crisis consultancy is becoming

a key aspect of the product recall armoury and

with a 5% standard bursary (of net premium)

available for clients to spend with their insurer’s

crisis consultant, clients can take some comfort

by having that expertise available to assist them

in the review of their supply chain management,

business continuity and recall management plans.

12 UK Retail market update 2016

Cyber liability– Message getting through

Despite suggestions to the contrary, the take up of specific cyber liability insurance remains fairly cool across most industries, with retail no exception. However with bigger and higher profile cyber breaches regularly exposing weaknesses in corporate risk management, sectors like retail are beginning to take notice.

Even if the actual incident does not turn out to be

that large in material terms (e.g. records stolen)

the reputational capital of the business may be

compromised which can certainly be material to

the balance sheet.

In 2015 we saw a high profile data breach at a

telecoms provider. Although this was ultimately

contained after initial speculation about its

extent proved wildly overstated, valid questions

about the longer term effect on brand and

reputation have been raised. In view of this it

is critical that the risk management strategy

of a retailer is such that it serves to bolster

resilience in technology, people and brand.

Insurers are beginning to create a range of

more robust solutions designed to meet the

demands of corporates facing the cyber threat.

Focusing on service-level response, these

solutions are built to withstand regulators’

ever-increasing interest in the obligations

companies have after a cyber-breach.

Zurich and AIG are arguably leading the

market with their solutions which use prior

nomination to appoint insurance claims

handling, IT forensics, data analysis, crisis

consulting, loss adjusting and legal advice within

a rapid response service level agreement.

Retailers must consider their own exposures

carefully, particularly given the potential for

cyber-attack or data breach to cause untold

damage to brand and reputation; a key

concern amongst risk managers in the Aon

2015 Global Risk Management Survey.

Aon Risk Solutions 13

7 Source: Claims Portal Executive Dashboard

The outlook for claims– Slow pace of reform

There has been no shortage of action taken to stem the tide of spurious injury claims brought against organisations like retailers both from employees and the public. As evidenced by the Chancellor’s Autumn Statement announcement in which he pledged to remove the right to monetary compensation for soft tissue injuries like whiplash, there is clearly an appetite from government to shift the balance in favour of employers.

The legal landscape has shifted considerably

in recent years. First the Legal Aid, Sentencing

and Punishment of Offenders Act became

law in 2013, followed shortly afterward by

the Enterprise and Regulatory Reform Act

2013; both of which promised to support

employers by reducing the costs of litigation and

increasing the burden of proof on claimants.

The introduction of fixed legal fees for employers’

liability claims valued up to £25,000 has yet

to influence claims volumes. Indeed, the

opposite seems to be true in relation to claims

notified via the Claims Portal. In the year to July

31st 2014 there were just over 33,000 Claims

Notification Forms issued, a figure which rose

to 54,634 in the year to July 31st 20157.

Improving your claims defensibilityIt remains to be seen what impact these

twin reforms could have on the cost of

claims for employers, but companies that

engage Aon will be able to put their best

foot forward. There are a number of trends

which risk managers should be aware of;

• Claimant lawyers seeking easy wins and hoping

to benefit from defendants with a less than ideal

accident reporting and investigation process

• Be aware that ‘Special Damage’ claims are being

made to boost the level of damages recovered by

the claimant. Early intervention into accidents to

identify what has happened and how serious an

injured party actually is, is essential

• Claims for rehabilitation and psychiatric referrals

are increasing, not always with justification.

Good claims defensibility requires consideration

of rehabilitation by the employer and potential

defendant early on, as opposed to waiting for a

claimant lawyer to do it at their cost

• While costs are decreasing in the new world

(post MOJ/LASPO), costs on old world claims are

increasing as firms look to maximise their recovery

• The move away from the recoverability of

success fees and ATE premiums from defendants

has seen claimant solicitors seeking higher

damages to try to help their clients mitigate

the impact of their success fees which are now

being paid out of the claimant’s damages

• There has been an increase in requests for

pre-med offers to the insurance industry.

Caution when considering pre-med offers as

there is a propensity for the claim to be bogus

or inflated due to the speed of settlement

14 UK Retail market update 2016

Aon Risk Solutions 15

About Aon Aon plc (NYSE:AON) is a leading global provider of risk management, insurance brokerage and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 72,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative risk and people solutions. For further information on our capabilities and to learn how we empower results for clients, please visit: http://aon.mediaroom.com/

Aon specialises in providing risk management and insurance solutions to the retail sector. Our experts will work with your business to assess your total cost of risk and develop solutions that fit your distinct industry needs.

© Aon plc 2016. All rights reserved.The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Aon UK Limited is authorised and regulated by the Financial Conduct Authority. Aon UK Limited Registered Office: The Aon Centre, The Leadenhall Building, 122 Leadenhall Street, London, EC3V 4AN. Registered No. 210725. VAT Registration No. 480 8401 48. Some links on this website may redirect you to third party sites. Aon is not responsible for this content. Telephone calls are recorded and may be monitored.

FPNAT.183

Risk. Reinsurance. Human Resources.

For more informationDan Fox | Retail Practice Leader

Aon Risk Solutions | National e dan.fox@aon.co.uk