Do tight margins mean poor risk management, asks James Durston

A huge fire swept through the only factory run by piemaker Hilliers of Plymouth last weekend, destroying the whole building within hours. None of the 200 staff who work there were hurt, but their future remains uncertain as the investigation into the cause of the fire gets under way.
The fire is just the latest to have razed a food and drink manufacturing facility to the ground in recent months. And, say experts, it won’t be the last. Insurance companies expect at least one significant fire in the food sector each month. Aon, the UK’s biggest insurance broker, says it knows of at least 19 fires in factories this year that incurred claims of at least £2m each.
The largest by some margin was the fire in in April at Geest’s Barton-on-Humber site, which destroyed two factories that made garlic bread and fresh pasta. The insurance claim totalled £85m, and production is still halted as safety requirements mean that the factories have to be demolished before the fire service can start its investigation. This will take another seven weeks.
Fires in the industry have not in fact increased in frequency, according to insurers, but the amount claimed has risen dramatically. One source who handles fire risk policies in the UK food market says that more than £500m has been paid out to food companies over the last 18 months.
Most food companies keep production of single lines limited to single factories in an effort to keep costs as low. So if a fire occurs, production of that entire line is destroyed, with no back-up facilities able to take over. The consequences are heavier losses and bigger insurance claims, which could lead to significant rises in insurance premium rates.
The source says: “The loss of revenue due to fires is getting heavier and heavier, and it can only be because of the pressure companies are under to maintain margins. Any insurers who have written fire risk policies for food companies over the last 18 months have made losses, and to a certain extent this area is being subsidised by other profitable areas. The natural consequence is that in the next 18 months rates will go up.”
For companies that have used combustible composite panels that are not adequately fire-resistant, the risk increases. Throw in the fact the fire service will not try to save a plant if there is no risk to life or of fire spreading, and it becomes more likely that a fire will destroy the whole building.
A similar spate of fires in 2001 caused several insurers to walk away from the UK food sector. This is unlikely to recur, says Jo Keeping, a consultant with Aon. But she says food manufacturers need to prove to their insurers that they are taking proper measures to minimise risks. “Companies need to make sure they have invested in fire protection, that their inception hazards are low and that they have business continuity plans in place. Those companies that have not invested are going to be hit hardest.”
The insurance source says: “Up until 2004, the food market seemed to have got its act together. Companies increased their investment and used thermographic testing equipment to assess risk in plants, sprinkler installations were common and there was a feeling the industry was moving forward. This hasn’t stopped entirely, but with premiums quite low it could be that risk management has slipped down the agenda.”
This will not be true of all companies, but unless the industry as a whole increases its commitment to risk minimisation, it could be a case of negotiating policies on an individual basis.
“Nothing will happen overnight,” says our source, “but we need to link in incentives to risk management. It may be a case of telling clients that only if you do this will your rate hold.”