RISK

Risk Mitigation

– is your business protected?

Stewart Hunt, Managing Director, First Commercial Insurance

The food manufacturing industry is vital to the New Zealand economy, representing 3.75% of our total GDP and 71% of our manufactured goods exports in 2019. With the arrival of COVID-19 virtually shutting down our tourist industry overnight, our economy is even more reliant on income from our food exports.1 New Zealand’s reputation for safe, high-quality food is a crucial part of the industry and the economy. Maintaining and increasing this level of trust with consumers is essential to supporting our export base for manufactured food, particularly when we are competing with a large number of global food brands with marketing acumen and deep pockets. We constantly live with risk. Most risks are so small that we ignore them as being of little moment - cutting a finger while cooking or dropping a glass of water. Other risks are monumental: Christchurch residents discovered the enormity of the risk of living in a city on a fault line in 2011. We constantly minimise risk, by wearing seatbelts, for example. And we can mitigate some risks by insuring our property in case of loss or theft, for example.

So it is in business. A food manufacturer constantly runs many risks in producing food for human consumption. They also live with risks relating to managing the structural elements of a business: plant, vehicles, employment disputes. These risks are a tiny sampling of those a business must minimise. The additional safety net of insurance cover is vital in order to maintain a viable operation when disaster or even minor incidents threaten the smooth running of an operation.

Small-to-medium enterprises (SMEs) are particularly vulnerable to business risks as a lack of capital and experience can have an irreversible effect on a business.

How insurance supports business

The insurance industry covers any, and almost all, risks faced in the operation of a food manufacturing operation. Generally an insurance broker will discuss with business owners or managers the extent of the business and determine its risk profile. Based on information received, they will recommend a policy, or policies that mitigate these risks and provide support when needed. It is important that you make informed decisions about the insurable risks you are faced with in your business. When researching insurance needs and options, it is vital to carefully disclose fully and review the information provided. Close to 50% of businesses do not financially survive a major loss and the majority of those businesses have insurance cover that is inadequate at the time of loss.

Recalls - a significant risk

Manufacturers must prioritise food safety to maintain our country's image of high-quality and safe food. It’s more important than ever for companies to prevent and mitigate damage arising from food-safety incidents. Increased awareness of new allergens and allergen-prone people makes it even more challenging for the food industry to manage these risks.

Robust manufacturing processes and procedures are the first line of defence in preventing these incidents from occurring. A recall plan is essential. An effective product recall plan, combined with robust crisis management planning, can minimise damage to a manufacturer's brand and reputation.

Insurance policies are available to cover businesses for recalls: the cost of removing stock from supply chains, lost profits, decontamination, manufacturing delays and damage to brand reputation, which can have a large impact on future earnings.

Cyber based threats – greater than you think

While evolving information technology is a boon to the food industry, it increases the risk of cyber-based threats. Combined with globalisation, this poses new challenges to the food manufacturing industry. Across the globe, businesses have become more reliant than ever on technology. Yet with a growing digital footprint, the risk of a business incurring a cyber incident is no longer a question of if, but when. Insurers may offer cyber insurance as a product but the speed of technological advancements fails to reflect what the policy covers. It is critical for insurers to update and reflect on their wording to offer adequate coverage. The media have a tendency to report only unusual cyberattacks, when in reality, cyber-crime occurs daily across a variety of sectors and through a number of channels.

Internet of Things (IoT)

An emerging risk businesses need to take into consideration is the rise of IoT devices. The Internet of Things (IoT) refers to the physical devices embedded with software which can then be controlled via internet infrastructure e.g. CCTV cameras, coffee machines, smart TVs. It is estimated that 50 billion devices will be connected to the network by 2028. Organisations have increased their use of IoT devices to 78%, up from 63% in 2016. IoT devices are especially prone to external threats as developers pay less attention to older versions of software which may still be in use and have inadequate cybersecurity measures to shield them from increasingly sophisticated intrusion methods.

Gaining entry through an IoT device into a corporate network is becoming an ideal opportunity for hackers. The lack of uniform security standards is one of the major challenges IoT faces. The technology of these devices primarily relies on cloud-based services, so the absence of structure makes it tough to apply adequate perimeter defences. The assumption that the biggest loss a business or organisation faces is financial is far from reality. Reputational damage, loss of competitive advantage, customer loss and revenue costs are only a handful of risks that must be considered. A company can undertake a variety of actions to mitigate potential losses, including taking the time to determine specific threats to their organisation. Understanding these threats can help a business prepare in the event of an incident. It is impossible to be 100% protected from a cyber incident, but the sooner a breach is reported, immediate costs can be minimised and exposure to slow burn costs reduced.

Cyber Crime is New Zealand’s third most prevalent crime yet less than 1% of businesses buy Cyber Insurance. If you are a business that holds client data or has an IT system central to the operation of your business you have an exposure. It is estimated that last year alone NZ businesses lost in excess of $650m to cyber events and the value continues to grow. Amongst others cover includes forensic costs to find and eradicate the problem, the costs of PR and crisis management, loss of profits during the outage and your third party liability to the public.

Conclusion

Risks come from all areas of an operation. Their realisation can have a devastating effect on its viability, whether through putting unbearable pressure on capital, through loss of confidence in products in the marketplace or through the loss of key personnel. Appropriate insurance cover allows a business to survive major catastrophe, or even minor adversity such as the loss of electrical power in the middle of a production run.

References

1 MBIE. (2018, April 17). Beyond commodities: Manufacturing into the future. https://www.mbie.govt.nz/assets/f0f81b6194/new-zealandmanufacturing-sector-report-2018.pdf

Stewart Hunt

Stewart Hunt has been providing insurance and risk advice in the food manufacturing industry for over 15 years. He is the Managing Director of First Commercial Insurance Brokers and a member of Insurance Advisernet. We believe it is important to understand your business first then provide the right risk advice and a tailored insurance program that Stewart Hunt, suits your business needs. Honesty, integrity and trust are the hallmarks of our business practices and these are underpinned by consistent business Managing Director, First Commercial Insurance advice processes. As business owners ourselves, we understand where the risk and value is in a business. We appreciate the daily commitment required to run a business and the importance of being able to rely on trusted professionals for the services outside of your primary business operations. Working closely with you, our focus is to ease the ‘labour of insurance’, allowing you to focus on what you do best – running your business successfully.