Organisations in the food and drink sector face a multitude of challenges, from supply chain disruption to labour shortages. Managing these challenges requires a combination of risk management and risk transfer, typically in the form of insurance solutions.
Below, we discuss the measures that food and drink organisations can take to address risks before they become problems, and how they can put themselves in the best position to secure optimal insurance coverage and terms.
Risk in the UK food and drink sector
A risk is any uncertain event which could impact positively or negatively on defined objectives. Organisations may view risk through both an opportunity and threat lens.
At a recent presentation given by Lockton to Food Safety Specialists at Campden BRI’s ‘Food Safety Risk Management’ event, we asked participants to rank a series of risk themes in terms of those that present the biggest perceived challenges to their organisation.
Perhaps unsurprisingly, participants highlighted supply chain disruption (opens a new window) as the biggest threat to the food and drink sector. Factors including high inflation, elevated commodity prices and ongoing geopolitical conflicts continue to disrupt supply chains. Food and drink organisations face potential business interruption and loss of revenue, and may need to review their business continuity plans accordingly.
Food safety was ranked as the second-greatest threat to businesses. Recent years have seen regulations tighten in relation to food standards and, particularly in relation to allergen labelling (opens a new window). This is driving an uptick in product recall activity. In parallel, a tough economic environment and climate change-related availability issues have contributed to a rise in documented food fraud (opens a new window), in which criminals pass off cheap or non-compliant ingredients as high-quality produce.
Participants chose labour shortages (opens a new window) as the third-biggest risk to the industry. Labour shortages remained broadly unchanged at 5% in Q1 2024, according to the Food and Drink Federation (opens a new window) – well above the UK average (2.9%). Food and drink organisations now face the challenge of attracting (and retaining) new talent, one that is likely to require investments in more comprehensive benefits and wellness programmes.
To monitor and manage their risks, it's recommended that organisations create and maintain a risk register. A risk register is a document that aims to collectively identify, analyse and manage risks, supporting more informed decision making. It allows risks to be prioritised according to likelihood, and for resources to be allocated effectively.
Linking risk and insurance
Organisations practice risk management when they undertake coordinated activities to direct and control their risk. However, managing risk is a process of value versus performance. While a lack of risk management may leave organisations vulnerable to threats, overly onerous risk protocols have the potential to hinder growth and development unnecessarily.
Organisations should target their resources to those where controls are likely to have the greatest effect. Risks which pose only a minor threat may be tolerated.
Other risks, such as high-impact threats which cannot be effectively controlled, may be transferred to a third party. In this way, insurance solutions can form a critical component of an organisation’s risk management strategy, providing a safety net that empowers them to act with greater confidence and security.
How to position your risk in the market
Once a risk register is developed, the crucial next step is to map those risks to your insurance coverage. This typically involves two stages:
Review your existing insurance policies to understand what risks are already covered; and
Map each risk from your risk register to the relevant insurance coverage to identify any gaps not covered by insurance.
Aligning a risk register with an insurance programme is crucial for several reasons:
Comprehensive risk management – alignment ensures that all identified risks are considered and appropriately mitigated, either through internal controls or insurance coverage
Demonstrates understanding – provides insurers with clear evidence that an organisation understands its risk exposures and is taking all reasonable precautions to mitigate those risks
Strategic decision making – informs strategic decisions by providing a clear understanding of the organisation’s risk landscape and the measures in place to address those risks
Resource allocation – by understanding risks and potential impacts, organisations can invest in insurance where it’s needed
Compliance and governance – alignment ensures compliance with regulatory requirements, and will be beneficial for stakeholder confidence
Operational continuity – supports business continuity planning by ensuring that critical risks are covered, minimising disruptions in case of adverse events
Cost efficiency – optimises insurance costs by identifying overlapping or unnecessary coverage and ensuring that premiums are spent effectively on the most relevant risks
Stakeholder confidence – showing that the organisation is proactive in managing and mitigating risks will build confidence among stakeholders, including investors, customers, and employees
Integrating risk management and insurance means regularly reviewing and updating both the risk register and insurance policies to reflect changes in the risk landscape.
Working with a broker
Organisations should work closely with their broker, who will provide guidance in collating the information required for an insurance submission and help determine what is relevant to include in the submission. This process of aligning risk management and insurance will generate more interest from the insurance market and is more likely to deliver better outcomes in terms of both policy coverage and premiums.
For more information, visit Lockton’s Food and Drink (opens a new window) page, or contact a member of the Lockton team.
