Five key risks facing global food and beverage companies

A recent Marsh McLennan article about the risks facing food and beverage companies surfaces issues that directors and boards should generally be paying attention to. 

Key among these risks that boards should consider taking action on are:

-Asking management to assess fire risks, particularly of flammable materials
-Supporting management to develop and implement a business continuity plan that take into account ongoing supply chain disruptions
-Asking management to reassess the impacts of inflation, notably on insurance cover
-Getting management to provide an update in the context of health and safety about how contractors are managed, in addition to employees
-When considering stakeholders thinking how some of those stakeholders (e.g. rural fire brigades) may play a role in company risk management
-Ensure that a more general review of insurance cover has been undertaken by management and be satisfied with the quality of advice provided.

A conflict in Europe between two leading grain exporters, spiraling energy costs, supply chain chaos, and extreme weather events have led to unprecedented times for the global food and beverage industry.

According to the UN’s Food and Agriculture Organisation, world food prices reached a record high last year. And although food inflation seems to have peaked, food prices are still a political issue in many parts of the world, keeping food and beverage companies firmly in the spotlight.

Additionally, the sector is facing a number of internal challenges such as a much harder insurance market following a string of substantial fire losses, notably in the US, Australia, and the UK — some relating to a type of combustible paneling used throughout the world in food production facilities.

Amid these market conditions, there are a number of risks food and beverage production companies need to consider.

1. EPS paneling

A cheap and lightweight construction material, expanded polystyrene (EPS) panels have been used by the food and beverage industry worldwide for decades due to their insulation properties. However, EPS is extremely flammable, and has been implicated in a number of high-profile fires at food production factories.

Businesses can mitigate risks associated with EPS by:

• Being aware of other combustible materials used in their food and beverage production processes, such as plastic and cardboard packaging, and making sure they are kept away from EPS panels
• Mounting electrical switchboards away from EPS panelling and sealing any exposed panels
• Ensuring there is adequate space between buildings to deter the spread of fire
• Removing key ignition sources. For example, smoking should take place far from buildings and the utmost care must be taken during welding work
• Installing fire suppression systems, such as smoke detectors and sprinklers
• Installing insulating panels made from more fire-resistant material, such as Xflam or PIR (polyisocyanurate)

2. Supply chain bottlenecks and pain points

Disruptions in the supply chain have caused bottlenecks for food and beverage companies, especially when they rely on a single supplier or are dependent on a single customer. Many have suffered business losses when a supplier or customer experienced a loss in their own respective facilities. Losses have also occurred when a food production company was unable to replace or repair vital machinery quickly.

Companies should therefore have a business continuity plan in place that identifies all eventualities, how they can be mitigated, and how they can be dealt with if disaster strikes, so operations can resume at full tilt as quickly as possible. Keeping critical spare inputs onsite or knowing how to source them rapidly elsewhere is also important.

3. Inflation

Global inflation is expected to fall from 8.8% in 2022, to 6.6% in 2023, and 4.3% in 2024, according to the International Monetary Fund. Nonetheless, companies are advised to make sure the values they are declaring in their insurance schedule are accurate. These should be assessed annually — either by Marsh or a third party — so there is less risk that a company is underinsured.

A company could have a claim payment reduced if the value of its buildings, plants, equipment, and the cost of business interruption are undervalued in an insurance contract. However, high inflation rates have made these valuations increasingly difficult. The Russia-Ukraine conflict has pushed up the price of commodities such as energy, fertilisers, and grains, while supply chain issues have contributed to a surge in the cost of raw materials used in the food and beverage sector.

There have been some unfortunate examples lately where clients have made a claim, but received a payout at a much lower level than they were expecting, as the values in their insurance schedule were under declared.

The business and asset values of food and beverage companies in Australia, New Zealand, and the UK are frequently indexing their values by 8-10%, at present. In countries where there is hyperinflation — such as Turkey, India, and Argentina — these values are underestimated to a much larger degree.

4. Contractors

Contractors hired by a food and beverage company can pose a risk, as they are usually unfamiliar with the site, and sometimes fail to treat it with the same degree of care as an employee. Errors can arise if they are insufficiently trained. Smoking or welding next to flammable panels are two common mistakes that can lead to large fires.

Since the Covid-19 pandemic, there has been a decrease in labour mobility and subsequent staff shortages. Countries that are heavily dependent on migrant labour such as Australia, New Zealand, the UK, and to a lesser extent, the US, have been the most affected.

Staff reductions have resulted in fewer people being available to maintain and repair equipment, which generally increases fire risk.

To reduce the risk posed by a contractor, companies are advised to have a robust contractor management plan in place that includes training of the worker before they enter the site and hot and cold work permits (authorising controlled work in potentially hazardous conditions). It is also advisable to ensure the contractor has a level of general liability to cover themselves to ensure the third party takes an element of ownership over the work they are carrying out.

5. Lack of engagement with local fire brigades

Many food and beverage plants are situated in rural areas, often far away from firefighting services. It is therefore vital that a company makes sure its local fire brigade is familiar with its site, so that if there is a blaze, firefighters know exactly what the most significant risk areas are and where the hydrants are located.

Australian food production companies are particularly good at engaging with their nearest fire brigades, lowering their risk from extensive losses in the event of a blaze. Often plant employees are members of the local volunteer fire brigade, and know the layout of the plants under their remit extremely well. Even though they may be a 30-minute drive away from a plant, and a fire can certainly spread quickly during that time, they can still have a big impact on a blaze because of their knowledge of the factory.

Navigating a hardening insurance market

Mitigating these risks and buying the most effective insurance to cover them are key steps a food and beverage company can take to protect itself.

However, the sector has had to contend with a challenging insurance market for many years. Rates started surging half a decade ago in reaction to several large plant losses that led some local insurers around the world to pull out of the class. Companies sought cover in the London market where rates were significantly higher, in the first instance, although they are now trending with general market factors.

More high-profile plant losses over the past year have once again pushed insurance rates up. Additionally, a treaty renewal on 1 January, 2023 that saw some reinsurers strip out catastrophe cover and increase retentions has resulted in extra costs for insurers which, in turn, are being passed onto clients.

Food and beverage companies should consult a broker to make sure they have the most suitable insurance coverage in place and are taking all measures available to mitigate their risks.