Smarter Risk Management Can Help Beat Credit Crunch, says Marsh
A new paper by Marsh, the world’s leading insurance broker and risk adviser, shows how insurance and risk management strategies can help UK firms improve liquidity, free up cash, strengthen their financial resilience and continue operating profitably during deteriorating economic conditions.
In its newly published executive briefing, Improving Working Capital and Business Resilience, Marsh explains how organisations can release working capital by reducing their insurance and risk costs, while managing changing risk factors such as supplier liquidity, customer default and increasing production and transportation overheads.
Martin South, Chief Executive Officer of Marsh Ltd, said: “Most businesses are only too aware that high prices for fuel, food and commodities are creating significant upward pricing pressures, while at the same time the global credit crunch is producing downward pressure on demand.
“Businesses should welcome the news that there are some simple actions that can be taken around insurance and risk management. These can free up cash for use in the business. Insurance can also be used as an additional security to facilitate either greater borrowing or cheaper cost of borrowing, or as a solution to offset liability on the balance sheet.“
Marsh’s recommended actions include:
- Manage insurance costs to create additional working capital: The cost of insurance should not be viewed as a written-off commodity spend but managed to create additional working capital. Marsh recommends firms review how much risk they retain and how much insurance they buy, taking account of the likely loss profile of the business and the appetite for retaining risk. Such a review may help to release working capital that would otherwise be tied up in insurance, whilst ensuring that proper protection is in place at times when margins may be squeezed.
- Maximise the value of trade credit insurance: Trade credit insurance can offer excellent value in times of economic uncertainty, providing protection against the growing risk of bad debts. This insurance provides companies with an additional security across their book of debts. By assigning the policy to a financial institution, accounts receivable become a more acceptable asset, securing either greater borrowing or a cheaper cost of borrowing.
- Pay insurance premiums by instalments: By spreading payment, businesses can typically free up cash for use elsewhere in their operations.
- Consider other forms of insurance: Marsh recommends that firms review any liabilities that may be on the balance sheet, for example environmental, historic disease or contractual liabilities. Insurance solutions or contract renegotiation may mitigate or transfer some or all of these risks and potentially free up working capital. Surety bonds can also free up credit capacity.
- Build business resilience: Volatile economic conditions can change areas and levels of risk rapidly and firms may now be exposed to risks that were previously not of concern. Marsh strongly recommends that businesses review their risk exposures, assess their potential impact and put in place robust business contingency plans.
Present economic conditions make it critical that companies maintain their credit rating and therefore access to funds. Standard & Poor’s has recently indicated that they will begin incorporating consideration of the strength of enterprise risk management practices as a component of their credit ratings methodology. This is yet another incentive for ensuring that a company’s approach to risk management is robust, capable of being articulated and will stand up to scrutiny.
Case study 1 - Reassessment of risk profile saves client £1.5 million
A chemicals and pharmaceuticals company engaged Marsh to undertake a risk assessment to ascertain the greatest risks to achieving its business objectives. Using a combination of interviews and workshops, Marsh produced a risk catalogue along with an analysis of likelihood and impact of each risk. This formed the basis of future business decision making and the clients’ annual risk review. A new risk management programme was designed around the results of the study which resulted in a 25% reduction in the total cost of risk – a saving of £1.5 million.
Case study 2 - Risk and insurance optimisation exercise delivers 28% cost saving
A retail sector client had been told by insurers to expect premium increases of over 40% in the following two renewal years. In response, the client wished to understand the amount of risk that could be retained on its balance sheet.
Marsh conducted a risk tolerance assessment to understand how much additional capacity the business had to retain risk. Risk modelling helped determine the expected losses and their uncertainty over the following year and the effect on cost of risk at various levels of retention. The analysis helped to support the marketing of the risk at renewal, as well as demonstrate the client’s commitment to managing and retaining risk.
As a result, total premium was renewed at 28% lower than the previous year in addition to reducing the overall cost of risk.
Companies wishing to obtain a copy of Marsh’s report can visit www.marsh.co.uk.
For more information: www.marsh.co.uk
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