Containing the exposure of Brexit stockpiling

Rasmus Nygard, AIG Property UK

Companies, and their insurers, need to be aware of the additional exposures created by stockpiling to avoid issues further down the line

According to a government minister, nearly every square metre of warehouse space in the country is now full in preparation for Brexit.

When we talk about emerging risks, the inference is we are addressing something that, in reality, is still some way off. However, there is one set of risks that has come upon us very quickly and is a very real issue right now: those associated with Brexit stockpiling.

Approximately half of all the UK’s food supplies alone are imported, much of that coming from the EU. The National Farmers’ Union has warned Britain would run out of food on August 7, 2019 if it cannot continue easily to import from the EU and elsewhere after Brexit.

With the spectre of a no-deal Brexit looming larger by the day, many companies are looking to how they might mitigate against some of the uncertainty this would bring. A crucial concern is regarding potential delays at customs points, which, if some reports are to be believed, could be of considerable length.

Around 240,000 UK companies that trade only with the EU would be caught up in customs processes, with a total administrative burden on business from customs declarations of around £13bn ($17.23bn) a year. This would have a substantial knock-on effect for companies across a variety of industries, affecting their supply chains, operations and output.

As a result, many businesses have taken the decision to stockpile critical goods to insulate themselves as best they can from the anticipated economic chaos that may ensue.

And whereas last year it was mainly big multinationals that were stockpiling, now smaller businesses have joined in. Reports suggest factory floors and storage facilities are filling up and business minister, Richard Harrington, was reported as saying in January “nearly every square metre” of warehouse space in the country is now full.

Flies in the ointment

However, while businesses are focused on the potential benefits that stockpiling may bring, they may not necessarily be attuned to the accompanying risks. The first, and perhaps most obvious, is a cost issue. In today’s economy, the most profitable companies operate with a just-in-time supply chain. Stockpiling has a number of financial consequences, including reducing cashflow and tying up liquid funds that could otherwise be invested elsewhere in new opportunities or research and development. The Institute of Government reports British corporations spend around £50bn a year on medicine and non-perishable food from the EU at present, so stockpiling just one month’s supply could cost about £4bn, increasing costs by around 8%.

Furthermore, there are additional threats to which companies may be exposing themselves. By holding more stock than normal, there is a very real risk companies may find themselves underinsured in the event of a loss. Increased inventory may also raise exposure to the possibility of theft or robbery or a heightened risk of fraud.

Depending on the industry, companies may see more damaged goods, for example due to increased use of and lack of space for forklifts, which may create attritional losses. Overstocking warehouses may also have the effect of increasing fire risk. Sprinkler systems require adequate flue space so they can be activated quickly in the event of a fire, so it is important stockpiling does not inadvertently jeopardise the integrity of fire safety systems.

Trade credit insurance

Insufficient trade credit insurance may also be an issue. Buyers looking to increase their levels of inventory may not be able to generate sufficient revenue to cover the credit, so the risk of non-payment may increase significantly. Suppliers that are shipping more goods to businesses in the UK should check they have adequate levels of trade credit insurance to protect them against any payment default.

In another interesting development, we are also seeing a number of companies that export goods to Europe opting to stockpile there. This will bring exposure to a similar set of risks but with the added complication of needing to be aware of, and to comply with, local laws and regulations.

And finally, it is not just companies that are potentially at increased risk; their directors and officers may be too. A business that suffers problems with its performance following Brexit that could be linked to the level of preparedness, including how stockpiling was handled, could see its board members at risk of actions from shareholders.

Stockpiling is an issue that needs to be approached with eyes wide open, to determine what is necessary and what is simply overreaction, otherwise it has the potential to become a problem not a solution.

Companies and their insurers need to make sure they are aware of these additional exposures and the implications for their businesses to avoid issues further down the line. This means contacting a broker or insurer immediately following a decision to store extra stock to ensure it is insured to the correct value. Similarly, in the event of a no-deal Brexit, companies will need to consider additional cover or make adjustments to their existing policies so appropriate protection is in place.

This article first appeared in Insurance Day.