The UK Manufacturing Industry

Existing trends & the Insurances available to help prevent losses for your business

The key facts identified about this sector are:

The UK manufacturing sector remains a vibrant and critical element of the UK economy
representing some 16 % of UK turnover and making it the third largest sector in the UK after
professional services and wholesale & retail.

Key trends impacting this market

There are 3 areas where UK manufacturing maintains its globally competitive edge: 1) high-tech
innovation, 2) international expansion, and 3) a highly skilled workforce. These are also the areas
where insurers should concentrate their efforts in order to differentiate.

Rank Sub-sector by GVA £million

1 Food, beverages & tobacco £22,134
2 Transport equipment £16,898
3 Basic metals & metal products £15,609
4 Basic pharmaceutical £13,344
5 Machinery & equipment (other) £10,940
6 Manufacturing & repair (other) £10,868
7 Rubber & plastic products £10,837
8 Wood, paper products & printing £10,556
9 Computer, electronic & optical £9,055
10 Chemicals & chemical products £8,882

Industry Trends Impacting the Manufacturing Sector

Key Themes Description Insurance Requirements

Companies are aggressively pursuing geographical • Multinational insurance

expansion as a way of broadening their customer base. UK • Political risks cover
mid-sized businesses are favouring countries like China, • Economic, social, legal and
India, Brazil, as well as in the Middle Eastern region. The political updates on key
rapid pace of change implies a need for international trading markets
Geographical insurance coverage. • Business travel insurance
Expansion • Marine cargo & freight
Geo-political risks have greater implications for UK liability
businesses that are internationally spread-out. Changes in
government, economic policies or tax legislations can have
immediate and significant impact on businesses’ revenues.
Subsequently, there is a need for greater information and
 support in this area. Therefore, more regular contact and
channels of communication with insurers is desirable

Diversification is seen as a key tool to offset the effects of • Risk management

economic pressure. As well as expanding into new consultancy
territorial markets, businesses are embracing other forms of • Risk management bursary
diversification:
• Manufacturing errors &
1) Related products based on existing competencies -
branching out into related products and applications omissions
means businesses can complement their current product • Patent infringement
line and manufacturing facilities. Related products are • Extend cover for prototypes
often seen as value-added to the business as it opens them during testing,
Diversification up to new markets while exploiting an existing core commissioning and
competency.
installation
2) New products and processes
Some businesses are moving to new products and
processes altogether in order to meet the changing nature
of demand and maintain an edge on the competition. This
comes with an additional level of risk, associated with a
more general move into unknown territory.

With increasing international competition, customers are • R&D investment costs

demanding lower costs for the same, he use of modern • Machinery valuations
technology to drive down costs is resulting in the following • Machinery breakdown /
shifts: explosions/ BI insurance
1. Increase in R&D-intensive manufacturing – investment • Computer and electronic
in R&D in order to drive technological enhancement is equipment insurance
required to differentiate and to continuously improve • Engineering Inspection
product quality Services
2. Automation – manufacturers are using robot machinery • 1st & 3rd party Cyber Liability
and CAD to improve their operational efficiency • 1st & 3rd party product recall
Technological 3. “On-demand” manufacturing – online ordering and expenses
advancement automation means manufacturers are increasingly • Product recall BI
looking at the possibility of “on-demand” production • D&O insurance
which will help to reduce waste and stock held
• Patent infringement
• Thermal imaging surveys
These shifting trends are leading to an increase reliance on
• Business Continuity training
complex manufacturing tools and machinery, as well as a
/ support
dependency on computer and software tools in
production (including internet linkage0. • H&S training / support
• Manufacturing risk control
bulletins
 As emerging markets mature, more emphasis is put on • Increased need for
quality in the pursuit of competitive advantage. specialist Engineering
Subsequently, we are seeing certain types of production, insurance and inspections
that were previously done in low-cost economies, moving services related to
back to or closer to UK markets where quality controls can production
be guaranteed and there is access to high skilled labour • Good in Transit
“Reshoring”
and/or niche high-tech processes.
Manufacturing sectors most likely to “reshore”, are:
• Computer, electronic
• Optical products
• Aerospace

The downward pressure on costs can also result in • Multi-national insurances

increased pressure to move simple production or part of • Intellectual property
the supply chain to countries in which labour is much (defence & pursuit)
cheaper and regulation/tax can be less demanding, which • Full Product recall
comes with increased risks and insurance requirements. • Economic, social, legal and
Offshoring /
Specific concerns are being raised regarding the political updates on key
Outsourcing
operational environment in these new emerging markets. trading marketed
These include reduced capacity for quality control, • Enhanced CBI and
inadequate supply chain controls and traceability issues, outsourced manufacturing
limited intellectual property protection, a rising trend in
counterfeiting, as well as broader geo-political risks
As well as the core business of ‘making things’, services • Professional Indemnity
continue to be an important part the manufacturing sector • Pure financial loss
across all sizes, providing an additional revenue stream and
the capability to help create long lasting relationships with
customers. Examples include: helping customers install
new products, traditional after-sales and repairs, overall
Increased maintenance and technical advice.
Service The increased service component comes with an additional
Component risk that is not always assessed by mid-sized businesses
that still very much see themselves as manufacturers first
and foremost. The range of service activities can quickly
move beyond the reach of product liability policies into
professional indemnity risk territory. This can easily leave
businesses without protection for what is potentially a high
impact risk.
Increased competition from foreign markets means • Reputational risk cover
businesses must maintain a competitive edge to survive. • Crisis Management
With developing markets able to leverage cheap labour • Product Recall / Tampering
costs, manufacturing firms in developed economies cannot • Essential personnel cover
Focus on compete on the basis of cost alone. Subsequently more UK
quality based manufacturers are restructuring their operations
away from competing primarily on price and putting a
much greater emphasis on product quality, knowledge,
customer collaboration and brand/reputation.
 Energy management is becoming a key part of every • Energy Services
manufacturer’s responsibilities. Energy costs are continuing • Carbon offsetting
to rise and there is increasing pressures to reduce the
environmental impact.
Energy Costs CBI predicts that over the course of the next decade many
firms will be turning to newer, cleaner technologies in
order to power their operations. Also, a survey by EDF in
2013 showed that two thirds of companies are investing in
energy efficiency to reduce their carbon footprint.
Manufacturers are facing a shrinking pool of qualified • Supply chain assessments
suppliers, thus increasing the risk of disruption and pushing • Business continuity
businesses to look for suppliers further afield, in markets training/support
like China and India. • Product recall
This comes with additional risk in terms of supply chain • BI suppliers’ extensions
Reduced
traceability. Also, having to look for alternative suppliers • 24-month IP (incl. suppliers)
Suppliers
further afield can make businesses more prone to
compromise on quality standards, which could have
serious implications for product liability exposure.
Concerns around product standards and operations control
can potentially translate into major product recall.
In order to keep costs down, manufacturers are using a • Employment practice
greater proportion of temporary and contract labour to • Imbedded crime/fidelity
deal with fluctuations in demand. At the same time, they cover
are facing a rising trend in employment liability, with much • Insurer/solicitor managing
of this attributed to the rise in prominence of ‘no win no EL training
Changing
fee’ legal assistance.
Employment
Rising premiums as a result of increased employer’s liability
Trends
claims are an additional cost that companies can ill afford
to bear, which is why additional support is needed to
reverse this trend. This could be in the form of re-aligning
incentives for staff, while also investigating areas like
training and awareness programmes.
The last few years have seen an exponential increase in EU • Relevant news updates
rules and regulations in various areas. Companies have to • Pollution liability
devote more resources to keep up and comply with such • Pollution clean-up
rules, which can be a source of frustration. • Specified legal expenses
Example - EU environmental regulation: compliance at UK cover
Regulation and EU level means that companies are at the forefront of
carbon-efficient technology to meet a clear and growing
demand from customers who are looking for ‘green’
products. Insurance partners should be paying particular
attention to value-added services and innovative solutions
for these specific areas.

Wholesale and retail

The key facts identified about this sector are:

• The Wholesale & Retail sector represents 13% of companies registered in the UK and generates
approximately 16.6% (aGVA £162.1bn) of the UK's overall wealth

Key trends impacting this market:

As companies in this sector look to diversify and grow, exposure to new and emerging risks
appear. For example there is an increased reliance on IT systems and growth in online sales
making companies more prone to cyber-attacks. Subsequently, insurance solutions need to adapt
to current market realities.

Key themes impacting the Wholesale & Retail sector

This research has uncovered a number of hot topics in this sector and looked at how these are
impacting businesses, as well as their potential risk and insurance implications.

Economic pressure
• The economic downturn affected mid-sized Wholesale & Retail businesses, especially
those with a high European presence
• The downward pressure on costs might mean an increased need for off shoring and
outsourcing which may subsequently lead to increased risks and insurance requirements
overseas
• In a recent poll more than 25% of mid-sized Wholesale & Retail firms told the CBI they
intended to grow in the next five years, recognising that insurance and risk management
will play a key role1

Supply chain
• Wholesale & Retail companies are facing a shrinking pool of qualified suppliers in the UK,
thus pushing businesses to look for suppliers further afield, in markets like China and India
and increasing the risk of supply chain disruption
• Having to look for alternative suppliers makes businesses more prone to compromises on
quality standards, which could have serious consequences for Product Liability exposures
• Against a background of ‘hard to monitor’ imports from the Far East and heightened
consumer rights and awareness, more retailers are demanding Product Recall cover to deal
with costs incurred in dealing with faulty products

Diversification
• Diversification is seen as a key tool to offset the effect of the downturn and global
competition. Subsequently, businesses are exploiting new geographical markets
• Businesses are providing an expanding range of services in addition to their core products,
blurring the lines between distribution and service provision6

Employment
• In order to keep costs down, businesses are using more temporary and contract labour to
deal with peak periods and fluctuations in demand
 • Businesses are facing a rising trend in Employment Liability, with much of this attributed to
the rise in prominence of ‘no win no fee’ legal assistance

Technology
• Internet sales have shown double-digit YOY growth since 2009, with average growth of
approximately 18% in that period2
• More companies are seeking solutions to protect their systems from malware attacks

Regulation
• The fallout from the financial crisis has meant that companies in this sector have had to
face more stringent rules and regulation, especially in the field of financial reporting
• Clients are increasingly looking to insures and brokers for advice and support
• The importance of green issues, such as environment clean up legislation and green trade-
up are all increasing

Brand Awareness
• More companies are recognising that mismanagement of a brand following a major
incident such as product recall can severely damage a company’s reputation and lead to
severe loss of customer confidence and ultimately, shareholder value.

In summary, as firms look to grow, exposure to new and emerging risks appear. Some key areas
where insurers can provide solutions that are better adapted to current market realities include:
• Assessing the growing importance of R&D
• Updating existing solutions for intellectual property
• Providing greater support for businesses’ international expansion
• Identifying supply chain vulnerability
• Fully protecting businesses from potential losses of reputation and brand image
• Protection against cyber attacks

2 See Appendix 2 – Sourced from ONS ‘Retail Sales’