Floods, fire and theft rank with ill-advised cost-cutting

Article in Risk Management suplement of the Financial Times By Andrea Felsted on 18 November 2008

"As the economic outlook for the UK becomes more gloomy, so the risks that businesses face multiply because, according to Peter Jackson, sales and marketing director for Aon Risk Services in the UK, "when times are tougher, the worst is more likely to happen."

One reason the risks are higher is because business have more stock because it is difficult to shift. Because of financial constraints they may wish to cut back on insurance, but actually lose more if there was a fire or through theft.

Other cost saving may be cutting back on maintenance, equipment may be replaced less regularly, or plant may be repaired rather than replaced. Directors need to be particularly aware of the risks as they may be held personnaly responsible if someone dies as a result of that equipment failing. Companies should have a clear idea of the minimum level of maintenance spend they can live with rather than just incrementally cutting and seeing what goes wrong.

John Scott, head of risk insight at Zurich Financial Services UK, says that when companies cut costs “management often take their eye off the ball on the simple, really key stuff around health and safety. We often see an increased trend of workplace injuries. That is something that is a consequence of tightening belts. Well-managed companies try to do both. They try to cut back but without jeopardising staff safety.”

Research commissioned by FM Global, an insurer of commercial and industrial property, suggests that risk management is not an area where costs should be cut.

Some 71 per cent of UK investment analysts it polled believed that companies should pay more attention to their risk management activities during the next five years.