Compass Group points the way to improved risk management

28-10-2020

Compass Group points the way to improved risk management

Scott Feltham, Compass Group

The COVID-19 pandemic has taken a heavy toll on Compass Group, the contract catering business. When the virus struck the company was in the process of overhauling its insurance and risk management strategy, and now an enhanced role for its captives may position it well for future challenges. Captive International spoke to Compass Group's Scott Feltham.

One of the world’s largest contract catering businesses, Compass Group operates in 46 countries around the world, with a presence in Europe, North America, Latin America and Asia. It generated revenues of £25 billion in the year before the COVID-19 outbreak, with roughly 60 percent of its revenues coming from North America.

The business has been hit hard by the pandemic, with many of the sectors it operates in particularly exposed to the virus-induced slowdown. Compass Group makes around 70 percent of its revenues from sports and leisure, education and business and industry catering, all of which saw dramatic falls in demand when the world’s economies shut down, says Scott Feltham, group insurance manager at Compass Group.

Compass Group was one of the biggest casualties in the Financial Times Stock Exchange index during the lockdown, although its share price has started to recover as economic restrictions have eased.

“Younger brokers are arguably not as well-versed on how captives can add value because they have never experienced a hard market before.” Scott Feltham, Compass Group

The business fundamentals, however, are strong. Compass Group has strong relationships with its clients, which include the UK’s National Health Service, as well as other healthcare and defence providers.

“We have a strong balance sheet, which was supported by a £2 billion equity raise in May of this year,” says Feltham.

Compass Group has been trading since 1941, so it is no stranger to crises. In recent years, however, it identified the need to overhaul its insurance and risk management strategy. It was with that in mind that Feltham was hired in 2019, creating a new role that gives him licence to review the business’ insurance needs and recommend changes to make the business more efficient.

Focus on insurance

“In the past insurance felt slightly on the periphery of things and there was less focus than there might have been on the role it can play as a risk financing tool,” says Feltham. “Reviews of the insurance strategy were more infrequent. That is not so much of an issue in a soft market because coverage is relatively cheap, but since the market started hardening the approach has started to change.

“As the business and our exposures have grown, and the cost of coverage has increased, there has been more attention on improving the strategy, and we are looking to conduct reviews more often, perhaps every two or three years.”

Feltham believes the company can reduce its insurance expenditure while at the same time reducing coverage gaps. The group’s captive, he says, is likely to play a significant role in that.

Feltham had previously spent nearly 10 years at Amey UK, an infrastructure company he joined as the group insurance manager in 2009, before working his way to become group head of insurance.

Before that he worked at Balfour Beatty, another infrastructure group, in an insurance management role. Balfour Beatty and Amey both had their own captives, giving Feltham first-hand experience of working with these structures, and a clear understanding of their advantages.

This knowledge is likely to be invaluable as he reviews Compass Group’s own insurance strategy. Compass Group has two captives of its own, one active and one dormant, and Feltham sees a significant part of his role as finding a way to extract maximum value from them.

A business enabler

Compass Group inherited the dormant captive as part of a company acquisition back some time ago and it stopped writing new business in 1994, creating a modest but manageable ongoing expense for the company.

“We have not yet decided what to do with that captive just yet. We are considering various options, including a loss portfolio transfer or Part 7 transfer . All options are on the table,” says Feltham.

The other captive is active and has been operating for 15 years, writing a range of coverages, including general liability, global property damage, UK employers’ liability and UK third party motor insurance.

“I think the captive may have been underused in the past. It has generally been treated in isolation, not integrated into the broader risk management strategy,” says Feltham.

“We need to help open the eyes of all our stakeholders to what is possible when it comes to the captive. It has been used for the bare minimum but it can be used for much more. That is something I plan to look at over the next 12 months.

It is hardly surprising that so few people at Compass Group truly understand its captives, what they do for the business or what more they could be doing. Many in the insurance industry barely know much more about them, Feltham notes, and are therefore not in a position to advise the group about using them more efficiently.

He believes brokers should work hard to increase their own understanding of captives, so they are better placed to educate their clients about them, and offer better advice about getting the best out of them, especially as the insurance market hardens and there comes a greater demand for alternative ways of financing risk.

“The older generation of brokers have been through market cycles before and know the benefits captives can bring. Younger brokers are arguably not as well-versed on how captives can add value because they have never experienced a hard market before.

“This brings about a need for brokers to upskill and provide further training to their staff,” says Feltham.

He explains that his plan is to look more closely at how the business finances different types of risk.

“We need to alter the mindset around insurance, so it is not seen as a necessary evil but as a business enabler,” he says. “Insurance needs to contribute to the broader prosperity and strategic direction of the business.”

Non-damage business interruption (BI) coverage is a perfect example of this, he says. “Our business profile is unique, we operate at many high profile events, at sports venues such as Twickenham and Wimbledon, as well as in schools and hospitals.

“These are properties we don’t own, and we don’t own many fixed assets considering the size of the business.”

Commoditised, commercial BI coverage therefore offers only limited value, and certainly does not address the full spectrum of risks that could be considered to fall under BI.

If something happens within 25 miles of an event where Compass Group is catering, and stops people turning up, that is certainly a significant disruption to the business, but it is not covered by the group’s existing BI policies.

“Of course, we need BI and property damage cover for our kitchens, but we also need event cancellation and reputational risk coverage,” says Feltham. “That is something we could look at writing through the captive given the absence of any real appetite within the external market to write these kinds of non-damage BI risks at present.”

A big incentive, then, is securing coverage that more closely matches the nature of the risks in the business. Another, he admits, is cost. “If the captive can smooth out the costs of cover that is a huge incentive,” he says.

Know your risk

A third reason for increasing the amount of business written through a captive is the increased understanding it gives the owner of the risks facing the business.

“It is about understanding your own risk appetite, and that is something you get from having more data about your risk exposures,” explains Feltham.

“The captive will give us valuable data on claims, risk management, operational processes and cost control. Management can’t think about those things coherently without having a loss transfer mechanism in place.”

These three factors, taken together, could encourage Compass Group to write a number of new coverages through the captive, Feltham says, including event cancellation, infectious disease and employee benefits.

“There is not much in the way of event cancellation or infectious disease cover available in the commercial market right now, especially following the impact of COVID-19, so if you eliminate that as an option it leaves writing it via the captive or leaving the risk on the balance sheet as the remaining options,” he says.

“Incubating these risks in the captive is the more sophisticated option because it allows us to gather more data about the risks we are taking. In the future we might go back to the commercial market but we will be in a stronger position if we have written the cover before in the captive and have detailed information about the nature of the risk.”

Whatever new lines Feltham recommends moving into the captive, he stresses the importance of taking things slowly and getting the group comfortable with the new approach.

“We need to move in baby steps at this point, start small and then grow it over time if it works out as our risk tolerance grows,” he says.

“We need to think outside the box and embrace new ways of doing things. But I think non-damage BI will be the first step.”

None of these plans was developed in direct response to the outbreak of COVID-19. Feltham had already been hired before the virus had even been discovered. However, the pandemic has added urgency to the mission, and determined how the business is likely to approach the task of increasing the use of its captive. An obvious priority is to increase its communicable disease coverage, even if this will invariably exclude COVID-19 itself—something that may not have been considered quite so urgent before the pandemic.

Once the review is complete, however, and more business is written through the captive, Feltham is convinced the senior management at Compass Group will have a more enhanced picture of the risks the company faces, which will help it to weather the storm next time there is a crisis that threatens the profitability of the group.

Compass Group, Scott Feltham

Captive International