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The big shift in retail risk

Evolving retail risk is changing insurance needs for traditional brick-and-mortar and rising e-commerce distribution channels. That means new opportunities for brokers…



HMV Canada is the latest retailer to succumb to the digital era. The music retailer, which will be closing its 102 Canadian stores this year, follows other big retailers—such as Walmart, The Gap and Macy’s, to name a few—that have closed many of their brick-and-mortar doors.

On the flip side, online sales are bursting at the seams. According to the report The State of Retailing Online 2015, U.S. e-commerce in that year grew to US$304 billion, and research company eMarketer estimates that, by 2019, 9.8 percent of U.S. retail sales will be conducted online.

But despite the closing of many big-box stores and the rise in e-commerce, insurance carriers and brokers still see retail insurance—whether online or brickand- mortar—as a profitable investment.

“HMV and what they’re going through—that’s part of the natural market cycle,” says Shane Neil, underwriting manager, consumer and business services and professional liability with Northbridge Insurance. “Some companies will move toward online and others will have their niche in brick-and-mortar. From our perspective, retail [insurance] is a centre that has probable growth.”

James Grieve, commercial lines manager at JWK Insurance, agrees. “Most of the insurance companies in Canada target the retail space,” pointing to the fact that the majority of businesses in Canada are small (with one to 99 employees). Statistics Canada data show that, as of December 2015, small businesses comprised 97.9 percent of total businesses. “It’s definitely lucrative because it’s very profitable. Even though you see some large companies going to online distribution, there are still retail plazas being developed every day.”

“I think there’s a misconception that the retail space is completely going to an e-commerce setting,” says Keegan Iles, director, insurance consulting leader, with PwC Canada. Statistics Canada reports that e-commerce sales of total retail sales for 2016 averaged approximately 2.0 percent each month.

…as these risks are evolving, a standard policy language might not be adequate for some of these new retail experiences.”

Like Grieve, Iles notes that retail spaces are still being bought. In fact, from Q3 2015 to Q3 2016, the retail commercial space that was leased in Toronto increased by 30 percent, Iles says. “Clearly, the square footage, as it relates to the commercial retail sector— has been increasing.”

Retail risk shifting

What is changing, however, is the type of insurance coverage retailers need. “If you think of a main street retail space,” says Glen Bates, vice-president, commercial insurance, Eastern Canada, and small business, Canada, with RSA Insurance, “it’s physical property, liability and business interruption. Traditionally, that’s what it’s been about.”

But as some retailers move to online distribution, cyber security becomes an issue. “Large retailers hold people’s data—credit card data, personal data—so the biggest threat and the biggest change that’s been going on in retail insurance is protection of people’s private information,” says Bates.

That, he adds, has changed the insurance landscape, as insurers and brokers are developing products around cyber, systems and data protection. “Selling online doesn’t mean out of sight, out of mind,” he says. “Whether you’re online or whether you’re in a physical store, you still require insurance to protect your assets and your liability and the loss of income.”

And data protection is not simply for large retailers with a sophisticated e-commerce component. “Even a small retailer that does business out of their house and doesn’t have a physical location still has some inherent risk in sending their product by mail or courier and in collecting client information online,” says Grieve.

While the online distribution model is not going away, Grieve says it can be challenging for insurers and brokers. “The biggest challenge for us is getting to know the customers and what, exactly, their operations are,” he says. “If you walk into a retail space, you can see what they’re selling. You can see the construction, the occupancy, the protection exposure. But when somebody’s distributing products online…sometimes it’s a little different nailing down what those operations are, where they’re working out of and obtaining that physical location information.”

Traditional insurance changing

While the world of e-commerce has its own issues of security, traditional insurance for brick-and-mortar stores has also changed—from expense. One change is the potential now for greater severity in slip and fall claims, according to Amandeep Dulku, senior underwriter, alternative risk transfer, with Zurich Canada.

“In the past, you may have seen slip and fall claims top out around $100,000, but now you see more claims higher than $100,000.” The reason? Dulku associates the increase with legal costs and our now more litigious environment.

Another is the business interruption side of property policies. Previously, losses on property policies were more heavily weighted toward actual property damage, Dulku says. But, in recent years, a higher proportion of losses on property policies is coming from the business interruption coverage. He points to the 2016 Fort McMurray forest fire as an example. “You may have had retailers in that space where their buildings didn’t burn to the ground. However, they did have high business interruption exposure given that they weren’t sure whether customers were going to come back,” says Dulku.

Then there are the new risks for retailers as they’re beginning to expand their product offerings. “In the supermarket retail space, there are new trends, such as alcohol sales in Ontario,” says Dulku. “Now in the retail space, you would have to train your employees to ask for ID or [consider] the new store hours you would be able to sell beer and wine in your store. That’s definitely a change to that aspect of retail.”

Chubb Insurance, in its Supermarkets: Addressing the Risks in an Evolving Market report, adds that retailers should consider limiting the amount of alcohol a customer can buy at one time, or monitoring their parking lots to ensure customers aren’t drinking on their property.

Considering marijuana sales, Zurich has some customers that have pharmacy sales as part of their business. “If marijuana is to be sold at a pharmacy, you’re looking at new risks and managing those risks,” Dulku says.

…despite the closing of many [retail] stores and the rise in e-commerce, insurance carriers and brokers still see retail insurance…as a profitable investment.”

Though actual legislation for cannabis is still to be determined, some of the potential risks include managing the risk of ensuring the product remains out of the hands of children and criminals; and differences between provincial and federal regulations on how cannabis can be sold and to whom, for example age restrictions.

And what of the retailers (such as Shoppers Drug Mart) that are now broadening their product offerings to include produce and food staples? The Chubb report offers some insight: for example, retailers need to consider food handling procedures (which would include maintaining appropriate storage temperatures) and best-before dates. Another example concerns liability in food preparation, as the report states: “Stores that sell prepared foods and dishes have to closely monitor how that food is made and cooked. They should not overlook the possibility that disgruntled employees may try to put something into the food to damage the store’s business and reputation.”

That’s good advice for Amazon Go, Amazon’s new 1,800-square-foot food storefront in Seattle. Currently in beta form, allowing only Amazon employees to shop, Amazon Go will soon open to the general public to shop for food and beverages without having to wait in a checkout line. Customers simply need an Amazon account, a smartphone and the free Amazon Go app. The storefront retailer will offer “…ready-toeat breakfast, lunch, dinner and snack options made fresh every day by…on-site chefs and favorite local kitchens and bakeries.”

There are also retailers with services conducted by machinery. Consider Cafe X, a robotic coffee shop located in San Francisco. “You can order off your app and a robot fills your order,” says Matthew Lawrence, a manager within PwC’s insurance consulting practice, noting how this may impact a commercial retail policy. “Now you’re talking about boiler and machinery coverage for robots, versus simply covering your boiler or refrigerator unit.” This is how the retail landscape is changing, and how insurers will now have to look at different coverages for their clients. “It’s the type of risk that’s changing,” says Lawrence. “More than the retail landscape itself.”

With this in mind, Iles says that brokers need to ensure the policies they’re selling are adequate for their clients’ needs. “Traditionally, especially for smaller retailers, [brokers offer] package policies that combine a property policy, a liability policy and a business interruption policy. It’s all put together and becomes a standard or boilerplate,” he says. “But as these risks are evolving, a standard policy language might not be adequate for some of these new retail experiences.”

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Copyright © 2017 Transcontinental Media G.P. This article first appeared in the March 2017 edition of Canadian Insurance Top Broker magazine

Transcontinental Media G.P.