Whisky, it is generally accepted, is one of the finest gifts that Scotland has given to the world, a subtle distillation of the rich fields, the rushing rivers and even the sparkle of the air. But, my goodness, it is a complex matter.
Every malt, of course, has its own distinguished pedigree, and 115 licensed distilleries ship 38 bottles every second to appreciative drinkers around the world, generating nearly £4 billion for the UK’s balance of trade.
In excess of 40,000 jobs in the UK are supported by the industry, and at any given moment, around 20 million casks are slowly maturing into the golden water of life in bonded warehouses around the country.
But that last facet of the industry adds yet another complexity. Among all the other elements which distillers have to consider is the value of their stock at given times in this long, slow maturation process.
This is particularly important for insurance purposes. How, for instance, is it possible to accurately calculate the value of a product which will not be saleable for up to 25 years? And how should it be valued if a loss occurs, say, four years into a 25-year laying down?
Like good malts, every distiller is different and their interpretations of valuing stock will also necessarily differ. There is no right or wrong answer.
But just as whisky companies make use of the talents of the best marketing and sales professionals to maximise their global market share, the sensible approach for them is to partner with insurance experts who can create a bespoke proposition for them.
We work with many whisky companies to resolve such complexities. The key, it has found over the course of fruitful associations is to assess matters from a forensic accounting perspective.
This involves drilling down into all revenue streams and working closely with the client to understand what must be considered and what calculations should be made in the event of a significant loss arising.
Consideration should be given to:
Identifying the value of stock between raw spirit, blended spirit and maturing stock;
Discussing how maturing stock could be valued – for instance, book value, brokerage value, direct trading value and going concern matrix;
Assessing the impact of evaporation – original litres of alcohol versus regauge litres of alcohol;
Loss of production;
Loss of gross profit;
Increased cost of working/additional increased cost of working;
This, essentially, is what any insurer will look for to quantify its exposure. Recognising the complexity of this topic, Lockton has a simple question for distillers. It will not start any discussion with the question: “How will your insurance policy respond in the event of a loss?” Its starting point is: “How do you want your insurance policy to respond?”
Gordon Duncan is Partner and Head of Corporate at Lockton Companies LLP.