AXA and Groupama are among the companies making contingency plans for the recession

Insurers are reviewing their supply chains and drawing up contingency plans in case their suppliers go bust next year.

AXA has begun investigating its suppliers, from body shops to disaster recovery contractors, looking at their financial strength and reliance on other suppliers.

It will now draw up a strategy to deal with claims settlement in case its supply chain is compromised by the collapse of one or more key companies.

David Williams, managing director of claims at AXA, said: “We are looking beyond the immediate financial position of our suppliers and looking at who they are obtaining goods from.

“Our suppliers are running on very tight margins so they could be affected by bad debt or a need to restructure their finances. We need to have a contingency plan in place.”

Groupama is also looking at its suppliers for early warning signs of financial difficulties such as sudden changes in staff numbers or supply times. It will also ensure it has alternative suppliers in case of bankruptcies.

Phil Bird, the company’s claims director, said: “We need to be vigilant in these difficult times. These things are good practice but are even more important now.”

Williams said the collapse of Woolworths and its distribution arm EUK had underlined the fragility of supply chains. EUK supplied CDs and DVDs to retailer Zavvi and to supermarkets.

He said: “It [the Woolworths collapse] happened so quickly. We are trying to get our heads around it. We are asking more questions of suppliers than in the past and investigating what our response should be.”

One strategy, he suggested, could be to increase cash settlements rather than replace lost or damaged goods or enlist a contractor to make repairs.

“It depends on what the customer wants. Increased use of cash payments can adversely affect loss ratios but, in the current climate, deals can be done.”

Meanwhile, the perilous state of the UK car industry could be a major issue for insurers who rely on garages connected to motor dealerships.

Ian Clark, an insurance partner at Deloitte, said: “An insurer could be left without a body shop in a particular region if it relies on a network of garages linked to a dealership [that subsequently collapsed].”

He said the insurers should have contingency plans as part of their recession planning.