New machines, new risks
How the high productivity of today’s machines have created higher risks for manufacturers, and the need for new insurance relationships
By Anthony Giannone
President, Travelers Boiler & Machinery
With today’s computer-driven equipment, machines are able to spit out parts and finished products at a rate that no one could have imagined a century ago. But with modern efficiency has come an increased exposure to the risk of breakdown – and the need for a dynamic interaction between manufacturers and their insurers.
The increased risk is evident. When equipment breakdown coverage was first developed in the nineteenth century, it was called boiler and machinery insurance. Back then, factories had coal-fired boilers supplying steam to stationary engines. The steam engines’ flywheels drove line-shafts containing load pulleys and forests of humming belts connected to clattering production machines. When something went wrong, repairmen – often onsite – could usually jerry-rig something that would suffice until a new part could be found. Sometimes the short-term solution was to add workers to the production line to take over tasks by hand that the balky equipment would no longer do.
Today, nothing is quite that simple. Foundries have new semiconductor technology, such as coreless induction furnaces that operate at variable higher frequencies and provide precise control of alloying. Manufacturers’ lathes and milling machines have on-board microprocessor-based controllers that are programmable to run multiple machining operations on a metal part, with automated tool changes between each operation.
Both the pace and the face of the factory floor have changed. Where 20 huge machines used to roar with frantic activity, today’s automated production may only require two computer-controlled machines. With increased efficiency, however, comes new dangers. When one machine breaks down, half the production capacity may come to a halt. Often it is not possible to simply throw more man-hours at the problem because processes can no longer be done by hand. If a replacement part is in Asia or Europe, the delay in getting a machine back online may threaten a company’s ability to meet contracts and generate cash.
At that point, a manufacturer’s first thought may not be to turn to its insurer for help. And it should be. The traditional role of covering monetary loss after the fact is no longer an insurer’s sole interest and responsibility. Today’s best equipment breakdown insurance comes backed with the expertise to find the fastest resolution to problems that can get a company back to work and eliminate further business losses. The working relationship between manufacturer and insurer can benefit both if the insurer is called in quickly.
Stepping in Upfront
Three case studies illustrate how a savvy insurer works with businesses before manageable problems grow into torrents of red ink.
A printer with a business heavy on production of date-critical, full-color material faced a crisis when a sudden jam in the in-feed section of a six-color printing press caused severe damage to the first three printing stands. The press, built in the late 1990s and out of warranty, was extremely important to the insured’s operations. It was unknown if repairs would be able to return the unit to its full capabilities – but what was certain was that there would be a long period of downtime that would disrupt business and threaten established customer relationships. The insurer’s claims department helped the printer find a suitable used printing press – and authorized a full-replacement-cost benefit. While the potential business income loss that was averted cannot be calculated, forensic accountants are certain it would have well exceeded the $150,000 replacement cost.
Locating appropriate replacement equipment was also key to the resolution of a second case. An office building’s 230-ton air conditioning unit suffered a massive failure, rendering it totally inoperable at the height of a heat wave. The insurer’s claims department aided the building owner in locating and renting a temporary cooling unit within two days of the loss so that operations would suffer minimal impact. The policy covered the $20,000 per month rental plus the $10,000 delivery and installation cost – as well as the replacement of the failed unit at a cost of around $147,000.
In another case, the recent purchaser of a shopping plaza with tenants that included medical and dental clinics and retail facilities was hit with an electrical breakdown that damaged air conditioners and threatened continued operation of the tenants. Besides having to replace the main electrical cables that led to a utility-owned transformer, the owner needed to replace multiple cables supplying nine tenant spaces and two air conditioning compressors. In addition, the best solution for tenants was to install temporary rental generators to keep the shopping plaza open. The insurer covered the loss and authorized advance payment to obtain the rental generators and expedite repairs.
Even though the first inclination for a manufacturer or equipment owner is to find a way on their own to get back into business quickly, the benefits of working closely upfront with insurers is clear:
- Insurers may be able to authorize coverage that the owner is not even aware is available as part of their policy
- They often have repair and replacement resources that go beyond the limited knowledge of the owner because of their wide network of customers
- They can protect the owner from making the mistake of having unauthorized expenditures that may not be covered retrospectively
The key is to remember that both the owner and the insurer have aligned interests: limiting income loss by getting the company back into business quickly.
Finding the Right Insurer
For the relationship to work well, a manufacturer has to find an insurer that is proactive and flexible in its approach. Beyond claims handling expertise, the following are key areas to examine when deciding what insurance company to select:
- Portfolio of coverage. The ever-changing nature of technology, as well as its application, requires product flexibility. In addition, there is no single answer on whether to include equipment breakdown coverage in a package policy or to maintain the coverage as a standalone policy – it depends upon the circumstances. For customers whose breakdown exposures are small in nature, such as the neighborhood grocer, packaged equipment breakdown coverage is the solution. For customers with higher challenge exposures, like a mid-to-large-sized manufacturing firm, there is no denying the benefits of tailored, standalone equipment breakdown coverage. A quality insurer has both packaged and standalone equipment breakdown products with the coverage flexibility to provide protection today for the exposures of tomorrow.
- Underwriting flexibility. Highly efficient and effective centralized underwriting has many advantages. However, now more than ever, an in-depth local approach is needed. Carriers may offer both options, but the key lies in whether the agent has the choice. Exposures that once needed a quick look may now require on-the-spot local expertise. Underwriting flexibility with multiple available coverage options is a crucial element to effectively providing comprehensive equipment breakdown coverage.
- Risk control services. Predictive and preventative maintenance services and risk evaluations are critical. Risk control services may begin with boiler inspections, but there is a lot more to be considered. The difference between a boiler inspection service and a top-tier risk control organization is the ability to identify and manage risk using experts from across many engineering disciplines, not just equipment breakdown experts. A superior carrier has resources in all fields and makes them available to clients.
- Technology loss trending. Leading equipment breakdown carriers distinguish themselves from the competition by moving beyond simple claim reporting to new technology loss trending. When new technology emerges, effective claim organizations gather rich and consistent loss data in order to have the edge in identifying loss trends with the newest of technologies. The best equipment breakdown insurance providers reject the knee-jerk reaction of increased premiums and reduced coverage for new technology and, instead, incorporate true loss trending to enrich the quality of the underwriting process.
Any equipment owner has only to look at his operations to know that we’ve moved into a new era of manufacturing. What may have escaped attention, however, is that insurance also has evolved to meet the demands of this new era. No manufacturer today should be satisfied with just paying premiums and looking for income recovery when equipment breakdowns occur. By engaging with the right insurer, manufacturers can gain access to expertise that will get them back online quickly, fulfilling the demands of their customers and keeping the cash flowing.
The views expressed in this article are those of the author and do not necessarily reflect the views of The Travelers Companies, Inc. or any of its subsidiary insurance companies (“Travelers”). This paper is for general informational purposes only.