Machinery breakdown risk in spotlight as claims rise

Machinery breakdown risks are coming under increased scrutiny after an uptick in claims, according to specialist property insurer FM Global. In response, the insurer has instigated a new risk engineering process and is now able to better advise risk managers of potential machinery breakdown losses, helping them prioritise maintenance. According to FM Global’s Owen Lewis, the insurer has experienced increased frequency and severity of claims linked to machinery breakdown. “Over the past couple of years, we have seen a real uptick in machinery breakdown claims, as machines are worked harder and with an increased financial dependency on equipment and machinery in general,” he told CRE. The trend is most pronounced in high-hazard industries like power generation, mining, paper milling and semiconductor manufacturing, explained Mr Lewis. “Some 70% to 80% of property losses in high-hazard industries are due to machinery breakdown. But we also see significant increases in commercial and manufacturing plants, where fires are often caused by machinery breakdown,” he said. About 70% of machinery breakdown claims involve a degree of human error, such as operating equipment outside design conditions, inadequate training for operators, and trips, said Mr Lewis. “What we have seen in 2017 and 2018 is equipment in large manufacturing plants, power generation and chemical industries worked hard to get high utilisation and productivity rates, so companies may defer maintenance,” said Mr Lewis. “However, projections for 2019 and 2020 suggest that the global economy might be turning and there is also a Brexit effect for the UK and EU. Companies are now growing more concerned about cost,” he said. Longer term, machinery is becoming more specialised, while increased manufacturing efficiency has reduced redundancy, explained Mr Lewis. “The economic impact of machinery breakdown is growing more acute, which we see reflected in claims,” he said. “What we are seeing from the insurer’s side is that loss costs are higher – due to the economic cycle and how machinery breakdown plays out in the business interruption loss,” Mr Lewis said. “Machines are more complex than ever and in some industries the number of equipment manufacturers and suppliers has reduced, so the time to get replacements or major spares is typically high. Equipment often needs to go back to the manufacturer for an overhaul, but they may have capacity issues,” he said. The trend for machinery breakdown losses has led FM Global to increase its focus on machinery breakdown exposures, both in its underwriting and risk engineering. “From this year, we now quantify machinery breakdown exposures in pounds and pence. We are now able to provide a severity measurement that includes the system-level impact of the breakdown and gives us new data that we can work with the client on, and feed that back into our underwriting and risk engineering approach,” said Mr Lewis. “Our underwriters need to make risk transfer decisions and ensure that the insureds have the risk evaluation advice to reduce the likelihood of losses,” he added. FM Global has extended its client risk evaluation system to inform underwriting and provide risk engineering advice. FM Global’s risk engineers evaluate a number of machinery breakdown risk indicators, including maintenance, operating conditions, environment, operators and equipment history, safety devices and contingency planning. These all drive the likelihood and potential impact of a breakdown. “Our engineers now calculate the potential scale of damage from machinery breakdown and how long it would take to reinstate. This helps risk managers understand their machinery exposures and work with businesses to prioritise maintenance,” said Mr Lewis. Where three or more risk indicators are unsatisfactory, the likelihood of machinery breakdown resulting in a significant loss increases five-fold, according to Mr Lewis. “The loss prevention process is important. Companies need to first understand the exposures and work with insurers to prioritise any risk management strategy that requires outage planning and capital,” he said.

Machinery breakdown risk in spotlight as claims rise

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