As in all areas of commercial insurance, engineering insurance is subject to the rigours of changing market conditions and customer demand. The major players within this sector are evolving and enhancing their services – particularly in the current market climate, where client expectations of product and service quality are higher than ever.
So how are engineering insurance and inspection firms responding to their clients' higher expectations? Added-value services are increasingly available to enhance the engineering insurance and inspection package. And risk assessment is a prime example of this.
Risk assessment comes into its own for the high proportion of engineering risks which are normally considered uninsurable. The imperative here is to identify and reduce these risks, so they can thus be insured. To appreciate the growing importance of risk assessment and management, it is worth analysing the history and development of the inspection service provided by engineering insurers.
Engineering insurance and inspection has its roots in the early stages of steam power. In those days, it was boilers that were subject to inspection by the relevant authority. The inspection was driven by both statutory and commercial needs to reduce the risks of death and destruction by explosions of poorly designed and maintained steam boilers.
Today, inspections are conducted by engineering insurers via a field force of engineer surveyors (ES). Each ES is responsible for a geographic region and specialises in a specific discipline, such as pressure/mechanical, electrical, lift and crane or power press. An ES must possess the relevant qualifications and practical experience to meet the requirements of the inspection body's accreditation authority, UKAS. Although the inspection of boilers remains, an ES now has a far wider remit of responsibility in terms of the extent of items inspected and the range of clients purchasing the service.
Millions of items of plant, equipment and machinery are examined by engineer surveyors across the UK every year. These items may range from a power press in a car factory to a lift in an office block or a café boiler in a restaurant. The purpose of an inspection is to ensure the item is in safe working order until the next inspection is carried out.
A new approach
So why has risk assessment become such a potent operational, sales and marketing tool for engineering insurers and brokers? Regulations, as ever, have led the way. Risk-based legislation has transformed the approach to inspections. Engineering inspections used to be conducted against a background of prescriptive legislation. Nowadays, goal-setting laws allow a more subjective view, with risk assessment being a cost-effective consideration.
Best practice is becoming synonymous with increased worker safety as part of a company's work ethic. By ensuring safety, a firm protects the reputation of the brand – indeed, “brand value” is now a measurable commodity. Corporate reputation has always been important, but this is even more the case in today's global economy. The adverse publicity and financial cost generated by an accident or fatality can be immense, as any shareholder of Railtrack will testify.
When looking at the benefits of risk assessment, it may be useful to take a closer look at specific examples of problems that occur in different industries. For instance, in the manufacturing industry, system specialists and designers may fail to predict operational safety loopholes associated with running and maintaining a processing plant.
Computerised machinery directly involved in the process may be safe, but has the specialist or designer considered indirectly related, but critical, ancillary machinery? Say an extraction fan fails in a manufacturing plant. As a result, the entire plant may have to be shut down until replacements have been installed. Engineer surveyors can deploy risk assessment techniques to help reduce the likelihood of this.
Similarly, what if a firm operating at a high volume experiences a small flood in one section of its factory? A maintenance team may consider a flood to be a small problem, particularly if the plant has several duplicating product lines – you could simply shut down one line and continue operating the others. However, the company's health and safety manager may need to intervene on safety grounds and, as a result, the power supply for the entire plant could be shut down – resulting in massive business interruption costs.
In service industries such as hotels, risk assessment is becoming an integral part of the inspection process. In hotel kitchens, where there is always a likelihood of contact between electricity and water, the inspection needs to be regular and thorough, especially when there is a high turnover of part-time, relatively unskilled staff. A failure to adopt preventative measures can have severe financial repercussions if an accident in the kitchen leads to a prohibition notice and prosecution.
A problem encountered by many pressure system engineer surveyors is that their client's process plant boilers are run with inadequate maintenance, with potentially serious consequences. Skimped maintenance, combined, for example, with inappropriate or inadequate feed water treatment, will result in the accelerated corrosion of the boiler tubes. In the event of serious deterioration, extensive repairs or even boiler renewal may be necessary.
Engineering risk management can identify the shortcomings and save lives and money. It is generally acknowledged that a significant defect in a steam boiler in a process engineering plant will present a real danger to the health and safety of employees. However, a boiler breakdown also incurs both a capital cost in dealing with the problem and a business interruption cost, resulting in lost revenue.
Independent third party
The engineer surveyor's inspection of a client's plant and machinery is unique. Few other kinds of services offered by an insurance company involve a physical inspection of equipment. On the commercial side, the broker can point to the benefits of insurers' risk management and independent third-party expertise.
Independent third-party engineer surveyors often discover that their clients overlook obvious faults – it is easy for an in-house team to become overly familiar with plant and machinery. Apart from the benefits of an independent third-party inspection, there is also the fact that independent inspectors do not have a direct interest in the size of any maintenance or repair contract that may result.
The long-term health and success of a commercial enterprise depends on the ability of business managers to safeguard against perils in the workplace. Risk assessment is a key factor in doing this in a cost-effective manner and is being adopted in firms, irrespective of size, across multifarious sectors of the economy.
The challenge for insurers and brokers is to optimise the amount of businesses that use risk assessment, thereby creating a brighter and safer future for all.