Once upon a time it meant insuring heavy machinery - now it covers everything from computers to
coffee machines. Claire Veares looks at the rapidly changing face of engineering insurance.
Cybervandalism is not the first thing that springs to mind when thinking of engineering insurance, but the damage caused to a modern business when a website is hacked into, gets attacked by a virus or goes down for a length of time, can cause just as much disruption as the breakdown of heavy machinery.
Modern policies also take account of aspects of business life that were unimaginable when this type of insurance was first taken out - such as stress caused by inefficient working practices and the possibility of the espresso machine in the local coffee shop exploding.
A product of the steam age, engineering insurance began life covering boilers against the possibility of explosion. But, as the tools of business have changed, so has engineering insurance, adding computers and coffee machines to the traditional boilers, lifts and heavy machinery.
General manager of engineering businesses for Royal & Sunalliance (R&SA) Ian Currie claims that engineering insurance these days is pretty wide-ranging, covering office equipment such as computers, printers and photocopiers, kitchen equipment and machines powered by steam. "Anything that's got moving parts," he says. "The biggest things for us would be lifts and computer equipment. On the pressure side, it would be the old boiler-type installation."
As well as the new types of cover offered by a changing insurance industry, attitudes towards engineering insurance have changed. Currie says insurance has moved on and now looks at the whole picture, rather than just paying out for a new boiler. It now assesses risk management and business interruption - reducing the chance of insurance needing to be used and thinking through what will need to be done if something does go wrong.
Currie gives computers as an example. Twenty years ago, engineering insurance covered computers, so if a breakdown did occur, the computer would be mended or replaced. Now it will cover the data held on those computers as well. "When breakdowns do occur, there is more exposure to business interruption," he says.
But companies often lack awareness of the business interruption risks to their cashflow, Currie says, and lack contingency plans should anything go wrong. They need to look at business interruption cover and have a supplier for new equipment lined up, so the path back to business is as seamless as possible.
He says small and medium-sized companies are not necessarily the best at doing this and may not be getting all the advice they might need, due to reorganisation of the broker market. "There has been a reduction in the number of specialist engineering brokers over the past 12 to 18 months throughout the market," he says.
This is a view echoed by Zurich Engineering marketing manager Emma Mundy. She says engineering insurance is a relatively small area that is not receiving a lot of attention from brokers and doubts whether the situation will change. She says it is up to insurers to fill in gaps in their engineering insurance clients' knowledge. Due to its nature, engineering insurance has historically been a separate line of business, she says, citing specialist skill requirements as the cause of this trend.
Reducing the risks
Zurich Engineering major account manager Ian McNeil agrees with Currie that risk management is an important part of engineering insurance these days.
He says this makes perfect sense, recalling a saying that it is only possible to insure for around 15% of risks - for the remaining 85%, you have to reduce the risk of them happening.
McNeil agrees that bigger companies tend to have adequate risk management measures in place. Mundy points out that the Turnbull report has been a driver in this area, as plcs have to make public in their annual reports the risk management steps they have taken.
This approach is likely to become more common with companies of all sizes in the future, McNeil says. "My feeling is that, over time, the ethos of Turnbull will devolve down to smaller companies." And this advice can be offered by insurance companies, giving smaller firms guidance on what they should be doing and a framework to work within.
As far as current risks are concerned, the main one is computer-based risks, McNeil says. "The key risks are the e-commerce risks. There is real potential for computer fraud."
These e-commerce risks can take many forms and result in damage to a company's reputation, as well as its revenue.
Insurers have woken up to the need for cover in this area. Allianz Cornhill Engineering, for example, offers cybervandalism cover aimed at small to medium-sized businesses that rely on the internet or computer systems to generate the bulk of their business. As well as covering attacks on the policyholder, it also gives protection if there are problems with vital partners such as the company's internet service provider and application service providers.
McNeil says another area companies should be looking at is stress among employees, with employers needing to look at their working practices to see if these are the root of the problem. A recent Mori poll found that two-thirds of top companies thought stress was a major factor in ill health in their companies.
Employers have a legal duty to ensure their employees are not made ill by work and, under health and safety law, a risk assessment must be carried out if stress caused by work could lead to ill health. The Health and Safety Executive recommends that companies:
Another area to keep an eye on is the law on corporate manslaughter. There has been much political talk on this subject but, for the time being, little action, as no announcement about it was made in the Queen's speech. Earlier in the year, the then Home Secretary Jack Straw proposed a new offence of corporate killing, with firms to be found guilty if their conduct fell below what could be reasonably expected. Proposed penalties included unlimited fines, with directors liable to be struck off.
Emphasis on inspection
The trend towards risk management has also had an effect on engineering inspection, which has had a close relationship with engineering insurance. There is more emphasis now on the need for a comprehensive inspection and the role this can play in preventing claims.
Inspection is often carried out by the same insurers that offer engineering insurance, with some customers buying a joint policy to cover the two functions. But Currie says there is a move to sever the link between the insurance cycle and the cost of inspection and to give inspection "a service rather than an inspection ethos".
Rates charged for inspection have often followed the same cycle as insurance rates, meaning if it was a soft market for insurance, inspections were also cheap - too cheap, according to some people. "Rates for inspection had gone below the rates where they were making economic sense," Currie says.
Andy Green, head of Norwich Union Engineering, says the company has introduced new analytical tools that allow it to charge a much more accurate price for inspections for each client. "In certain cases, this has led to price increases," he says. "We have seen some of our competitors adopt a similar approach and we are currently seeing a readjustment of inspection prices in the market to more realistic levels."
Rates for engineering insurance are also looking more healthy. "Things are certainly beginning to turn around. Rates have started to harden reasonably well," says Currie. He says premium rates for engineering insurance have seen an upturn that began towards the end of last year and has seen increases "in the region of double figures".
This is probably because customers are becoming more attuned to potential dangers. Most engineering insurers report an increase in interest by customers. They are becoming more demanding in their expectations levels of performance, with a move towards involving customers in performance monitoring.
It is now up to the insurers to deliver.
Putting safety first
Two pieces of safety legislation were introduced at the end of 1998, both with less than catchy names that, fortunately, are usually reduced to their acronyms.
The Provision and Use of Work Equipment Regulations, known as PUWER, relate to machinery and tools used at work. They incorporated existing regulations, but extended their scope to cover mobile, self-propelled and remote-controlled work equipment.
The Lifting Operations and Lifting Equipment Regulations - LOLER - address the risks associated with lifting and lowering loads and people. Lifts, cranes, hoists, chains, forklifts ropes and pulleys all count as lifting equipment.
Health and safety legislation dictates that certain machinery is subject to inspection, but this new legislation is gradually changing companies' attitude towards inspection. Increasingly, risk assessments are being made of equipment to establish when they should be inspected, instead of relying on the old routine inspection regimes.
Allianz Cornhill Engineering chief engineer Philip Wright says the impact of the legislation wasn't immediately startling. It is having more of an impact as people get a feel for its effects.
He says: "There is now a more holistic risk management approach. There wasn't really a trend to do that before the legislation." He likens the previous attitude to that of people with an old car facing an MOT, with equipment being inspected because it had to be inspected, with little thought about the process.
Wright says that the range of examination of equipment has been extended and surveyors are being encouraged to be more active and to look at the risks imposed by the machinery. He says: "Surveyors now ask questions - about the environment, about training, about who is impacted by the machine."
Plants covered by the legislation will be risk assessed, taking account of their location. Wright says the assessment can vary from site to site. "They know then that the inspection is for their site and for their particular environment."
Business interruption is also considered, with surveyors looking at the wear and tear of the machinery and working out when spare parts are likely to be needed and whether they can be sourced in time.
"We have a particular client with a very large and unique piece of equipment. If the machine is out of commission, the whole plant is out of commission," Wright says.