AXA XL experts give overview of equipment breakdown insurance market

A Q&A with AXA XL’s Brian Strain and Tom Gallagher

The number one priority for many businesses is delivering high quality products to their customers on time. And they don’t want anything – including the breakdown of equipment – to stand in their way. AXA XL’s Head of Equipment Breakdown insurance, Brian Strain, and Tom Gallagher, AXA XL’s Equipment Breakdown Engineering Leader, have the same priorities. They want their clients to get their products out the door.

Fortunately, preventative measures, including loss prevention strategies, reliability engineering and insurance, are helping protect facilities’ financial health, keep equipment up and running, and high-quality products out for delivery. Here Brian and Tom explain more.

What is the current state of the Equipment Breakdown insurance market?

Strain: Right now, capacity is shrinking. In addition, there are also very few carriers in the market because there are some very challenging exposures, both in terms of complexity and severity of the associated risks.

Of course, the capacity crunch comes at a time when businesses are more reliant on various types of equipment to conduct business in many ways. As this reliance continues to grow, and processes become more automated than ever before, making sure equipment and technology remains reliable and operational is a big part of the production process for many businesses.

When you say “challenging exposures” what do you mean?

Strain: Generally, we’re talking about very large, highly specialized equipment – things like: large forge presses and steel mini mills, concrete manufacturing equipment, paper mills, to name a few. Power generation systems, industrial freezer units, food manufacturing and critical production equipment as well. When systems like these are damaged or otherwise inoperable the impact on the business can be devastating:

• Business Interruption. Downtime for repairs can result in a company’s inability to deliver on existing contracts or even bid on new orders.
• Property. Repairing or replacing equipment can be very expensive. Some of the equipment is one of a kind and lead time for new equipment or even replacement parts can be extreme.
• Environmental. Industrial refrigeration systems that use anhydrous ammonia as a coolant can result in release of toxic liquid and gas that can contaminate food products.

Gallagher: It’s easy to see how far-reaching and harmful breakdown of complex equipment can be. Compounding the complexity of these risks is frequency. We are seeing more of these happening in recent years. That’s why our attention to reliability engineering is a big advantage to our Equipment Breakdown clients. Failure of even a single, (critical) piece of equipment can result in the shutdown of an operation that may negatively impact a facility’s production goals including their ability to deliver product in the quantity and within the timeline promised to their customers. We were the first equipment breakdown insurer to incorporate critical equipment reliability engineering reports into our product offering.

What is Reliability Engineering?

Gallagher: Quite simply, we evaluate the reliability of our clients’ critical equipment based upon measurable data results from various preventive and predictive maintenance programs. It is a consistent, repeatable and quantifiable approach to evaluating equipment reliability. Reliability engineering is gaining traction as an increasingly viable way to help companies address equipment vulnerabilities that may impact business continuity risks such as unplanned equipment outages. We provide them with an in-depth assessment gauging the reliability of critical production equipment. It’s designed to help businesses maximize production reliability and reduce the chance of business interruption.

Our EB Critical Equipment Reliability report provides businesses with a concise summation of assessment results in a table format that includes the critical equipment rating, Probable Maximum Loss (PML) and Maximum Foreseeable Loss (MFL) scenarios, a brief description of the rating for each piece of critical equipment or service evaluated and corrective action recommendations, among other equipment reliability details.

Strain: Through our report assessment, recommendations and loss scenarios, we give our clients a ’Big Picture’ overview allowing them to drill down further as they wish for additional data to effectively target plant exposures that may lead to production interruption and loss of business income. While this information helps us as underwriters write the EB coverage, our reliability ratings and subsequent recommendations can provide a useful tool for CFOs, risk managers and plant managers when allocating resources to maximize availability rates. It’s all about maintaining plant reliability and getting product to the market.

Is the Equipment Breakdown market seeing an increase in breakdowns?

Strain: Yes. The economy has been heating up. As a result, equipment is running for longer periods and at higher capacity trying to maximize output. There is also less downtime and regular maintenance may be delayed or shortcuts may be taken. The result is increased likelihood of breakdown and subsequent damages.

Gallagher: Supersizing, as critical equipment becomes ever larger to increase production, is another area of risk. Demand for product or service increases, engineers and manufacturers continue to push the envelope to design and build bigger machines that can keep up with increased demand. And as those machines increase in size and output, loadings on its various component parts like belts, bolts, gears, hydraulics, bearings, and structural framework will also increase, creating greater risk of breakdown.

But once a piece of equipment is back up and running, the company gets back to business as usual, right?

Strain: Unfortunately, it’s not that straightforward. Consider pumpkin spice. For the most part, this flavour shows up in everything from coffee to cereal to cookies to ice cream, with products appearing in the stores in late-September or so. The manufacturing of those products actually began months before so they would be ready to ship in time for the seasonal demand.

But suppose an ice cream manufacturer’s freezer system fails, causing spoilage of their initial shipments of pumpkin spice ice cream. Repairing the system may only take a matter of days, but in that time not only have they lost a massive amount of inventory, but they have also lost valuable time to get to their customers at peak pumpkin spice season.

Gallagher: Plus, being a food handling operation, their facility will need to be fully cleaned. Then it will be subject to inspection by agencies like the FDA and/or the USDA. Depending on the nature of the failure, OSHA may even be involved.

With demand for pumpkin spice so high, the company will want to capitalize on that seasonal demand and their shareholders will certainly expect that. So, once everything is repaired, inspected and back online, they will likely add more shifts and run their equipment longer with less downtime, thus increasing the potential for another breakdown claim. That’s why attention to equipment reliability is more important than ever before.

How is your team staying ahead of these risks?

Gallagher: Our approach to assessing the reliability of these risks, whether they are brand new or have been in business for years is vital. We look at not only the facility where the equipment is being used, but also the critical components within the equipment itself. We closely study monitoring data from the equipment, but we also focus on interpreting the data to understand what the data can really mean and spot trends. The result of this work is a set of unique Key Performance Indicators (KPIs) for each individual piece of critical equipment, which allows us to accurately assess and rate its reliability. This detailed approach separates us from our competitors.

Authored by AXA XL