5 Uninsurable Manufacturing Risks

The condition of uninsurability can vary from week to week and from exposure to exposure. Here are 5 manufacturing risks that could be deemed uninsurable.
By: | April 5, 2019 • 6 min read

When it comes to the manufacturing sector and risks that might be uninsurable, Gary Love, a vice president for underwriting with FM Global, puts this issue into perspective by dividing the topic into three buckets:

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One, he said a risk can be deemed uninsurable if risk transfer for a particular exposure isn’t being offered to the client.

Two, a risk might be uninsurable if there is cover offered for the exposure, but the client chooses not to purchase the cover. In manufacturing, according to Love and others, flood and earthquake are two risks for which coverage might be available, but property owners don’t or won’t pick it up. They might think it’s too expensive or that a flood or earthquake could never happen to them.

Three, a risk could be determined uninsurable if the probably maximum loss associated with the exposure exceeds any insurance capacity. In that case resilience, rather than risk transfer, becomes a primary focus.

Keeping in mind that the condition of uninsurability can vary from week to week and from exposure to exposure, here are 5 risks in the manufacturing sector that could be uninsurable.

1) Contingent Business Interruption  Otherwise Known as Contingent Time Element-Extended

There have been any number of events that impact manufacturing and result in business interruption or contingent business interruption. The floods in Thailand in 2011, though, serve as a case study for this exposure.

Gary Love
Vice President
Underwriting
FM Global

“That was a very large contingent business interruption, FM Global calls it contingent time element-extended,” said Love.

“A lot of the losses came from not just the direct suppliers but came from the supplier of the supplier of the supplier,” he added.

The reason contingent business interruption can be so hard to insure is that it can be very difficult to assess. You may know what your client’s direct exposure is, but determining the exposure of the supplier to your supplier can be far more difficult, if not impossible, to quantify.

2) First-Party Cyber

In its earlier days, cyber insurance focused more on third-party damages, that is, cover for expenses incurred by the insured in notifying a third party that their data had been lost in a hack and offering them credit monitoring and additional restorative services.

“I think third party has gotten the most attention so far. First party has some significant exposure to it, and a lot of people are shying away from that.”—Gary Love, vice president, underwriting, FM Global

As the cyber threat relates to manufacturing, Love pointed to the first-party exposure. These are cases in which a manufacturing facility suffers physical damage or business interruption due to a cyber event. The manufacturing sector has been notoriously slow to pick up insurance coverage for those first-party cyber damages.

“I think third party has gotten the most attention so far. First party has some significant exposure to it, and a lot of people are shying away from that,” Love said.

“They may not understand what their full exposure is,” Love continued. “For all aspects, they may understand a little bit more on the third party. But the understanding of the property and business interruption aspects are still evolving and that risk transfer may not be available.”

3) CATS  Specifically Flood and Earthquake

Flood and earthquake represent for insurers a risk in which the aggregate exposure limits the amount of risk transfer capacity available. There is also a mindset many fall victim to that catastrophes happen to other people and other people’s facilities.

“I think there is a dynamic that exists with those types of things it does with a lot of risks, that it is not going to happen to me, it is not as frequent, it is something that doesn’t happen all of the time,” Love said.

“It is sometime[s] characterized as an anomaly, and memories start to run short on what could possibly happen. Even with Hurricane Katrina, people are back in the same place doing the same thing but the exposure is still there.”

For flood and many other uninsured, uninsurable or under-insured risk, Love said he and his colleagues at FM Global place a high premium — not an insurance premium mind you — on resiliency.

“I think that is the crux of what a client ultimately needs. They need resiliency, they need to stay in operation,” Love said. “It is really that enterprise risk management. Identifying what your key exposures are. Quantifying what you need and then looking for the various solutions and put them together in a business continuity plan.

“Thinking ahead and planning ahead and saying ‘where should I expand and where should I not? If that is where I have to expand, what am I going to run into? How do I want to avoid the risk? If I can’t avoid it, how do I mitigate that risk through continuity?’ ” he said.

4) Political Risk — Specifically the Debate Surrounding the U.S.-Mexico Border

With so much trade transpiring between Mexico and the U.S. and so many suppliers to suppliers sending products back and forth across that border, manufacturers are holding their breath watching President Donald Trump float the notion of closing the border as part of his hard line stance against immigration from Central America.

Jeremy Brown, account executive, PSA Insurance

According to Jeremy Brown, a vice president with PSA Insurance, closing the Mexican border would have resulted in an unprecedented shock to domestic manufacturing supply chains. A shock and an exposure that for many would be uninsured or uninsurable.

“In the realm of political risks, many manufacturers probably considered it unthinkable that our border with our second biggest trading partner, Mexico, could be closed,” Brown said.

“Yet, here we are, in a precarious political climate, with both goods and means of production in Mexico in jeopardy. While this scenario is unprecedented, and people are not eager to invest in coverages that seem far-fetched, those who contemplated this unlikely situation and secured insurance, funded for, and/or otherwise planned to mitigate this particular risk will be better prepared to weather the adversity,” Brown said.

5) Product Liability

The nature of some products manufacturers put out makes them very hard to insure, said Brown, who is also a Maryland-based broker specializing in the manufacturing sector. Categories of products that Brown said give underwriters pause include airplane parts, automobile parts and implantable medical devices and pharmaceuticals.

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“Underwriters often perceive certain products’ liability exposures as too risky, because the product has the potential to cause a more catastrophic loss than usual,” Brown said.

“We have experienced underwriters declining product liability exposures for manufacturers of products such as medical devices, aircraft parts, and automobile specialty accessibility and adaptive equipment. However, a good broker will understand a manufacturer’s unique product offerings and any safeguards in place that prevent the product from failing,” he said.

“Knowledge of these technical details can really make a difference in the exposure’s risk, and can allow a broker to better explain the product to the underwriters in the marketplace,” Brown added.

Several brokers in this year’s Risk & Insurance® Power Broker contest won their laurels in the pharmaceutical category for just that sort of attention to technical detail.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]