In late 2014, a steel manufacturing facility in Germany lost control of its blast furnace, causing massive damage to the plant. The catastrophe's trigger was traced not to employee error, but rather, a cyber attack.
Hackers had used a “spear phishing” campaign, sending targeted individuals at the company legitimate-looking e-mails that, when opened, pilfered logins and passwords that were used to break into the facility's furnace-control systems.
While facility damage resulting from a cyber attack is rare, the event was an eye-opener for manufacturers worldwide. “People think of cyber risk in terms of data privacy, not property damage and downtime,” says Geoff Taylor, executive vice president for Willis Insurance Services of California, in San Francisco.
Cyber risk, in fact, tops the list of concerns for manufacturers, according to the 2015 Travelers Business Risk Index. “We get asked more and more about cyber [coverage],” says Scott Higgins, president of the commercial accounts group at Travelers. “Manufacturers are concerned with finding an insurer that can help them manage risk, being able to respond effectively if there is a breach, and having the right coverage in place.”
But putting the right coverage in place can be tricky. For one thing, there is no one-size-fits-all coverage solution when it comes to cyber, even for similar types of clients; each manufacturer's exposures are different, and policies must be carefully crafted. “[Cyber] products are generally designed well enough for manufacturers, but brokers need to be knowledgeable about cyber exposure and ask the right questions of their carriers,” says William Boeck, senior vice president, insurance and claims counsel at Lockton.
One question that producers should be asking insurers is whether policies cover property damage from a non-physical cause of loss, such as a cyber attack. FM Global's policy does, for example, and also includes data in the definition of “property.”
“We have seen an increase of more than double in both the frequency and severity of claims over the past 18 months as this whole cyber world unfolds in front of us,” says Gary Love, vice president, operations underwriting at FM Global. Despite the spike in claims, rather than attempting to curtail coverage, the company is “exploring more ways to help brokers and clients protect against the risks they are exposed to.
“For cyber risks, we feel we have property covered well, but we are focused on the business interruption side, looking for areas where triggering events may not be covered,” adds Love.
In addition to obtaining cyber coverage through property or liability forms, brokers can pursue standalone coverage products for their manufacturing clients. Coverage in the marketplace varies widely, but forms generally include a mix of third-party liability coverage for damages suffered due to loss of data and first-party coverage for response and remediation costs, fines, and penalties. Policies can also include coverage for business income, intellectual property, and errors and omissions. Some carriers also include property damage and bodily injury coverage, typically on an excess or difference-in-conditions basis. And if you don't see what you want in a coverage form, don't be afraid to ask.
“In this market, there is an opportunity for brokers to approach a carrier with a specific need and get a more bespoke policy wording,” says Taylor. Despite an increase in claims, he adds, “it's still a competitive market and the advantage is with the buyer in terms of coverage.”
Other exposures continue to vex manufacturers. Food safety remains a key concern not just because of the risk of bodily injury, but also due to the long-lasting damage for the brand that often follows. “The last thing any food manufacturer wants are food safety events, recalls or claims that they are mislabeling their product, and other events that damage their reputation,” says Mark Moitoso, executive vice president and general manager of Liberty Mutual's casualty operation.
“We help our clients focus on loss prevention, such as coaching them in the product-testing process and helping ensure that products and labeling meet requirements. We also coach on crisis management, helping to make sure that post-crisis corporate response is part of the overall risk management process,” he adds.
Industrial hygiene labs, which insurers offer, are an important part of the risk management strategy around food safety. Travelers maintains a 100,000 square-foot forensic lab, staffed by more than 60 forensic specialists and engineers and which houses 3,000 pieces of equipment used to analyze product defects and identify workplace hazards. “When something goes wrong with a food product, our ability to set up dedicated adjusters, supported by our lab, to investigate and address the issues that arise with a compromised food product are key components of our claim handing,” says Higgins at Travelers.
The manufacturing industry often looks at relocating operations, with some companies moving toward outsourcing while others bring production back onshore. For companies that outsource, the trend has been to set up shop or work with suppliers in developing Asian and Latin American countries. That shift, in turn, presents risk management challenges arising from differences in construction practices and building codes.
“On property, sprinklers have proven to be a great mitigation resource. However, in other countries, particularly in developing countries, there often are not code requirements for sprinklers that manufacturers are used to seeing in the U.S.,” says Love. Developing countries also may not have in place the rigorous building codes that U.S. manufacturers are used to, such as Florida wind and California earthquake codes.
Without those codes, it's unknown how well structures will withstand natural disasters, or how well the building materials will withstand fire and collapse, Love adds. “Clients need to know what they’re walking into, when they move into developing countries.”
Choosing a supplier in a developing country can also increase supply chain risk and the need to put appropriate protections in place. “Whether you’re sourcing raw materials or finished products from emerging economies, you can experience bottlenecks in the supply chain at ports, political issues around emerging economies, and quality issues that impact your brand,” says Taylor. “We’ve seen some new supply chain products emerging to respond to this, such as contingent business income coverage that addresses loss beyond physical causes, such as strikes and labor disputes.”
On the opposite side of the sourcing spectrum is a trend toward insourcing, or “reshoring.” Although there is some debate around just how much manufacturing is returning to the U.S., global management consulting firm A.T. Kearney has identified an overall lift in U.S.-based manufacturing every year since 2009. Additionally, a Travelers survey of manufacturers found that 88% of companies plan to hire employees over the coming year.
Brokers need to understand the impact that growth in domestic production has on risk management. New, inexperienced workers account for a greater percentage of injuries, creating the potential to drive up Workers’ Compensation loss ratios and premiums.
“Close to 30% of work comp claims happen to employees who are in their first year of employment,” Higgins points out. “However, almost half of mid-sized and smaller companies don't have a new-hire orientation program. There's an opportunity for brokers to partner with carriers that can help manufacturers set up onboarding programs or new hire orientations, and provide other services to minimize injuries.”
Market conditions are favorable for brokers looking to do business in the manufacturing sector. “Insurance capacity is good, and the price-firming we had seen over the past few years has stopped,” says Steve Kubicki, senior vice president and unit manager at Lockton.
Manufacturing also continues its uptick in activity. The industry has seen consecutive months of growth for more than two years, according to Institute for Supply Management data. Buyers can expect to find flat pricing to slight decreases on workers’ compensation, property and liability, and single-digit increases in auto.
“There is still a lot of capacity available that, combined with the lack of severe natural catastrophes, is driving pricing downward. Above-average accounts can see decreases on all lines of coverage,” Kubicki adds.