Those who manage and underwrite risks for manufacturers arefacing familiar risks—but with some challenging new twists.

With Workers' Compensation, the big shift is the medicalcomponent of costs exceeding indemnity costs—this after an extendedperiod when companies could materially cut their Workers Comp'expenses by focusing primarily on returning injured employees towork.

With Supply Chain risk, it's the realization that supply andupstream customer chains can be far more fragile than anticipatedin a catastrophe.

Insurers have realized this, too. After an earthquake andtsunami devastated Japan last year, Contingent BusinessInterruption coverage of supply-chain interruptions is now tougherto procure.

Compounding the supply-chain problems is the additionalpolitical risk that some companies are facing as they move someincreasingly expensive manufacturing operations out of China tocheaper producers located in less politically stable countries.

And for food processors, the emerging challenge is a food-safetylaw that has given federal authorities sweeping new power to issuerecalls.

In many of these cases, insurers have responded with either newor expanded coverages—coverages that many buyers either are unawareof or are examining and have not decided whether to procure.

Manufacturers & Food Safety

Any company involved in food production saw its Product Recallrisk greatly magnified last year with the enactment of the U.S.Food Safety Modernization Act (FSMA), says Louis Lubrano, the NewYork-based senior vice president of global crisis management forLiberty International Underwriters.

Under FSMA, the federal government for the first time isempowered to order recalls of food products even when authoritiesonly suspect a problem with a product but have no hardevidence, Lubrano says.

“That's a game changer,” he observes. “The issue is stillevolving on what could trigger a recall,” but Lubrano saysthat for now, “it's what the government believes” rather than whatit knows is a risk.

The law stems from a series of recalls of various products sincethe mid-2000s. Some of the recalls involved eggs, peanuts, milk anddog food. The 2009 peanut recall alone affected 2,000 companiesthat used salmonella-contaminated peanuts from a single processingplant in Georgia.

Before FSMA was enacted, the vast majority of food processorsdid not purchase Product Recall coverage, Lubrano notes. For manycompanies with tight insurance budgets, the coverage was toopricey.

In addition, the coverage responded only when thecontaminated-food product either already had made a consumer ill orevidence showed that its consumption likely would causeillness, Lubrano says. Under FSMA, the U.S. Food and DrugAdministration does not have to wait for those developments toorder a recall.

Insurers have responded by offering an endorsement, foradditional premium, that will cover the cost of FSMA recalls, hesays.

As a result, Lubrano says, the number of submissions forProduct Recall coverage at LIU “has been spiking ever since [thislaw] was passed.”

LIU can offer up to $15 million of limits on a primary or excessbasis, and Lubrano says he has seen buyers build programs with upto $70 million of limits.

Exclusions vary by industry and client, but every policycontains an absolute lead exclusion, he says.

Despite buyers' growing interest in the coverage, “there arestill a lot of companies that don't buy this but need to andshould,” Lubrano says. He notes that while the largest brokersproduce most of LIU's Product Recall business, between 70 and 80smaller producers each have brought LIU one or two policyholders.

Manufacturing & Workers' Comp: Four Tips forControlling Medical Costs

The National Council on Compensation Insurance Inc. (NCCI)reports that medical services now represent 60 percent of Workers'Comp claim costs. In the past, indemnity costs made up the biggestpart of the Workers' Comp claim.

From provider networks to prescription plans to medical audits,there are a number of measures available to help companies containmedical costs.

But the economy will drive many employers to turn to additionalmeasures, brokers and insurers said. Here are four strategiesthat work.

1) Workplace Safety:

An elementary but critical step in any plan to keep medicalcosts down is workplace safety.

With large employers retaining big chunks of their Workers' Compobligations under large deductible plans, they have to redoubletheir efforts on preventing losses in the first place, observesMike Stankard, a Detroit-based managing director and the industrialmaterials practice leader at Aon Risk Solutions.

2) Bogus Claims:

And while establishing a culture of safety is essential toprevent workplace injuries, employers also should be guardingagainst bogus claims, Stankard says.

In recent years as the economy soured, employers have facedspikes in Workers' Comp claims—not all legitimate—when some workerswho feared layoffs or knew they were pending filed claims to secureincome after their jobs were lost.

Establishing ongoing testing of various job-related physicalfunctions, such as hearing, gives employers a baseline measure theycan track and respond to quickly at the first sign of aproblem—rather than after a worker has filed a claim, according toStankard.

3) The Right Hires:

Some manufacturers are seeing improvements in orders and arerehiring, which brings up a third important element in controllingWorkers' Comp costs: avoiding hiring workers who pose high claimrisks.

“Data analysis tells a story of hot spots around anorganization,” Stankard says. In many cases, the analysis takesemployers back to the point of hire and their ability, or lackthereof, to match hires to a job. One step that can help: makingsure the job description adequately characterizes the demands ofthe job.

Filling jobs with the workers who are best suitedpsychologically for those positions also will help preventinjuries; it will also help prevent myriad indirect costsassociated with a Workers' Comp claim, according to Scott Higgins,president of commercial accounts at Travelers Cos. Inc. of HartfordConn.

Travelers offers its Workers' Comp policyholders psychologicalprofile testing of job candidates as a tool in selecting those whowill be safe and reliable workers.

Data compiled by Travelers show that new hires who are poorlymatched psychologically to their jobs are five times more likely tobe injured, even when they have received appropriate job training,says David Nelson, industry manager for the metals and high hazardsproduct program at Travelers.

4) The Age & Weight Impact

In their efforts to prevent claims, employers also shouldconsider the impact of an aging and increasingly overweightworkforce, says Calvin Beyer, the Edina, Minn.-based head of themanufacturing group at Zurich North America's commercialdivision.

In helping workers control their weight, an employer can expectto see fewer Workers' Comp claims attributable to sprains andstrains, Beyer says.

Winning Plan for Workers' Comp: The Kennametal CaseStudy

At Kennametal Inc., the need to focus on the medical componentof Workers' Comp claims is an obvious one for the Latrobe,Pa.-based Fortune 1,000 company, which manufactures metal-productsolutions for various industries.

The company, recognized by National Underwriter lastyear for improving workplace safety and curbing its Workers' Compcosts, slashed its overall Workers' Comp costs by 70 percent over athree-year period ending in 2012.

And the company has cut the indemnity component of its Workers'Comp cost to 10 percent of its total—meaning medical costs accountfor 90 percent, according to Michael Murphy, manager of globalproperty & casualty insurance.

Looking at its 90/10 Workers' Comp cost split between medicaland indemnity expenses, “it really becomes apparent where ourefforts should be,” Murphy says.

To bring down medical costs, the company's risk-management teamis focusing on the company's provider network and its communicationprocess with providers.

For example, the company brings providers to worksites tounderstand the work demands their patients face upon returning totheir jobs. That understanding among providers is an importantguide in their treatment regimens and decisions to release patientsfor work, Murphy explains.

“You can eliminate extremely expensive case management if youcommunicate your expectations to providers,” Murphy says.

Another important element of the communication process involvesengraining in workers the importance of reporting even minorincidents immediately, which helps keep costs in check, Murphynotes.

Helping workers realize that they are not babying themselves byreporting what they initially consider a minor back or knee tweakon a Friday afternoon can save the company significant costs if itcan steer the worker to a network provider and keep them out of ahospital emergency room over the weekend if the worker determinesthe tweak actually is a more serious problem, Murphy explains.

Supply Chain Risks: Responding to the Wake-UpCall

2011 was a wake-up call for manufacturers on the fragility oftheir supply chains. Catastrophes last year—including massivefloods in Thailand that disrupted electronic- and auto-partsmanufacturers—caused record totals of $105 billion of insuredlosses and $380 billion of total economic damages worldwide,according to Munich Reinsurance America.

Jim Rubel, a New York-based executive vice president for LocktonInc., characterized supply-chain management as a major priority formanufacturers since the earthquake and tsunami wrecked Japan nearlya year ago.

In addition to contractual indemnity provisions with suppliers,manufacturers can turn to their property insurers for ContingentBusiness Interruption insurance—which covers losses arising from asupply-chain interruption even when the policyholder did not suffera property loss.

It was coverage that, until a year ago, property insurers“didn't think too much about” before adding the coverage to abuyer's policy, Rubel notes. In the wake of what happened in 2011,it is now top of mind for many.

Supply-Chain Limits

The amount of coverage an insurer will offer typically dependson the size of the buyer's operations.

For mid-sized companies, Rubel estimates that sub-limits rangefrom $5 million to $10 million.

Larger manufacturers—and those mid-sized ones—can command higherlimits but not without providing much more information about theirsupply chain than they have had to in the past.

“The higher the limit, the more information you have to supplythe underwriter about what your supply chain looks like,” Aon'sStankard says.

(Smaller companies that may find a $10 million limit woefullyinadequate for their needs can get higher limits with the rightinformation—with one caveat: “Smaller accounts are generallywritten by a single carrier, so larger limits can be constrained bythe Facultative Reinsurance marketplace that may have to beaccessed by the single carrier underwriter as opposed to multiplecarrier programs where the limits are shared, Rubel notes.)

Buyers typically have been able to provide insurers solidprojections on how their profits would be affected by a businessinterruption resulting from a physical loss on their ownpremises—but not how profits would suffer if a major supplier wentdown, Rubel notes. Insurers now want that kind of information, hesays.

Specifically, insurers want the names and locations of suppliersand engineering data that indicates how well protected they areagainst typical perils in the regions where they are located,according to Rubel.

Essentially, insurers, which are trying to get a firm grasp ontheir true exposure to this risk, want to know as much aboutsuppliers than as if they were a policyholder's wholly ownedoperations, he says. “Information is king” in obtaining thecoverage, he says.

Rubel says that with enough information, insurers will writehigher limits than they previously have, but insurers also arecharging more because of the increased demand for the coverage.

Policy Fine Points of Supply Chain Coverage

Experts note that supply-chain coverage has some limitationsthat policyholders often do not consider.

For example, Contingent Business Interruption insurance respondsonly when a supplier is crippled by a peril for which the U.S.manufacturer is covered. If an Ohio-based manufacturer has animportant supplier in China that an earthquake knocks offline, theOhio company has to have earthquake coverage for the supply-chaininsurer to respond.

“A lot of people don't think of those things,” Rubel says.

Aon's Stankard also notes that “some underwriters will coveronly first-tier suppliers.” As a result, a policyholder would notbe protected if its supplier is shuttered because its flow of partsor materials from its own supplier was interrupted.

Manufacturing E&O Coverage and PoliticalRisk

Meanwhile, manufacturers face increased demands from upstreamcustomers for contractual protection, which has driven up interestin Manufacturing Errors & Omissions coverage, says Beyer ofZurich.

The coverage, which a few insurers offer, is geared towardmid-sized manufacturers of large finished products or majorcomponent parts, Beyer says. Insurers typically offer $1 million oflimits, although manufacturers involved in producing wind turbinescan obtain $5 million of limits and sometimes more, Beyer says.

Insurers have written the coverage for a few years, but themarket for it is far from saturated, according to Beyer.

Another supply chain issue—the cost of outsourcing—has meantexpanded political risk for many manufacturers, says Evan Freely,the New York-based global political risk and trade credit practiceleader at Marsh Inc.

Because of the growing cost of doing business in China,triggered by labor reforms and inflation, many U.S. manufacturersthat had outsourced work to suppliers there have switched tosuppliers in other countries to trim production costs.

But the stability of the political climate in thosecountries—Vietnam, Malaysia, Indonesia, Sri Lanka and some Africannations—is more uncertain, Freely says. In those countries, thereis an increased risk of civil uprisings, terrorism andnationalization, Feely says.

U.S. companies are addressing the issue by performing more duediligence of the country to which they are shifting operations,Feely says. Typically, U.S. companies consider Political Riskcoverage only when they have a capital investment in an operationoverseas, he says.

Speaking of China—the 800-pound gorilla in overseasmanufacturing—a catastrophe here could produce the “mother lode” ofclaims, given the number of U.S. companies that have outsourcedoperations to suppliers there, Rubel notes.

Kennametal & Catastrophes

Kennametal was not materially affected by the catastrophe inJapan, nor would a catastrophe elsewhere around the globe likelyimpair its operations extensively, Murphy says.

“We've grown diverse enough to be able to handle a specificincident in a region” of the world says Murphy, noting the companyhas warehouses in Singapore and Germany as well as the UnitedStates.

He says Kennametal addressed its interdependencies withsuppliers several years ago when it began engaging in enterpriserisk management.