Making Hay: Manufacturing Poised for Growth

Brokers also report that manufacturers have a bit more money available to commit to risk management than they have in recent years, says Paul Johnson, senior vice president of risk management for The Horton Group. The agency's manufacturing book has grown about 5 percent over the past year.

Manufacturers are also optimistic about hiring: in Travelers' survey, 88 percent of those surveyed either hired new employees or made plans to hire in the next year. Inexperienced workers account for a greater percentage of injuries, creating the potential to drive up Workers' Compensation loss ratios and premiums, however. "We are seeing a real differentiation in the market between well-performing and poorly performing accounts," says Kubicki at Lockton. "We're seeing price increases as high as 50 percent on accounts with loss problems."

Those types of increases are driving affected accounts to consider program structures that require them to assume more risk. "We see more manufacturers who were on a guaranteed-cost program looking at taking on risk through deductible programs," says Mike Stankard, managing director of Aon Risk Solutions' Industrial and Materials Practice.

PRICING FIRMS, PRODUCT RECALL HEATS UP

The past year has seen 5-8 percent renewal increases on good accounts. Rates are going up even more if they have any kind of products exposure or are a tougher manufacturing class, such as auto or aviation. Lockton reports getting flat renewals at best on most classes over the past year, following a seven-year period of softening prices. The one exception to is the high-tech manufacturing sector, which carriers are viewing that as a very profitable segment because of the relatively light Workers' Compensation and products exposures.

Despite firming prices and increased underwriting scrutiny of challenging classes and accounts, overall capacity in the market remains strong. Stankard says he's seen some 15 markets that are aggressively pursuing manufacturers, and abundant capacity across the small, middle-sized and large manufacturing markets.

One area that has seen a significant uptick in capacity is product recall. Interest in the coverage spiked in the food-production sector with the 2011 enactment of the U.S. Food Safety Modernization Act (FSMA), and that interest has trickled into non-food manufacturing sectors as well. Brokers report a doubling of capacity for recall coverage in the past 12 months.

Product recall coverage is a new cost item for a margin-challenged business, Stankard notes, but manufacturers are very concerned about the impact of a recall on their balance sheet.

Brokers report no problems in finding capacity to handle sought-after liability or Property limits. Property carriers have been more concerned, however, that insurance limits reflect accurate building values.

GLOBALIZATION VS. OUTSOURCING

Travelers' survey states that 71 percent of companies are currently conducting sales outside of the U.S. "Smaller manufacturers can access overseas suppliers just as easily as large companies," notes Mandes.

Globalization is a key trend impacting the insurance picture for both buyers and carriers, he adds: "There is more of a need for foreign coverage, including Ocean Marine and coverage for employees who are overseas. If you have longstanding suppliers, you know where they are manufacturing. If you work with a new supplier, you need to bring in new planning to provide back-ups in the event that supply is interrupted."

Global supply chains have kept interest in Contingent Business Income cover high. "Prior to the catastrophes in 2011, Contingent Business Interruption coverage had been available but was not the focal point for renewal negotiations," says Stankard. "Today, everybody is taking a fresh look at it."

On the opposite end of the spectrum from global outsourcing, insourcing has gained a foothold. In Deloitte's 2012 Global Outsourcing and Insourcing survey, 48 percent of respondents say they have terminated an outsourcing agreement early for cause or convenience, with 34 percent of those deciding to bring the work back in-house.

"Insourcing is growing due to quality and cost issues today, as well as more pride in domestic manufacturing," says Santosh Perumbadi, director of industry practices in manufacturing for Liberty Mutual Insurance. This move is creating both challenge and opportunity for carriers and brokers.

"Manufacturers are looking at insourcing strategically, but that also means they need to also look at the new exposures that result," Perumbadi continues. Shifting production domestically, he says, "changes the amount and type of coverage you need for property, including buildings and inventory, and increases Workers' Compensation costs due to a larger base of employees."

DIFFERENTIATION IN A COMPETITIVE MARKET

Both brokers and carriers are vying to differentiate their services by rolling out more services targeted to supply chain management, with a particular focus on mid-market manufacturers.

Travelers recently introduced its "Open for Business" disaster planning tool, adding new webinars, creating sample guidelines for safety programs, and expanding its loss-control knowledge base. In the 1Q 2013, Aon introduced a series of tools and services that analyze supply chain, international and contractual liability risks. 

The manufacturing sector remains a highly competitive insurance marketplace, with a combination of exposure-base and rate increases projected to produce mid-single digit gains in revenue in 2013. "It's not going to be a 'hockey stick' [increase]," says Perumbadi. "Brokers and buyers can expect the hardening market to continue, and brokers can expect to see insureds in the manufacturing sector willing to pay for coverage needs."

Digital Bonus

Increased construction demand, especially along the shoreline devastated by Superstorm Sandy, is creating additional manufacturing demand, as Bonnie Cavanaugh reports in the May Digital Bonus Edition.

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