Whether it's protecting customer data, ensuring suppliers are on time with deliveries to keep up with production, or providing safety training to reduce workplace injuries, today's manufacturing companies are constantly presented with stressful challenges.
Even with the most robust risk management program, it's impossible to eliminate every possible operating risk. However, with broad and effective insurance choices, manufacturers and distributors are able to reduce their exposure to many potentially costly claims.
The following four critical insurance solutions — when structured properly — can provide significant financial protection for manufacturers and distributors:
Charred remains of a warehouse and new cars are left burned after an explosion at a warehouse in northeastern China's Tianjin municipality, Thursday, Aug. 13, 2015.(Photo: Ng Han Guan/AP Photo)
1. Contingent business interruption
The explosion at the Tianjin Port in China is a recent example of why contingent business interruption coverage has become an increasingly essential risk management solution for companies, especially those that are dependent on overseas suppliers or ports.
According to news reports, the blast at the industrial port in Tianjin, the world's 10th largest port, leveled warehouses containing auto imports and exports — as well as a substantial portion of China's steel production — and caused major disruption to iron ore, coal, and crude oil shipments. With the movement of vessels at the port halted because extensive cleanup, some impacted manufacturers are likely to experience delays.
Affected companies with operations in Tianjin included Samsung, Nestle, Honeywell, Coca-Cola, Bridgestone, Lafarge, Novo Nordisk and Motorola. A three-month delay in receiving raw materials could translate to $3 million in contingent income loss for a company that has $1 million in monthly costs and profits. With contingent business interruption coverage, this loss would be fully covered.
(Photo: Shutterstock)
2. Experience modification review
Workers' Compensation experience modification ratings (EMR) are complex formulas, but understanding how they are calculated can go a long way in helping a company keep Workers' Comp premiums in check.
By performing the same evaluation of the experience modifier as a regulator, an insurance broker can determine calculation accuracy and forecast future financial impact on a premium. Inaccurate EMR calculations are typically the result of errors in payroll amounts, inaccurate job classifications, improper claim reserves and open claims that should be closed.
Example: A large service provider that performs work on both public and private contracts had its Worker's Compensation payrolls analyzed and an EMR calculation conducted after having difficulty qualifying for new projects because of its 1.16-EMR. A review of the company's open claim reserves determined that many of the open claims were excessive and needed to be negotiated down with the insurer. This accounted for nearly 20% of the experience modification calculation.
The improved reserves were reported to the National Council on Compensation Insurance, resulting in a reduction in the company's EMR to 0.94, which allowed the company to bid on and win several contracts worth more than $15 million. The company also realized a premium savings of $264,000 over a three-year period.
(Photo: Shutterstock)
3. Cyber risk coverage
It's important to look for Cyber solution that has flexibility and scalability, and one that offers a wide range of coverage enhancements to fit the specific needs and challenges of a business.
Recently, when a laptop belonging to an executive of a West Coast-based mortgage company was stolen, management feared criminals would gain access to sensitive customer data. The potential breach required that roughly 18,000 customers spread across 22 states be notified and have their credit monitored.
The client was able to immediately notify affected customers and provide credit-monitoring services for a year. Because the insurance program had been designed and tested in the market and was flexible to the evolving nature of cyber threats, the company did not sustain any significant business income loss. And, the cost of notification and credit monitoring, which totaled $255,000, was covered, subject to a self-insured retention and policy conditions.
(Photo: Shutterstock)
4. Setting proper limits based on catastrophe modeling
Weather-related events generate the greatest number of catastrophe losses.
According to a new report from Allianz Global Corporate & Specialty, the U.S. is the top loss location, accounting for half (49%) of 11,000 major business insurance claims greater than 100,000 euros from 2009 to 2013. The growth in catastrophe exposure — which includes earthquake risk on the West Coast or flooding in the Southeast — is far outpacing take-up of insurance coverage, resulting in a growing gap in natural catastrophe preparedness, according to the report.
Increasingly large industrial companies and insurers are relying on catastrophe models to bridge that gap. However, effectively using catastrophe modeling goes beyond inputting data and basing decisions on the output. Setting proper limits based on a catastrophe model requires a combination of technical analysis, information gathering and negotiation. Through a detailed and targeted process, a company's premiums can be reduced and the appropriate limits can be established.
Example: A modeling exercise was conducted for a company using industry-leading software that valued the worst-case risk for flood and wind on the at-risk properties. An efficient and marketable structure was then created that met the financial and business issues of the company, and that agreed plan and structure to was marketed to targeted insurance companies. As a result, the company now has a single policy across the portfolio with a limit that satisfies the risk with a premium savings of $70,000.
These are four solutions that manufacturers and distributors across the country should be considering when evaluating their insurance programs. When structured properly, these solutions can provide significant financial protection and significantly help protect a company's bottom line.
Randy Crawford is Valhalla, N.Y.-based USI Insurance Services' national industrial practice leader, specializing in alternative risk structures product development and risk consulting. Crawford is based in Houston and can be reached at randall.crawford@usi.biz.
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