Preparing for and dealing with equipment failure

Preparing for and dealing with equipment failure | Insurance Business

Preparing for and dealing with equipment failure

Critical equipment failure is one of the most worrying risks for businesses, being listed as a major concern by 94% of Fortune 500-size companies, according to a survey by FM Global. In fact, equipment breakdown was responsible for nearly one-third of all property-related losses in 2018.

In order to prevent equipment breakdown risks, companies must recognize the business value of preventative maintenance measures, according to Tan Hian Hong (pictured), vice president and client service manager, Asia, at FM Global. These companies can build resilience into their operations by better understanding their exposures to equipment failure and then engineering solutions to prevent potential losses.

The survey found that equipment failure risks have increased over the past five years as reported by 43% of respondents, compared to only 29% who said those risks have decreased during this time period.

Other key findings from the 2018 review of large risk losses include:

  • 62% of equipment breakdown losses were due to lack of maintenance, accounting for three-quarters of all equipment loss claims paid
  • 25% of equipment breakdown losses occurred after repairs were made or during start-up
  • Nearly half of all equipment breakdown losses had a significant human element impact or influence
  • Operator training was a factor in 43% of equipment losses, highlighting the need for enhanced training and knowledge transfer as the industry sees significant turnover due to demographic changes

“Appropriate and consistent maintenance is essential,” said Tan. “Often, in periods of strong economic growth, business owners are tempted to push machinery harder for short-term productivity gain, skipping maintenance cycles. This bet often doesn’t pay out and instead businesses are met with costly repairs, a prolonged loss in revenue, and, in the worst cases, they lose market-share to competitors operating at full capacity. We found that safety devices are often ill-maintained, further leading to loss.”

Tan emphasized that resilient companies must invest in risk mitigation and a comprehensive maintenance plan. Through regular on-site risk surveys and data analytics, he said, businesses can make informed decisions on when to conduct maintenance, upgrades and replacement of machinery. This will help the company’s bottom line in the long-term.

Another important factor in mitigating equipment failure risk is managing against human error. For example, one-third of all electrical system failures are due to human error. By deploying comprehensive remedial action plans, consistent standards and targeted operator training, businesses can improve their risk profile.

What to do in case of equipment failure?
According to Tan, when a business has experienced equipment failure, it is important that the cause of the failure is diagnosed so that the business can take the necessary preventative measures to stop it from happening again.

“It’s also important to model potential equipment failure scenarios, which are increasingly informed by analytics,” he said. “Predictive analytics is a valuable tool to assess patterns of equipment failures so business owners can identify equipment most at risk of breakdown and put in place proactive contingency plans.”

FM Global uses over 700 data points from 100,000 location visits each year to help clients prioritize property risk and allocate risk improvement capital.

“By looking at varying metrics, including construction parameters, geographic characteristics, and lifecycle, risk managers can understand causes and mitigating factors going forward,” said Tan. “Predictive analytics can provide business owners with a detailed picture of the severity, likelihood and plan for risk management going forward. With these tools, business owners can take the guesswork out of risk management.”

Filling the insurance gap
Almost all businesses have standard property insurance, which cover the repair and replacement of equipment damaged or lost as a result of insured perils, such as fire and flood. However, this type of insurance will not cover losses caused by equipment breakdown and/or failure. According to FM Global, this gap is filled by boiler and machinery policies.

Boiler and machinery insurance is purposely designed to cover the cost of repairing or replacing machinery and equipment that encounter sudden and accidental breakdown. It also covers contingent losses, including physical damage, business interruption, and increased cost of working.