Risk engineering that prevents equipment failure and increases corporate resilience
Equipment failure is a major exposure for large corporates. It accounts for 28% of insurance losses across all industries and 70% of losses in high hazard sectors such as power generation, chemicals, forestry products and mining.
These figures are based on the loss experience of FM Global clients that include a third of all Fortune 1000 and FTSE 100 companies.
Losses can run to hundreds of millions of dollars, as detailed in the accompanying case studies, and impact a company’s ability to maintain ongoing operations. Despite the size of the potential exposure, only a third (34%) of Chief Financial Officers say their organisation is very well prepared to recover from an equipment failure loss. Is yours?
Root causes of equipment failure losses
Equipment failure losses refer to those resulting from any piece of mechanical or electrical equipment. FM Global has a database of more than 50,000 different pieces of equipment that fall into categories including:
- Chemical vessels
- Pulp and paper processing machinery
Despite the huge variety in equipment, there are a number of common drivers that repeatedly appear in losses.
First are economic factors and in busy periods, when facilities are working harder to meet increased demand, equipment is worked harder and maintenance schedules can sometimes slip. Fewer check-ups and heavier workloads can quickly result in equipment failures.
Second is ageing infrastructure, and breakdowns for older equipment can be particularly expensive due to the scarcity of parts and service engineers with specific technical knowledge required.
The third loss driver is demographics and the issues created when junior employees step into the shoes of more experienced and technically skilled colleagues without an effective transfer of knowledge.
Fourth is human error and whether testing, maintaining or operating equipment, mistakes happen.
The analysis also found that nearly half of all breakdown losses involved a significant human element, demonstrating the need for technical skills training and robust knowledge transfer programmes.
Understanding these drivers will empower companies to implement risk management improvements that make a direct impact on their risk performance.
Preventing and mitigating equipment failure losses
Equipment failure is a growing concern and 44% of business leaders at Fortune 500-size companies say equipment failure risks have increased over the past five years.
FM Global is further strengthening its own expertise in this area and is currently recruiting 60 specialist equipment engineers to build a 250-strong team. In total it has almost 1,900 risk engineers completing 100,000 engineering site visits annually.
The data gathered by engineers during these onsite inspections gives FM Global an in-depth understanding of each individual location. It has also allowed it to create a very deep pool of real-life, up-to-date and highly accurate risk data.
FM Global uses this data to improve its understanding of risk and to develop some of the most advanced predictive analytics tools in the market.
For example, its Equipment Factors tool assesses data in the seven fields of: maintenance, safety devices, operators, operating conditions, environment, contingency planning and history.
The assessment creates a very precise picture of an individual risk and enables an insured to understand where its equipment is most vulnerable and to prioritise the risk improvement measures that will deliver the greatest impact.
FM Global has also developed predictive analytics tools that detail the locations most likely to experience a loss and that identify the specific exposures that are most likely to lead to a loss.
This level of insight allows companies to create a very targeted risk mitigation and management programme that builds resilience into their business.
Brion Callori, senior vice president of engineering and research at FM Global, comments: “Our analytics tools, based on thousands of location site visits by our loss prevention engineers over many years, continue to accurately predict large losses. While our data also shows those large losses diminish as engineering site visits and client tenure increase, if companies don’t take measures to prevent equipment breakdown, they put their business resilience at risk.”
University – $104m (£80m) gross loss
- Maintenance of boilers and steam piping had been neglected over many years, despite recommendations to the contrary
- 100 buildings left without heating during major freeze
- Water pipes froze, broke and damaged building interior and contents
Foundry – $112m (£87m) gross loss
- Critical electrical system safety bypassed
- Came down to operator error
- Capacitor banks exploded resulting in ignitable liquid fire
- Power to entire facility was lost
- Plant was down for months