For businesses across many industries, breakdown of critical machinery can cause havoc. Operations are unable to function as normal, contracts are unable to be fulfilled and customers are unhappy, potentially leading to a loss of revenue and reputation. In many cases a breakdown can even result in a wider impact on critical municipal infrastructure. The risks that affect critical machinery (known as boiler and machinery risks) can be very costly to recover from.
At FM Global, our 2018 large loss review revealed that almost one-third of all losses greater than three million US dollars experienced by our clients across all occupancies were due to boiler and machinery breakdown. The high costs associated with these losses is often a result of the business interruption that follows a loss event, as well the secondary damage to auxiliary equipment or from major fires that can follow the initial incident.
The risks are particularly acute in high hazard industries such as power generation, pulp and paper, chemicals, molten material, mining, and semiconductor manufacturing – in these industries up to 65% of property losses can be attributed to machinery breakdown.
The business interruption suffered by organisations operating in complex, technical industries is often exacerbated by the time required to repair or replace machinery. The intricate and specialised machinery is typically built to order, with limited supplier options. When coupled with the lack of available spares, the length of time it takes for machinery to be replaced can be significant. For example, it could take six months or more for a power plant to be brought back online following a catastrophic power outage due to critical machinery breakdown.
Given the scale of the interruption that boiler and machinery losses can cause for all businesses, it is vital that business leaders recognise the risks of machinery breakdown, and that sufficient steps are taken to mitigate these risks.
Appropriate maintenance is, of course, essential in reducing the risk of critical machinery failure. However, this is perhaps not always given the priority it deserves, especially in strong economic times, with businesses wanting to optimise production and having to balance competing risk management priorities, particularly growing intangible risks such as cyber threat.
Data analytics capabilities can offer significant benefit in prioritisation and allocation of resources, especially when combined with a detailed risk management assessment and insight from a knowledgeable insurer. Utilising these tools and support, businesses can have confidence that their key equipment has been evaluated, with the aim of revealing hidden exposures that could disrupt the business.
Although the exposure that industries such as power generation face from boiler and machinery losses is significant, it is not insurmountable. With the right knowledge and insight, risk management focused insurers can provide crucial advice and at-risk businesses can prioritise maintenance and upgrade and replace machinery where it will be most effective. Boiler and machinery exposure will be reduced through effective and appropriate capital expenditure, resulting in a resilient operation for the long-term.
This was first published in Nordisk Energi in 2019.