Poor practices could be costing you a bundle in insurance premiums

Few companies realize how much their poor maintenance, engineering and management practices might be costing them in insurance premiums.  Insurance costs the typical plant 0.1% to 0.3% of the insured asset value – $2 million to $6 million annually on a $2 billion plant – and where you land in the range depends on a host of factors largely determined by how well maintenance professionals do their jobs, according to a recent  EAM/RCM 2007 keynote presentation by Ian Barnard, senior risk management engineer, American International Corp.

Do badly enough and you won’t be able to get insurance at all. “Insurance is a commodity,” Barnard says. Risks must be backed by resources, and the highly global and diversified set of insurers and re-insurers have only so much to work with, and naturally they prefer lower risks, he says. “Just because you have it today doesn’t guarantee you’ll get it tomorrow.”

The rising popularity of business interruption (BI) insurance has insurers looking more closely at the facilities they underwrite. Unlike conventional property or machinery breakdown coverage, BI insurance covers loss of profit. For example, a destroyed compressor in a petrochemical plant might require complete replacement at a cost of $1 million. If it’s a purpose-built machine with a lead time of six months, lost profits may exceed the replacement cost by orders of magnitude. So BI insurers have a critical interest in the quality of asset management systems.

Companies effectively self-insure for the first $5 million, and cover their own business profit losses for the first 45 days. Assets with smaller potential losses are generally  unimportant to the insurance industry but, Barnard says, “Risks that are placed in the Excellent and Good ranges by the insurance risk consultant as a result of superior asset management systems can often effectively negotiate the deductible and BI exclusion period.”

Policies require the insured company to follow a number of guidelines, including adherence to the equipment manufacturers operations and maintenance schedules, and compliance with “industry normal” practice for the asset. They also mandate that traditional asset management and condition-monitoring (CM) methods be applied. “For example, the application of thermography, oil and vibration analysis, dissolved gas analysis, partial discharge testing, the full suite of nondestructive metallurgical techniques and a host of others are all required by business interruption insurance providers to protect the assets,” Barnard says “The message here is that it’s necessary to use proven CM techniques to manage assets, but don’t rely on anything too innovative and unproven.”

Risk management engineers are usually assigned to a client for the duration of the insurance relationship, and can help by suggesting asset management methods and technologies to reduce risk of breakdown and business interruption.

Further, it’s not enough to just have some monitoring tools lying around. “The majority of failures aren’t due to lack of technology, but on ineffective application of technology,” Barnard says. “Oil, infrared, vibration analysis, etc., are all good technologies, but we look at every aspect of execution. It’s not just a tick in a box on the survey.”

Insurability and rates are determined by industry type, location, political stability, supply lines, markets, company history, fire protection, plant design and asset management. Risk management engineers perform what Barnard calls macro-surveys of:

• Management systems: contractors, change management, incident management, continuous improvement and hazard auditing.
• Plant and equipment: design, condition, suitability, history, reliability, support, integrity, testing and alarm systems. Barnard says, “There’s nothing better than to be able to say availability is 96%. There’s nothing worse than not knowing.”
• Human elements: operation and maintenance procedures, employee relationships, safety management, training, organizational structures, staffing and turnover. Barnard says, “If you have trained people and they leave, we demand to be informed of that and to be told about who’s running the plant.”
• Maintenance: management, improvement and performance measurement.
• Asset protection: emergency response, training, hot work, etc.
• Disaster recovery: planning, testing and history. Barnard says, “Half of losses due to business interruption come from not planning how to deal with it – we want that planning to be done.”

Along with the macro-surveys, inspectors perform micro-surveys covering individual incidents and units of equipment. Citing an example where a poorly maintained power-generation turbine air filter element was sucked in because the unit’s vacuum-relief doors had rusted shut, shutting down four petrochemical plants, Barnard says, “People are insured against stupidity –for this year.”

When the surveys are done, “Everything is rated,” Barnard says. “Do you know your ratings?”

Paul Studebaker - [email protected]