Manufacturers who automatically renew the same insurance coverage each year may be making a costly mistake. Business conditions change -- from expansion driven by globalization to contraction caused by economic turmoil and the need to protect a company from exposure to risk evolves with those changes.
Take the manufacturer who joins the export boom and begins shipping products overseas. The company's standard U.S. coverage is unlikely to protect it from the expenses of products damaged or lost at sea, careless handling during port unloading, theft at the point of destination and a variety of other exposures that come into play once a domestic operation becomes international in scope.
Or the economic downturn may result in a company restructuring its operations, cutting back in some areas and trying new, more efficient techniques in others. Are there opportunities to reduce coverage, or are legacy risks still a concern that must be addressed going forward? Is new equipment more prone to breaking down or more difficult to replace, posing a threat to business continuity?
Failing to recognize the impact of new business approaches, whether new strategies that increase risks or downsized operations that alter exposure levels, can cause a manufacturer to make the wrong decision on insurance coverage. The answer is an annual assessment that allows a manufacturer to customize insurance choices to reflect the reality of the risks faced.
The 1-2-3 Agenda
Insurance needs should be addressed on an ongoing basis, but planning strategy about coverage in a focused way rarely tops a company's list of pressing concerns. Negotiating with suppliers for better deals or meeting the needs of customers clamoring for products is much more likely to absorb time and attention. The solution is to make a point of focusing at least once each year on three areas: coverage type, coverage limits and risk management services.
1. Coverage Type.
Any number of activities may bring new exposures into play. A company may buy new equipment or adopt new manufacturing processes that may increase the chances of disruption to business continuity. Unfamiliar equipment may lead to larger business losses if downtime is extended because of repair difficulties when problems occur. Or, new equipment may change the dynamics of a company's workers compensation claims by exposing employees to new risks.
A company may take on new territories for its sales force, or become globally engaged by importing ingredients or components, shipping products overseas or placing a manufacturing facility offshore. Each of these carries new exposures that may not be covered by existing domestic policies.
Some manufacturers may face new regulatory requirements for different labeling, additional reports or some other action that may be difficult to address and require costly recalls if an error occurs.
Offering a new type of product may change a company's seasonal work flow (for example, a company that now sells candy for the coming Easter holiday in addition to the toys it produced last year for Christmas), making added or different peak coverage advisable.
By looking at the current status of how a company operates and comparing it with what has been done in the past, the insurance needs can be accurately assessed and addressed.
2. Coverage Limits.
A company that was well covered with a $5 million umbrella liability policy may face a different environment if it has grown significantly, changed the way it operates or expanded into new, unfamiliar arenas. While those changes are what the company ultimately might desire, it must remember to update its coverage, as it now might need $10 or $15 million, and in some cases even more, for its umbrella policy.
One example: If the current inventory of manufacturing equipment is valued at $3 million when prior to revamping it was worth only $1.5 million, the increased value should be part of the calculation that determines necessary coverage.
Another example: A company may not have been required to meet federal Motor Carrier financial responsibility requirements in the past, but perhaps it has taken on a more active role in distribution and now needs Federal Filings for financial responsibility. To continue to meet federal mandates, insurance limits may need to be adjusted. Filings would have to be made.
Even the good news of a company that has become more efficient and is able to produce its goods more quickly may need to reconsider its coverage limits. With the new efficiency, a two-day interruption on the assembly line may carry a far greater dollar loss than the same outage in the past.
In addition, a company that downsizes or eliminates an operation or product may need to think twice before lowering its limits to economize on premiums. Many companies have ongoing, legacy risk from prior operations that should still be covered by substantial liability policies into the future.
3. Risk Management Services.
When insurers do their job well, they offer their customers not just the piece of paper that is the insurance policy, but also important services that protect a manufacturer well beyond after-the-fact coverage. A manufacturer should look at an insurer's capacity to deliver training, information about industry best practices and expert advice when an emergency makes quick action imperative. As a business changes, it should take advantage of the free services that many insurer's offer to minimize risk and maximize protection.
Manufacturing executives know the importance of looking ahead and making strategic decisions about new tactics to enter growing markets or new approaches to control overhead. But just as important is making sure that whatever changes they embrace in their business do not bring new or increased liabilities outside of the scope of their current insurance protection. It may be easy to automatically renew last year's policy, but it is not always the smart choice. By looking at the three areas of coverage, limits and risk management, manufacturing executives can make sure their company stays protected even as it moves forward in new ways.
Dave Stevenson is second vice president, commercial accounts product, at Travelers Property Casualty. Travelers offers a wide variety of property and casualty insurance and surety products and services to businesses, organizations and individuals in the United States and in selected international markets. http://www.travelers.com/business/commercialAccounts/industryEdge/manufacturers/index.aspx.
