The insurance response to today's manufacturing risks
Serving manufacturing clients well in 2024 means offering products and services that respond to their changing needs.
In 2024, manufacturers find themselves facing increasingly complex and potentially costly risks that only promise to worsen for the foreseeable future.
Fortunately, insurance professionals will be ideally poised to help manufacturing companies protect their businesses by knowing, evolving with, and staying ahead of the potential perils posed by today’s leading manufacturing risk areas, which include climate, supply chain, cyber and AI.
Climate risks are only growing worse
Climate change is one of the leading risks facing manufacturing businesses in 2024. Weather events are becoming more severe, and the business interruption and property damage they cause are worsening.
With this in mind, nearly half of firms included in the Middle Market Indicator — Year End 2023 (MMI) from Chubb and the National Center for the Middle Market (NCMM), say that preparing for a catastrophic weather event is now a top factor in their insurance purchasing decisions.
Less than half of companies in the MMI felt that they were prepared for a business disruption caused by a natural disaster, and 44% of businesses that have had such an operational interruption reported that they had recovered only partially or not at all.
Mike Williams, Chubb Manufacturing Industry Practice Leader, cautions that in the United States, the geographical area that can be impacted by extreme weather events such as tornadoes, hail, wind, and floods is expanding rapidly. “Manufacturing companies that are deciding to reshore operations, add a line, or open new facilities somewhere in the country need to carefully evaluate prospective locations and consider factors related to climate risk in those areas,” he stresses.
Building insurance solutions for current and prospective manufacturing clients involves performing thorough risk assessments, looking not only at existing risks but at the long term. “Manufacturing companies invest tens of millions in state-of-the-art facilities. To protect those investments, companies need to understand their exposure to floods and wind, not only today but how those risks can evolve over 10 or 15 years. As a strategic partner, we stay on top of that evolution to help customers navigate increasing risks of weather,” Williams says.
Inflation, another leading risk facing manufacturers in 2024, serves to complicate an already perilous situation.
“The rising cost of parts and materials for buildings and equipment has overlapped with a higher frequency and severity of severe weather — particularly convective storms,” notes Michael Teng, AVP of Regional Products, Pricing, and Underwriting at Sentry Insurance. “Those risks in tandem have challenged property risk.”
He adds that as a result, manufacturers that operate in older buildings are starting to upgrade their facilities for better fire and weather protection, which can yield more favorable insurance options.
Extreme climate events are driving rate increases.
“The combined impact of more frequent and severe weather events, along with the rising costs for parts, materials and labor, is driving up rates in the short term,” Teng explains. “Similar factors are affecting the reinsurance market and may ultimately drive tighter underwriting. The more that businesses can work with their insurer to upgrade their facilities and enhance safety practices, the more opportunities they’ll find for savings and insurance availability.”
Kevin Nolan, Head of Multinational, The Hartford, notes that when it comes to natural disasters, “it’s crucial for businesses to have a robust plan to protect against unexpected circumstances that could lead to business disruptions and create financial risk.”
Supply-chain disruptions still a challenge
Although many moons have elapsed since the height of the supply-chain issues caused by the Covid-19 pandemic, manufacturers are continuing to cope with the vulnerabilities of the global supply chain, points out Brian Kramer, Chief Underwriting Officer General Industries, Technology and Life Sciences, The Hartford.
“To mitigate future effects, manufacturers are looking to continue reshoring efforts, as international labor and shipping costs increase.”
Recently, Kramer explains, shipping delays, parts shortages, and transportation delays have had the greatest impact on manufacturing companies. He notes that companies are exploring new strategies to source parts and raw materials to find the most cost-effective supplies.
Kramer stresses the importance of planning ahead to mitigate any potential loss from “uncertain world events.” “From changing weather patterns to global pandemics, developing a contingency plan for supply chain disruptions may be the difference between continuing or pausing production.”
Cyber risks a top concern
According to Chubb’s MMI, fewer than half (47%) of companies surveyed believed they had adequate cyber insurance in place. Furthermore, two-thirds (62%) indicated that cybersecurity is the top concern that is factoring into their insurance purchasing decisions.
In its most recent annual security research report, Security Navigator 2024, Orange Cyberdefense revealed the highest number of cyber extortion victims ever recorded, with an increase of 46% worldwide in 2023.
Their threat detection teams processed 30% more events across the period—a total of 129,395, of which 25,076 were confirmed security incidents. Of these, the threat action “hacking” remained the most prominent, accounting for almost a third of confirmed incidents (30.32%), followed by misuse (16.61%) and malware (12.98%).
As in past years, the manufacturing sector (32.43%) was by far the largest contributor in terms of confirmed incidents. “With the environment more unstable and less predictable, it has become even more vital that organizations reduce their risk of exposure by understanding the threat landscape and how it can affect them,” Orange Cyberdefense stated.
“We’ve seen a noticeable uptick in the number of manufacturers seeking cyber insurance. That trend followed an increase in cyber risk as more operations became interconnected,” Sentry’s Teng notes.
Change: The only constant
Serving manufacturing clients well in 2024 and beyond requires staying apprised of their evolving risks and continuously offering products and services that remain responsive to their changing needs. It’s challenging, but the rewards insurance professionals reap in terms of client satisfaction and loyalty make the effort more than worthwhile.
“There’s never been a greater time, or opportunity, for manufacturers and insurers to work closely together,” stresses Sentry’s Teng. He points out that many manufacturing businesses are seeking to manage their total cost of insurance. Insurance companies that develop sufficient expertise to become true specialists — and offer the products, safety team, and claims service that best suit manufacturers’ needs — can provide the best insurance coverage for the cost.
“An insurer who can provide financial security, while also helping clients to prevent claims, or resolve them quickly, is invaluable. That comes from experience and knowing specific segments of the manufacturing industry,” he points out.
Williams of Chubb agrees. Manufacturing is complex,” he says, “and insurers must embrace this complexity to be an effective partner in helping clients work through and mitigate risks. This involves asking questions and really understanding potential risks to people and property from a company’s processes, equipment, technology, the products they make. This is what we do everyday.”
It’s all about relationship-building. “Good protection comes from good relationships and good expertise. We spend time working with our brokers, agents, and manufacturing customers to understand their needs, and in turn, build a plan to address their risks. That has become crucial as manufacturers — and their risks — have changed dramatically in recent years,” Teng says.
“In the world we’re operating in, the only constant is change,” points out Mo Tooker, Head of Commercial Lines and Enterprise Sales & Distribution in The Hartford’s June 2024 Risk Monitor. “From GenAI to geopolitical and supply chain shifts, climate change, cyberattacks — and so much more — the world is fundamentally different than it was a decade ago. And we know the next decade will be fundamentally different than today. Change necessitates innovation.”
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