An inspector calls

Engineering inspections are not strictly speaking an 'insurance sell'. Items that need to be inspected include lifts, pressure systems, air-conditioning units and electric cables. Venues that require inspections can range from a local gym to a nuclear-power facility. In fact, the lift you used today would have probably been inspected by an engineer surveyor within the last six months. When you hear the fire alarm being tested weekly at your office, although annoying, you would rather know that it works than rely on hope.

There are five major players in the UK's competitive inspection services market: Royal & SunAlliance, Allianz Cornhill Engineering, HSB Haughton, Norwich Union via Bureau Veritas, and Zurich, and a number of smaller independent operations.

It is no coincidence that insurance companies have large inspection departments. After a series of steam-boiler explosions in the 19th century, the industry decided it would only insure boilers if it was permitted to inspect them. However, it was not injuries and deaths that were the major concern, rather damage to property. The Boiler Explosions Act 1882 was the first statutory requirement for inspections and there have been several acts since (see table, p40).

Given the potential huge costs of a corporate manslaughter claim (see Corporate Manslaughter, pp31-32), companies should be made aware of the inspection business.

Market opportunities

Citing the importance of brokers in this market, Terry Dyson, sales and relationship leader for engineering business at RSA, says: "Around 80% of engineering inspection business happens via brokers. The average commission is 15% and can be as high as 20%. Most contracts are run on a year-by-year basis and often fall on the anniversary of insurance contracts." Commenting on the size of the market, Dyson says: "I think, through inspection companies, the market is around £150m, though some companies choose to undertake inspection in-house."

Phil Moore, head of engineering at Zurich Services, whose 510 engineers survey 110,000 sites in the UK, including some nuclear facilities, estimates the inspection market is worth £175m across the UK, although it has recently "flattened out after significant growth over the last seven years". He says: "Most brokers will take commission, while some work on zero commission but charge a fee for the technical service they provide for assessing the relevant bids.

"In many cases a broker will place a whole raft of insurance and, more often than not, the engineering inspection is separate."

Moore sees opportunities for growth in electrical inspections. Most electrical circuits need to be examined every three to five years, depending on the system, though in high-risk areas this should be more frequently. He says: "More companies are moving to an arrangement where they have independent inspections of their electrical wiring systems. We would examine the fuses and the wiring. We can fit in with the clients' needs - we can work at weekends, or perhaps shut down half of the office if necessary."

Dyson says brokers that are moving into niches such as the construction of tower cranes have opportunities to show expertise and add customer value. He says RSA can offer flexible schemes and pricing on a simple basis.

Paul Miles, manager, commercial sectors at NIG, says: "Brokers definitely make money. The bigger the schedule of plant, the more money they are going to earn. Any broker transacting with NIG will be eligible to earn a commission."

Inspection education

Brokers have an opportunity to provide valuable information to their clients by learning about some of the more complex areas of the engineering inspection process. Dyson says: "Inspection has a big connection with liability and property risks. By talking with authority about engineering inspection, a broker has an opportunity to establish a better relationship with a client."

Phil Wright, chief engineer at Allianz Cornhill Engineering, warns: "Many people are failing to respond adequately to the legal requirements for safety in the work place and the insurance industry has to ask whether it can do more to help companies comply with the law. Managing risk is an essential part of applying sound corporate governance principals. The insurance industry is arguably failing in its professional duty if its customers are allowed to ignore or become complacent about health and safety in the work place."

Brokers are often at the front line of insurance when it comes to liaising with business owners, and, therefore, are in a prime position to offer inspection information.

Moore says: "Underwriters should take into account inspection examinations. Certainly, if you did not have plants examined, failure rates would increase, there would be more fatalities and explosions, and more cranes would topple over; before the introduction of regulations, that is exactly what happened." He continues: "Most businesses in the UK appreciate the service we provide and we have never come across any hostility towards our people."

Prices can vary, with fees negotiated on an item-by-item basis or sometimes an overall price can be arranged. Miles says: "Brokers are legally obliged to offer employers' liability cover and I believe brokers should be offering inspections in the same way. Most brokers are aware of inspections, but there is still a certain amount of mystique when it comes to inspections."

NIG and HSB Haughton offer a service for those in the motor trade, including owners of repair garages and showrooms. The policy, currently exclusive to NIG, includes a fixed price per location for the inspection of all statutory items. There is also an insurance product offering breakdown cover on all equipment.

Paul Miles, manager of commercial sectors at NIG, says: "It is on offer from large franchise dealerships to one-man bands. It was launched in December 2005 and there has been a lot of interest. Some of the main risks are jacks, cranes, air receivers and exhaust ventilation. "

Chris Lyons, partnership manager at HSB Haughton, which deals with around 5000 brokers, confirms: "HSB acts as NIG's inspection authority across its whole product range. HSB has 230 engineers inspecting across the UK, and inspects four million locations worldwide, with business in the US, Australia and Canada."

Miles says: "Engineering inspection is one of our added-value services. Inspection is available across a number of our contracts. Most inspections are individually priced based on the trade, type and size of the item."

Regulation

Regulation, especially European directives, has helped underline the importance of the engineering inspection industry.

Rules, including the Health and Safety at Work Act, Pressure Systems Safety Regulations 2000, Lifting Operations & Lifting Equipment Regulations 1998 (LOLER) and Electricity at Work Regulations 1989 mean there are statutory requirements for items to be inspected. The table above presents the different regulations and their coverage. More information is available from the The Safety Assessment Federation - a trade association for the independent engineering inspection and certification industry - and from the Health and Safety Executive. There are also European regulations for buildings under construction.

As with the Financial Services Authority's attempts to regulate insurance, rules are still being improved. SAFed is currently in negotiations to produce guidelines for the examination of escalators, which are not mentioned under the LOLER. According to SAFed, the guidelines are expected to be published in the second quarter of 2006.

There are different inspection requirements for individual items. A lift that carries people needs to be inspected once every six months; if a lift does not carry people, then it is to be inspected once every 12 months.

The inspection is not a quick 'once over'. An inspection of a lift, carried out by a qualified engineer surveyor, can last four hours and a report is available to the maintenance company and the owners of the building. If necessary, the inspector has the power to shut down the part or apparatus on the spot. Dyson says inspection companies can offer 'single hits' - when one item needs to be inspected outside of a contract.

Inspections should be carried out by a competent body. All surveyors are monitored by the UK Accreditation Service, which operates under a memorandum of understanding from the Department of Trade and Industry, which performs internal audits at the inspection companies and assesses the competence of the engineers. The companies are assessed on a four-year cycle; year one is a full assessment, during years two and three they are kept under surveillance and the next year there is a full reassessment.

A complex network of buildings such as Canary Wharf in London may require a team of engineers based permanently on site. Allianz Cornhill Engineering has four members out of their 490-strong inspection team at Canary Wharf. There are 500 lifts, 100 escalators and 300 items of suspended access equipment for window cleaning requiring inspection. All of these items need inspecting as well as the computer-controlled fountain in Cabot Square, which has a sensor that detects wind strength and adjusts the water height accordingly.

Statistics show the importance of inspections. RSA files reports for 42,000 serious defects per year, of which approximately 5000 have an immediate notice application. RSA examines coal-fired power stations in England and Wales and also gas-powered stations in the UK. Major customers include Aon, Marsh and Heath Lambert.

Technology is improving inspection techniques. Zurich is introducing new technology and equipping their engineer surveyors with Panasonic Tough Books, which are rugged laptops, and gives the surveyor the capacity to file reports quickly. Zurich also has Esytrak, an electronic system that automatically locates and allocates a surveyor in the vicinity with the relevant skills.