Rising to the occasion

Engineering insurance policies provide financial protection to business against engineering risks, while engineering inspection makes provision for the examination of plants and machinery to meet customers' regulatory requirements.

The engineering insurance and inspection market premium income is in excess of £570m, of which around £170m is attributable to the inspection services product.

In 2002, contractors all-risks and engineering all-risks premium rose by 8%, and grew further in 2003. In the same period, inspection premium increased by 10%.

The majority of business continues to be transacted through brokers of all sizes. At Allianz Cornhill Engineering, some 49% of business comes through national brokers and about 45% from provincial firms - a very small percentage of business is conducted directly with clients and this is true for other insurers.

The classes of business that have been particularly buoyant are: contract works, contractors' plant, business interruption and inspection services.

The reasons for this are clear - the British construction industry is riding the crest of a wave with nationwide development. New-build commercial office and retail projects, refurbishment and regeneration of older buildings and the strong housing market have led to record output. Examples include the £500m Birmingham Bullring Shopping Centre, projects creating stylish warehouse apartment living in previously rundown parts of Manchester and work currently taking place to prepare Liverpool for its role as European City of Culture in 2008. The burgeoning leisure industry has also seen many new restaurants and bars open across the UK, with former banks making prime development opportunities.

Rising premiums

The sector has benefited from rising premiums. Rates have risen to reflect the hardening of the market and to cover increasingly technical work such as the installation of air-conditioning, environmental controls and construction of intelligent buildings. The rising value of property also means that the sums insured need to be considerably higher to match this.

Looking to the future, we are in favour of modest rate rises - cutting premiums for inspections could have serious repercussions for the sector.

Technology has added insurance policies covering computers and electronic equipment to the portfolio on offer to the broker and client.

The continual updating of such policies ensures that new equipment is captured as technology changes, for example, through the broadening of insured property to include laptops, tablet screens, cameras, projectors and personal digital assistants.

In addition, this type of cover now includes loss or damage to computer environmental controls such as air-conditioning, loss or corruption of data and additional expenditure, over-voltage/power surge and consequences of breakdown.

The application of products to new markets has also impacted on and changed engineering insurance covers. Policies providing business interruption cover and the costs of repairing breakdown of plant/machinery are being applied to the leisure industry. This is evident with restaurants, where environmental control systems are critical to the operation of kitchens and the ongoing trading of the business.

Recent trends

Clients' buying habits and behaviour have changed significantly over the past few years. While price has always been a significant determining factor when securing new business, well-managed businesses are now anxious to ensure that they receive value from their providers rather than simply the least expensive quote.

There has been a trend for brokers to set up their own risk management divisions and to train staff to provide professional guidance, for example, on complex but sometimes relevant areas such as alternative risk transfer.

The large engineering insurers are often able to offer support in terms of allowing qualified surveyors to accompany brokers on site visits.

With growing emphasis on risk management, there has also been greater need for inspections, even if these are not required by law. Brokers are emphasising the benefits of this so that the premium can be as competitive as possible and, in some cases, to ensure that a quote can be obtained at all.

The increased emphasis on risk management is already showing signs of paying off. Claims in general are either down or at a manageable level for most insurance companies. This is good news both for clients and for the long-term future of the engineering insurance and inspection sector.

As brokers look to build closer relationships with their clients, this is also true of their dealings with insurers. Most brokers now say they are placing more business with fewer carriers. The result is a mutually beneficial relationship, whereby the costs of trading are removed from the broker/insurer relationship. The insurer obtains a good flow of business and the broker receives preferential status with the insurer, which can include faster quote response times and training for staff.

Skills gap

Regulation by the Financial Services Authority is fast approaching and, in the case of engineering insurance, a skills gap of the product and inspections market has been exposed.

There are a number of reasons for this, including company mergers, the reduction in the number of specialist engineering brokers and the combining of engineering and commercial property departments.

Brokers in a regulated environment will be under increasing pressure to provide best advice and, to improve awareness, a number of brokers have been requesting additional training for their staff from insurers.

Insurance companies also need to prove their staff can meet the highest levels of competence. This has led to various initiatives by insurers, such as the Chartered Insurance Institute accredited Allianz Cornhill Underwriting Academy. Insurers have sought to ensure technical ability is promoted through formal training and structured assessment programmes.

Brokers are also likely to find their clients are becoming switched on to regulations. Individuals' knowledge of FSA regulations and regulations regarding the workplace and protection of the public in general has increased significantly. As a result, this represents an opportunity for both broker and insurer to provide dedicated and focused advice and product solutions to the customer.

From a customer perspective, they need the benefit of knowing that the advice they receive is the best it can be and that the insurer is compliant.

This allows the client the peace of mind to do what they know best - managing their own core business activities.

Engineering inspection

The market has also grown on the engineering inspection side. While some traditional heavy industries have declined and manufacturing output has fallen, the growth in construction has more than made up for this in terms of volume.

While older traditional plant such as pressure and boiler plant is on the decline, risk assessments are concluding that electrical fixed-wiring installation work needs to be regularly tested.

In this new environment, engineering inspection is changing. Rather than a thorough examination being carried out at a prescribed time, more examinations are now being considered after much data gathering and with the introduction of risk-based inspections.

The operation of the equipment, load capacity and environment are now being focused on when considering the condition of hidden parts and the possible need for more intrusive methods of examination.

Technology such as endoscopy, thermography and oil analysis can now be employed by the engineer surveyor to ascertain when the next examination should take place.

Another modern-day development in engineering inspection is that of critical-load path analysis, where consideration is given to failure of a part during the normal lifting operation, which would result in a catastrophic event.

Modern methodologies

The need for electrical testing is spreading to all kinds of work equipment.

Modifications to electrical control circuits need to be properly recorded.

For example, there is a requirement for circuit drawings relating to work equipment to be held on site and for them to be able to be called upon by anyone who is to work on such electrically controlled equipment.

In order to meet all of these modern methodologies, engineer surveyors working for inspection providers need to constantly update their knowledge.

All such employees should have a personal development plan in order to identify and fill any skill gaps.

Inspection providers have to ensure their employees are kept at the forefront of knowledge in respect of modern standards, regulations and supplementary testing techniques. This is to ensure that the service provided to customers is both technically sound and assists the client to be fully compliant with the relevant workplace regulation.

To underpin the activities of the engineer surveyor, some inspection providers maintain operational and training standards through a team of chartered engineers who are experienced in their own specific disciplines.

They are in regular contact with all of the policy-forming units of European standards-devising bodies, enforcing authorities and the Health and Safety Commission.

Legislation drives the engineering inspection sector. The UK's health and safety legislation is already tough and, in recent years, a number of European Union directives have been introduced. As a result, a framework that covers most types of business exists.

The demand for inspections has also been fuelled by the increased awareness by business leaders of the need to take health and safety risk assessments more seriously.

So, with strong growth in the amount of business, rises in premiums, a greater emphasis on risk management and the impending FSA regulation, the role of the brokers is more important than ever in the placement of engineering insurance and inspection.

LAYING DOWN THE LAW ON INSPECTIONS

Legislation that brokers will most readily associate with involve traditional, heavier industries such as the Pressure Systems Safety Regulations and the Lifting Operations and Lifting Equipment Regulations. However, the Provision and Use of Work Equipment Regulations impacts on many items of equipment found in an average office as do the Electricity at Work Regulations.

Meanwhile, amendments to the Disability Discrimination Act 1995 will soon be in force. These regulations will encourage building owners and managers to ensure that disabled people are not excluded from access to buildings and, as a consequence, more mechanical handling plant, lifts and escalators/travelators are being installed.

Finally, The Work at Height Regulations (still in consultation) are set to be introduced and deal with working at height. This will require that the hazards associated with this activity are fully assessed and effectively managed. Among the measures that will be required will the regular inspection of access equipment.