Any business relying on machinery and equipment for its operations is exposed to the probability of significant financial losses due to a breakdown of a key piece of machinery that isn’t quickly or easily replaced or repaired. According to the Market Statsville Group (MSG), the global equipment breakdown insurance market size is expected to grow at a combined annual growth rate of 11,7% from 2023 to 2033, while Precision Reports has recently published a report titled ‘Equipment Breakdown Insurance Market’, echoing the expectation and stating that “the Global Equipment Breakdown Insurance market is anticipated to rise at a considerable rate during the forecast period, between 2024 and 2032”.
According to Bester Els, business unit manager at Aon South Africa, the equipment breakdown insurance market is driven by an increasing reliance on sophisticated machinery and equipment across various industries, often involving intricate components and advanced technology, making them more vulnerable to breakdowns or failures. Such incidents can lead to significant financial losses for businesses, including repair or replacement costs, downtime, interruption in production and service delivery, brand reputational damage, and even serious or fatal injuries to operators.
However, not all losses relating to machinery or equipment breakdowns are covered by a standard machinery breakdown policy, which normally includes a ‘sudden and unforeseen’ requirement. “Post-loss investigations often reveal that the breakdown was due to gradual deterioration and wear and tear, which the business may or may not have been aware of, which may result in the insured being unsuccessful in obtaining indemnity for its loss in terms of the machinery breakdown policy. It is imperative to understand the importance of equipment breakdown mitigation and preparation, and to take proactive measures such as implementing a formal risk management programme in conjunction with machinery breakdown insurance, to minimise the risks associated with such incidents,” Bester explains.
A machinery and equipment breakdown prevention and contingency plan should form part of the organisation’s formal risk management programme to assist in preventing and predicting breakdowns or failures and to take proactive steps to mitigate the risk associated with breakdowns. Such a plan should include:
• Identifying critical or vulnerable equipment: The first step is to identify critical and or vulnerable machinery or equipment essential for daily operations, to enable the company to focus on implementing preventive measures and creating contingency plans specific to that machine or equipment. The feasibility of keeping critical spare parts in stock should be investigated, specifically those that can have a large impact on production. Anything above a 30% interruption, that has a long lead time to procure and or replace and commission should be held as critical spares and ideally included in supplier agreements.
• Implement regular inspections and maintenance: A proactive inspection and maintenance schedule can reduce the likelihood of gradual deterioration and unexpected breakdowns by identifying potential issues or deterioration before they escalate, extending the lifespan of the equipment. Condition monitoring of equipment such as thermographic inspections, oil and gas analysis on transformer oils, vibration analysis and predictive analytics can aid greatly. Risk carriers take kindly to businesses with robust preventive maintenance programmes, which also portray the organisation’s risk profile positively.
• Establish and monitor the useful life of plant or machinery: Tracking the useful life of equipment enables the company to plan for the overhaul or replacement of key equipment to prevent unexpected downtime and replacement costs at the end of life.
• Establish an emergency response plan: An emergency response plan should outline the immediate actions required when a breakdown occurs, to ensure a quick and effective response. This could include immediately stopping production or utilities, notifying the maintenance team, and initiating temporary workarounds where possible, to minimise further damage, downtime or safety hazards. The plan should also include alternative means of continuing operations − possibly at an increased cost of work − either through spare capacity within the organisation or an agreement with similar service providers, for example. Insurance may well assist in protecting lost revenue, however brand and loyalty is not compensated, so recovery and keeping products available for clients is imperative. Reserve stocks that allow for supply retention during the lead time can also be considered, albeit in consideration of cost to exposure and returns.
• Develop a recovery plan: The recovery plan should outline the steps for returning to normal operations and should include resource allocation, communication strategies, and timelines for the recovery process.
• Relationships with equipment suppliers and service providers: The repair or replacement of equipment can be expedited where partnerships have been established with equipment suppliers and service providers.
“Taking a proactive approach to prepare for machinery and equipment breakdown assists in mitigating the risks and ensuring that the business has a workable plan to get back to normal operations as soon as possible. When combined with bespoke equipment breakdown insurance, it provides a safety net for businesses that would be severely impacted by machinery or equipment failure. It is here where the insight and guidance of an independent risk consulting team proves invaluable in putting together a solution that will help the business keep operational efficiency at optimal levels, with an engineering risk management programme that can anticipate and mitigate the risk of machinery breakdowns, complementing machinery breakdown insurance,” Bester concludes.
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