How technology wreaks havoc on equipment breakdown insurers

Increased complexity of technology is one of several market trends contributing to larger equipment breakdown (EB) insurance losses.

Aging of equipment and its eventual obsolescence, supply chain issues, increased competition and even climate change are also affecting EB insurance, says Doug Laurin, Intact’s director of national energy and equipment breakdown.

“You’re getting all of this new technology, a lot of advancement in the equipment, sometimes prototypical equipment,” Laurin says. “The main thing with these advancements is those losses can occur to very small components but can cause major shutdowns in the event of a breakdown.

“The other challenge is these components are so specialized. It could sometimes take significant time to get that equipment back up and running, which will lead to larger business interruption losses.”

Rapid aging of equipment in both Canada and globally, combined with technological evolution means industries can be faced with an unavailability of replacement parts. “This sometimes will necessitate a full replacement of the equipment versus being able to repair it,” Laurin says. “And that seems to be something becoming more and more commonplace with respect to wind turbines, as an example.”

Supply chain issues also continue to linger after the COVID-19 pandemic. The situation is improving, but it’s still difficult to get parts, and it takes a little longer than it used to, Laurin reports.

“So, not only have you got your physical damage loss, which is pretty stable, but you’ve got your business interruption loss that’s significantly impacted by these supply chain issues, because [the equipment] is down for much longer,” he says. “And the loss of profits that we have to pay on those claims is more significant.”

Intact is also seeing increased competition in the marketplace, which is creating some pricing instability in the mid-market and large account space, Laurin reports.

Policy triggers

Laurin explains a big factor in triggering an EB policy (also known as boiler and machinery insurance) is the need for ‘an accident to an object.’

“You don’t think of it when it comes to the breakdown because we need an accident to an object, but climate change does play a part in terms of equipment breakdown losses,” he says.

Severe weather events such as hurricanes, wildfires and flooding can lead to a greater risk of breakdown. That’s why it’s important to have a risk control team to help clients understand how equipment is affected by weather events and to provide the proper steps to get them back up and running.

EB policies are essential to complement all-risk property policies, Laurin adds.

“That equipment breakdown policy is going to help fill the gaps that are present in an all-risk property policy,” he says. “Your typical property policy responds to specific covered perils…but an accident to an object will not be covered by the policy if one of those perils is not present.”

Feature image by iStock/LOUISE BEAUMONT