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The Insurance GameThe Insurance Game

December 1, 2003

18 Min Read
The Insurance Game

The cost of insurance, which in many global markets has skyrocketed since Sept. 11, 2001, may be forcing plastics executives to cut corners by reducing insurance coverage—thereby putting their operations, employees, and customers at risk.

JLT Corporate Risks, part of Jardine Lloyd Thompson Group, says that in the U.K. alone, 40% of processors suffering a major disaster go out of business within one year. According to the country''s National Audit Office, many processors who experience fire or theft never actually recover. And adequate insurance coverage at affordable rates is only becoming more and more difficult to find around the world. As risk and costs increase, processors may find themselves under-insured Philippe Druot, commercial director at toll compounder Polytechs (Cany-Barville, France), says fees for product liability insurance and logistics insurance for products shipped overseas have jumped significantly since 2001. Marc Setzen, TPE product manager Europe at compounder PolyOne (Assesse, Belgium), says that since Sept. 11, 2001 insurance companies have insisted on an increased awareness of safety measures at his company''s facilities—including installation of video cameras, which is a costly undertaking. Prior to Sept. 11, insurance rates were too low, in some cases 50% below normal premium rates, as insurers tried to gain market share, says Wilhelm Crößmann, managing director of Germany''s plastics processors association (GKV), technical parts division (Frankfurt). "There is a fear among our members that now with substantial rate increases, they could be forced out of the market because they are unable to gain adequate coverage," Crößmann says. He points out that for producers of foamed plastic products, insurance coverage is almost impossible to find because insurers perceive too much risk. Previously the GKV offered its members an insurance package from Marsh Insurance, which covered equipment, buildings, liability, fire, and product liability. But after Sept. 11, the rates increased by a factor of two and in some cases three, forcing the GKV to drop the program. Crößmann says there are few insurance companies that specialize in the needs of plastics processors and that today, single insurance companies are reluctant to provide coverage without including several other partners to help diversify risk. German processors may soon be presented with a more viable option, though. The GKV, through one of its members, is negotiating with an undisclosed insurance company to offer a coverage package sometime in 2004. Processors in Switzerland and Lichtenstein already have an option. Earlier this year, the Swiss Plastics Processors Assn. (KVS, Aarau) started offering members a package of insurance targeted to processors'' needs. Working together with GWP Insurance Brokers (St. Gallen, Switzerland), a division of DaimlerChrysler Services, they came up with Swiss Plastic Insurance Cover (SPICO). Intended for both processors and moldmakers, it covers general liability, risk, equipment damage, production loss, fire and flood, transport-of-goods coverage, and product liability. "Our experience has been that the small to mid-sized processor generally has no real structured coverage for all his needs," says GWP Agent Markus Stäger. "These processors are very often under-insured and are not really aware of the risk they are running, particularly in product liability." Stäger says SPICO is not an off-the-shelf plan and therefore has a commensurate price (determined individually by calculating revenue, size, possible risk, and needs), but adds that the rates correspond to such a value-added product. Coverage is generally offered for processor operations with a staff of 50 or more. Operations with six to 10 are simply too small to qualify, he says. SPICO coverage has no double coverage overlap; if a problem occurs, the insurance company rather than the processor has to show burden of proof, and with changes of ±10% in processor turnover, coverage rates remain the same. So far only 10 processors have taken advantage of the SPICO offer, says Peter Jetzer, director of communications for the KVS. But Stäger says such low numbers reflect how new the product is, and he estimates it will take up to four years before existing insurance policies run out and KVS members have an opportunity to apply for SPICO. Looking at individual coverage areas, Stefan Wagner, project management and sales director at molder TR Plast GmbH (Neumarkt, Germany), says fire prevention should play a bigger part in any processor''s insurance plan. His firm, which supplies automotive, consumer goods, and other markets, emphasizes the company''s new fire alarm system to its customers. The alarm is linked to the local fire department to guarantee rapid response in the event of a fire. "The fire alarm costs quite a bit, about €25,000," Wagner says, "but it will pay for itself (in the form of lower fire insurance rates) within the next decade." He adds, "We (installed the alarm) for our customers'' sake, to give them the assurance that our building, machines, tools, and everything can be replaced," in the event of a fire or other accident. Proving such commitment to customers is becoming increasingly important, he says. At Pro-Fit (Parsberg, Germany), a rapid prototyping firm working in the plastics industry, General Manager Carl Furth muses, "I''d wager fewer than 25% of processors have a fire alarm installed in their building." He continues, "We had a fire once. Trust me, it is a huge problem." Soon thereafter, his firm invested in a fire alarm linked to the local fire department. "Our boss sleeps much better now," he jokes. Furth adds that while most processors have some degree of fire insurance, he believes many are not adequately insured. "It''s very hard to really get the right [fire] insurance," he says, as processors are not insurance experts, and few insurance salespeople have sufficient knowledge of plastics processing to recommend special coverage for items such as work-in-progress or molds. "I think an insurance salesman could make a fortune if he knew what he was talking about" with processors, he says. "I was lucky. I had an old fax machine [the kind that used copy paper] that survived the blaze, and on this paper was the most recent fax from the insurance company updating our [fire insurance] policy." He recommends processors store copies of all such vital documents off-site so that they survive any catastrophe befalling a facility. Liability insurance taxes U.K. processors Premiums on compulsory employers'' liability (EL) insurance in the U.K. have risen by as much as 500% over the last two years in some sectors. Although the average increase for plastics processors has been more modest, it is still probably around the 40% mark. Further, directors of companies can be held personally responsible for injuries to employees operating faulty or poorly guarded equipment. Use of the expression "corporate manslaughter" is increasingly common. The issue has caused the British Plastics Federation trade association to organize specialist seminars for processors at its London offices. The U.K. differs from other industrialized countries in the way awards for injuries are calculated. In the U.S., for example, the "workmen''s compensation" scheme provides set benefits for specific injuries, but in the U.K., each case is argued on its merits. EL insurance also covers industrial diseases, for which there have been many claims in recent years. Phil Grace, casualty risk manager at major insurer Norwich Union, says companies are having to pay out on claims that were completely unforeseen when diseases such as Mesothelioma (caused by asbestos inhalation) were contracted decades ago. Abolition of legal aid in the ''90s and the introduction of "no win, no fee" offers from lawyers have also helped create a more litigious culture in the country. And it doesn''t stop there. Insurance companies have suffered further with the dramatic fall in recent years on returns from their investments in equities. "Employers'' insurance, which has never been profitable, has become dramatically unprofitable," Grace says. Several insurance companies have stopped offering policies, and the reduced competition has caused prices to rise even higher. Insurance companies'' popularity has plummeted, especially among the small- and medium-sized companies (SMEs) that make up the bulk of the plastics industry. "We get comments from purchasers that the insurance industry doesn''t recognize what they have done to improve health and safety," Grace says. Not surprisingly, he sees the problem in a different light. With a big company that makes several claims a year, the premium can be calculated based on previous experience and what the company is doing to implement better health and safety policies. "We can''t do that with SMEs," says Grace. "There are too many, and individually they don''t have very many claims. "We might underwrite 100 small plastics risks on the basis that we know there will be, say, five claims. But we don''t know which firms will claim. All we know is that from those 100 firms, we have to get enough premiums to cover those five claims. Until we see the majority of these firms pulling together, and reducing the five claims to three or two, it''s difficult to see why we should reduce the premium on any one firm." Trying to get out of this vicious circle, the Assn. of British Insurers (ABI) is looking to cooperate with trade associations to set up health and safety (H&S) schemes for members that will enable brokers to better calculate premiums. Such schemes already exist in some sectors, such as building and construction, where companies are independently audited. No such scheme yet exists in the plastics industry. The BPF is preparing an assessment tool that would enable companies to do their own benchmarking, but this is likely to be of only limited use to insurers. One suggestion has been for trade associations to make a minimum level of H&S a prerequisite for membership, but this is generally regarded as unworkable. Changes to the law on H&S also look unlikely. U.K. law puts the emphasis on self-regulation, Grace notes, and the government''s Health and Safety Executive, in its current form, would not have the resources to accredit all companies in the country. Companies that conform to the new international standard, OHSAS 18001, developed to be compatible with the ISO 9001 and ISO 14001 management systems standards on quality and environment, could get lower premiums, but very few companies are yet accredited. And if history is anything to go by, SMEs will be the last ones to get accreditation, simply because they do not have the time or resources. Through the roof down under Australia''s insurance industry was thrown into turmoil with the collapse of HIH Insurance in May 2001 and the Sept. 11, 2001 terrorist attacks. Since then, insurance premiums have literally been going through the roof. A recent survey by the Victorian Employers'' Chamber of Commerce and Industry (Melbourne, Australia), for example, found liability insurance premiums rose by an average of 85% from June 2002 to June 2003; this came on top of a 74% rise the previous year. "There is a general lack of [underwriting] capacity in the market, as insurers are only prepared to risk their own capital. They''re no longer prepared to underwrite just so that they can put it on their books," notes Charles Gordon, a specialist in insurance for the plastics processing industry at Tartakover Insurance Brokers Pty Ltd. (South Melbourne, Australia). "Insurers are starting to concentrate on specific niches, and only a few look at the plastics industry," he adds. Getting insurance is no longer a simple case of calling up your local broker. Insurers are increasingly more selective as to who they will and won''t insure, even in their chosen niches. "Gone are the days where you can have bags of pellets stacked to the ceiling," says Gordon. In fact, good business practices and proper documentation, including risk-management and production manuals, are now prerequisites to getting insured at all. "Lots of paperwork is involved, but if a plastics processor can show the underwriter they have the controls and quality checks in place, it makes a big difference," says Gordon. "The processor has to look at everything these days, from storing waste materials off site, to solvent handling, sprinklers, and staff training, and even the proximity of machines to each other." Gordon notes that insurance is more of a partnership now. "The insurer will have his own risk recommendations, and if the processor complies, then he can get coverage. If not, then he misses out." If a processor is ISO certified, then that implies the company has risk-management in place. But ISO certification costs time and resources that may be beyond the reach of small processors. A lot of smaller processors have no controls in place. "They might have been lucky over the past 10 to 15 years in continuing to secure coverage, but they''ll be lucky if nothing changes," Gordon observes. Australia''s Plastics and Chemicals Industries Assn. (PACIA; Richmond, VIC) is working on a program to help ensure that its members have access to insurance. "We are working with the insurance industry to develop a [plastics] industry-specific program so that insurers can better understand processors and properly define their risk profile—and plastics processors can better communicate their situations to brokers," explains Ashley van Krieken, a consultant for PACIA. In Malaysia, meanwhile, insurance costs for investments of less than RM50 million ($13 million) remain very competitive, although product liability insurance is no longer cheap, according to the Malaysian Plastics Manufacturers Assn. (MPMA; Petaling Jaya). Recently, MPMA appointed BIB Insurance Brokers Sdn Bhd (Kuala Lumpur, Malaysia) as its strategic partner to offer training and risk-profile reviews to its members, in addition to providing insurance quotations. "Our members will benefit from this partnership in terms of pinpointing areas where insurance coverage can be improved, and insurance costs may be further reduced through using BIB''s services," says MPMA president Callum Chen. Moreover, as BIB has a global reach, it can service processors with operations outside of Malaysia. Brazil bucks the trend For all the headaches liability and related insurance causes in other parts of the plastics world, Brazil is remarkably free of such challenges. Brazilian companies in general say they are satisfied with their insurance contracts. Even the smaller companies, which often survive by not paying taxes and by hiring employees under the table, tend to have basic damage insurance, according to Sergio Haberfeld, the head of the Brazilian Assn. of Flexible Packaging Manufacturers and the chairman of the board of directors for Dixie Toga, Brazil''s largest plastics manufacturer. Smaller companies are helped mostly by the access they have to low-cost insurance, often offered by their bank. As a result, insurance doesn''t present a significant cost for Brazilian companies. Because Brazil''s insurance companies give clients a three-month grace period for late payments, companies that are having difficulties making payments often switch insurers or move to a new location as a way of reducing costs, taking full advantage of the generous law. Smaller companies rarely have liability insurance, in large part because there are very few liability cases in Brazil. "In Brazil, it''s hard to sue someone even when you''re right," Haberfeld says. As a result, companies don''t see liability as a potential risk. Larger companies also have access to low-cost policies for damage insurance that covers fire, flood, and electrical damage. "Insurance is not an issue that concerns our members," says Merheg Cachum, president of Abiplast, Brazil''s Plastics Industry Assn. "For now, insurance is cheap, and I don''t know of any company that doesn''t have damage insurance," he says. The picture changes a little bit when it comes to liability for larger firms, particularly those that are publicly traded. Such insurance covers product liability, fraud, potential health risks, and faulty products. According to Haberfeld, the cost of liability insurance has increased significantly since 2001. "Dixie Toga used to pay $19,000 per year for its liability insurance, but after the Enron and WorldCom scandals, the same insurance increased to $80,000 per year," says Haberfeld. Haberfeld says that the company is considering the option of excluding the fraud liability from their policy, which will result in a significant reduction in the cost of the policy. Despite the recent increase in exports, Brazilian companies have not expressed concerns about potential liability claims in the United States or Europe. "If there is a problem with a product outside of Brazil, it would be difficult to collect damages in Brazil," Haberfeld says. There are some concerns for larger companies that have assets in the United States and Europe, Haberfeld says. "If a company has a local presence abroad, they become more vulnerable to lawsuits," he says. He notes that few companies fall into this category. The situation in Chile is quite different. According to Jorge Vergara, the general manager of the Chilean Assn. of the Plastics Industry (ASIPLA), insurance costs have gone up significantly in recent years, hurting the plastics industry. "Many insurance companies have raised costs by 100%, and renewals of old policies have also become a problem," he adds. Likewise, Chile''s free-trade agreement with the United States, which began Nov. 1, 2003, is expected to further increase exports and could prompt companies to increase the amount of liability insurance that they need to purchase. Runaway U.S. insurance costs weigh heavily on bottom line U.S. processors have a lot on their minds these days, from rising global competition to ever-changing customer requirements. Every cost and activity is scrutinized in an effort to trim fat and boost sagging bottom lines. This leaves little room for error. Experts say these and other factors make it critical for molders to maintain adequate insurance coverage to protect their equipment, property, and income. "Product liability is an issue, I believe, that will be part of our fuller agenda impacting U.S. manufacturers," says Maureen Healey, VP of government affairs at the Society of the Plastics Industry (Washington D.C.). One of the biggest financial hits any processor can incur is insurance cost. Rates for three core commercial coverages—product liability, general liability, and property damage—have increased sharply in the U.S. since Sept. 11, 2001. Statistics are hard to pin down, but industry watchers estimate rate increases range from single to triple digits, depending on such factors as loss history, products manufactured, and firm size. "The prices an individual business pays for coverages depend on a variety of factors, including loss history, size, products manufactured, processes used, sales volume, property values, the state(s) in which the business operates, and management''s commitment to safety and loss prevention," says Robert Jones, industry practice manager, manufacturing, The Hartford Financial Services Group, Inc. (Hartford, CT), one of the nation''s largest investment and insurance companies. As processors get leaner, observers say a rising number of companies are taking a hard look at limiting certain types of insurance coverage. Premiums can represent a significant chunk of operating expenses, depending largely on the type of products manufactured and markets served. "We''ve had companies refuse to give us a price quote because they didn''t want anything to do with medical parts," says Lynn Hahn, VP at Metro Plastics Technologies Inc. (Noblesville, IN), an injection molder with decorating, assembly, and packaging capabilities. "The market for plastics is so diverse, it''s really hard to generalize what the norm should be as a percentage of your overhead," adds Bob Muenzburg, VP at the independent insurance agency, McGrath/Burnham Group Insurance & Risk Management (Southbridge, MA). "If it''s a medical product that''s invasively used in any kind of surgery, then the product liability pricing is a lot higher than for an assembled part that becomes part of a dashboard." Some members of the plastics industry speculate that the fear of legal action keeps innovative products off the market. Given today''s litigious society, product liability insurance is considered more essential than ever. Hahn recalls when Metro Plastics invented a device to help people access their attic. "For a long time we couldn''t decide whether to move forward and develop and market it because of the risk factor," she says, noting the maximum capacity for the product was 250 lb. The model was later modified to accommodate more weight. Others view product liability insurance as an expensive safety net they can do without. "You''ll find most molders hate product liability insurance because they pay for it year after year," says Troy Nix, executive director, Mid-America Plastics Processors Inc. (MAPP; Indianapolis, IN) an association representing plastics processors, moldmakers, and industry service providers in the Midwest. "Then when it comes time to file a claim, they have to fight with insurance carriers to get their money." In order to choose a plan that meets their budget and business needs, experts say it is important for processors to obtain the right information before they buy. "You want to deal with a professional who understands the risk of the market," suggests Jeff Mengel, a partner at accounting and consulting firm Plante & Moran (Southfield, MI), who runs the plastics industry team. "It''s hard to ascertain whether insurance is any good until you have a claim." Matthew Defosse [email protected], Robert Colvin [email protected] in Germany; Peter Mapleston [email protected] in the U.K.; Stephen Moore [email protected] in Asia; Elizabeth Johnson [email protected] in Brazil; and Greg Valero [email protected] in the United States.

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