The aftershocks of the COVID-19 pandemic have hit businesses hard, with inflation, supply chain disruptions, and increasing downtime.
Just as we saw how ill-prepared our healthcare system was for the global outbreak, so was our economy, and our supply and distribution network.
In addition to rising operating costs, equipment failures are a bigger threat than ever as higher prices and longer wait times make it difficult to fix or replace things.
When equipment breaks down, companies are scrambling for spare parts and materials, paying more for repairs, and worrying about the possibility of a business interruption.
It is a challenging time for commercial organizations, and they are looking to insurers, not only to help cover their losses, but to get them back in operation as quickly as possible.
Equipment Costs Up 16 Percent
According to the Bureau of Labor Statistics, the Consumer Price Index (CPI), which measures the costs of goods and services over time, rose 4.7 percent in 2021 and 8 percent in 2022.
Over the same period, HSB has seen the cost of the replacement equipment it insures go up an average 16 percent. Manufacturing equipment had the highest percentage increase at 19 percent, followed by electrical equipment, air conditioning and refrigeration equipment, and boilers.
It is also more difficult to source parts and get them delivered. The Federal Reserve Bank of New York’s Global Supply Chain Pressure Index (GSCPI), which measures supply chain conditions, has been higher than the standard deviation since January 2020.
Although there are signs of easing inflationary and supply chain pressures, progress is slow. We are seeing delays for replacement parts of up to 22 weeks for refrigeration compressors, and 18 months for computer numerical control (CNC) machines.
A “Take What You Can Get” Attitude
The combination of persistent inflation and equipment shortages has driven up the cost and the availability of key parts, sub-components, and machinery. As a result, trends have emerged that were not prevalent before the COVID-19 pandemic.
- Replace vs. Repair. If parts are not readily available to repair equipment, a business might decide to replace it instead, a practice many service providers embrace and may even encourage.
- Increased Business Interruption Days. HSB has experienced a 29 percent increase in the number of insurance claims paid that include business interruption losses or extra expense payments.
- Accept What’s Available. When it comes to repairs, business owners are more willing to replace trusted parts and equipment with less familiar substitutes. Faced with an unexpected breakdown, they take what they can get to resume operations.
Technology to Manage Risk
As spare parts get more expensive and harder to find, it is important for a business to properly operate and care for critical equipment.
Increasingly, they are taking advantage of digital platforms that make it easier to keep track of equipment maintenance, hire contractors, schedule service, and make repairs.
Smart sensors check facilities 24/7 to detect water leaks and frozen pipes, then send alerts so customers can shut the water off with devices controlled by smartphone apps.
Other insurtech tools monitor equipment to improve operating efficiency, lower energy costs, and identify electrical system faults that could lead to building fires.
The savings can be significant.
In one example, sensors inside a healthcare center alerted the staff to a sharp drop in temperature, traced to a fresh air vent stuck open in a snowstorm. Had nearby water supply lines and sprinkler pipes frozen and burst, the estimated loss would have been $120,000.
The Future of Insurance
The inflation and equipment shortages we are experiencing may continue for some time. In addition, the industry will continue to face a lack of trained repair professionals.
Insurance carriers can play a key role in helping their customers respond by delivering technologies that help them predict and prevent losses.
The widespread availability of advanced sensors is helping us extend and expand that predict and prevent model to the next phase of services we call connect and protect.
We are learning through new connected technologies about how things work at insured locations, so we can offer more comprehensive and customized solutions and interventions.
The full adoption by policyholders faces challenges and may take time, but the coupling of connected technologies with loss prevention and the underwriting of risks is underway.
The economy can be unpredictable, but technology is clearly transforming the future of insurance.
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