Tailored cover: industrial special risk

Vol 47: Issue 2 | July 2024

In short

• Medium and large companies with complex needs may need tailored cover beyond an off-the-rack business insurance package.
• Brokers can design a more comprehensive combination of material damage and business interruption insurance to match unique risk profiles. 
• Supply-chain disruption and rising inflation in some countries will require brokers to update asset valuations as often as quarterly for some large businesses if they are to avoid being under-insured.
  

Known in Australia as industrial special risk (ISR) and in Malaysia as industrial all risk (IAR), these policies can be built to address a unique business risk profile.

“The sort of businesses that typically require ISR cover have a wide range of assets over varying geographies and need a tailored solution for those assets,” says Robert Kelly, co-founder, managing director and CEO of Steadfast Group in Australia.

“ISR can be tailored to suit the risk transfer that the client wants, whereas business insurance packages are usually locked down to a standard, broad range of coverages.

“An ISR policy is capable of providing more coverage and is drafted to make sure that the events you want to get covered are included in the specifications.”

Kelly says the two standard parts of ISR/IAR cover — material risk and business interruption — go hand in hand. “A business interruption section of an ISR policy is only triggered if there’s a claim under the material damage side of the policy,” he says.

While this might sound straightforward, it can be anything but. As an example, Kelly points to the 2011 floods in Thailand.

While some Australian businesses had ISR cover for their overseas suppliers, their policies did not cover flood damage to overseas premises and stock. As a result, they could not claim against either their material damage or business interruption ISR insurance sections.

Regional differences

In New Zealand, the primary cover offered is the material risk aspect, and it’s commonly taken up by medium and large businesses.

“It’s treated differently in New Zealand because we have material damage, rather than industrial special risks. Different terminology, different coverage. Each market has its own little quirks,” says Chris Pirie, general manager, Commercial, at PIC Insurance Brokers Ltd.

“New Zealand has always seemed to have some of the most comprehensive policies in the world, and in our material damage cover, you’re covered for full accidental damage, unless it’s explicitly excluded.”

In Malaysia, Puriantoh Supu, head of Commercial Lines Underwriting, Generali Malaysia, says businesses taking up the equivalent IAR cover have a total sum insured exceeding RM50 million (A$15.7 million).

“Manufacturing or heavy industry would opt for IAR cover due to the additional accidental and theft cover which is not provided in the standard fire tariff,” he explains. “For normal commercial property risks, the standard fire tariff would suffice.”

Puriantoh says that the other option in Malaysia is the large and specialised risk (LSR) scheme IAR, which is only available for industrial risks exceeding the combined sum insured (material damage and business interruption) of RM300 million (A$94.4 million).

“The scheme is managed by the LSR scheme manager appointed by Bank Negara Malaysia [Central Bank of Malaysia],” he says.

“The main difference between the LSR scheme IAR and the tariff IAR is the open pricing of the LSR scheme. It also allows the option for a wider coverage compared with the standard tariff. Given the type of coverage available in the LSR scheme, large industrial-based companies would normally choose this IAR cover.”

As brokers in Australia and New Zealand might have suspected, Puriantoh says there is a common misunderstanding of the phrase “all risk” in the IAR cover, with clients assuming that all types of perils are covered, and any loss is within their IAR coverage.

"Just like any type of insurance cover, IAR has its own exclusions and conditions as defined in the full PDS.

"For example, the standard IAR tariff has fixed mandatory wordings to be applied and even the price is determined by an appointed committee known as the Special Rating Committee,” he explains. “No amendment of wordings are allowed for risks within this category.”

It’s a different story with LSR. “The LSR IAR has room for tailored wording, subject to the approval of the scheme manager,” says Puriantoh. “In general, the coverage is wider and may have the flexibility to include engineering sublimit cover, such as machinery breakdown, within the limit approved by the scheme manager.”

Designing cover

Both material risk and business interruption elements require significant fact finding and due diligence from the broker in order to design a policy that responds appropriately to the customer’s risks.

Pirie says a broker would need a good six to eight weeks to get all the facts and review and analyse the business information for the submission. “For material damage, people underestimate the value of what they have,” he says.

In addition, Pirie says capacity for cover is “an issue” in New Zealand, with restricted reinsurance limits, so a broker may have to approach multiple insurers in addition to drawing up a good-quality submission.

“Nothing beats face to face,” adds Pirie. “You want to be able to paint as good a picture as you can to prospective insurers, so you need to actually go and eyeball the client and their workplace.

"Look around, check their security, check their fire protection, check the construction of the buildings and show interest in what the client does and how they do it.”

Says Puriantoh: “Understanding the risk and exposure is the key to asking the right questions and providing sound advice to the client. For example, a factory that produces goods is exposed to accidental damage within the premises and possible loss of goods from theft exposure. [In this case], IAR coverage is the most suitable cover, rather than the standard fire tariff.”

For material risk, an in-depth analysis of the physical assets, their location and their exposure to weather events such as flood and bushfire is required. If a company has physical assets or supplier assets overseas, the cover must reflect that risk exposure from their geography.

If a client’s revenue comes from buying widgets from Thailand, you have to evaluate their exposure to that widget factory and make sure you mirror the cover under the Australian ISR policy, Kelly explains. “That way, if the non-supply of a part or product would lead to loss of turnover and trigger a claim, you’ve got that coverage.”

“With customers commonly buying so many types of general insurance online, it was fascinating to take a closer look at a product that really draws on broker expertise and service if it is to deliver for the client. The story also highlighted again how interconnected our world is, when a supply-chain breakdown in Europe or a storm in Asia can lead to substantial business losses in Australia or New Zealand.”

Pirie says that lots of insurers in New Zealand don’t really want to cover anything outside the country, so brokers need to understand which insurers will be willing to offer that cover. While having that discussion, it’s a good idea to also negotiate cover on unique elements.

If a client has a building with a plant room or a lift, for example, you should be looking at insurers that don’t exclude those locations immediately and don’t leave it as a sub-limit. “You can ask other insurers to include them but there may be a premium involved,” says Pirie.

Kelly adds that a broker cannot build section two — business interruption cover — without a full analysis of the customer’s revenue stream. “A good insurance broker would do two things: get the accounts at the company for two or three accounting periods and, secondly, ask what the customer’s budget is over the next two years,” he says.

“Sometimes an indemnity period is required to cover future exposure, so you have to then look both retrospectively and going forward to give a concise analysis of what the business interruption policy should respond to if there’s an insurance event.”

Buyer beware

In countries such as Australia and New Zealand, brokers and their clients can’t afford to ignore the impact of inflation on insurance cover. (Malaysia is currently less exposed, with headline inflation in 2024 estimated to stay at a moderate 2–3.5 per cent by the Central Bank of Malaysia.) All three countries are similarly affected by global supply-chain interruptions that delay parts, materials and replacements.

“If an insurance broker is not advising their client of the trends of these elements on replacement value, they’re committing an error in the advice protocol they’re giving to the client,” says Kelly.

"The ways to rectify that and make sure you’ve got full value, he adds, is to have valuations done on machinery and buildings and to also establish the value of imported products when they arrive in Australia.

He says that brokers should be reviewing values at least annually, and perhaps even twice a year with bigger clients.

While Malaysian customers may not need property valuations more often than every three to five years, Puriantoh warns of another concern in that jurisdiction.

“Customers need to know there is an under-insurance penalty in the event of a loss if the actual value at the time of the loss is typically more than the percentage allowed in the policy,” he says.

Pirie says stockpiling due to supply issues is a common challenge for New Zealand clients. “They order extra container loads of product when they can get it and forget to tell their broker that the extra stock has been sitting in their warehouse for six months,” he says.

“You need to keep in touch with your clients, especially if you think or know that they have a lot of imported stock. Perhaps do six-monthly reviews or quarterly reviews on larger clients.”

Another consideration for landlord clients in New Zealand is indemnity periods for loss of rents. Pirie says that currently, anything less than 12 months is too short.

“It can take a long time for the claim to be investigated and accepted, for repairs to be tendered and then done, and then there’s the time to replace a tenant,” he says. “We’re usually suggesting 24 months [of indemnity] for property owners.” 

What’s covered?

Industrial special risk (ISR) / industrial all risk (IAR) insurance is typically more comprehensive than a standard business insurance package or Malaysia’s fire tariff.

Cover included:

• Fire
• Theft
• Glass damage
• Accidental loss
• Malicious damage
• Post insurance event clean-up

Cover not included:

• Wear and tear
• Livestock
• Dangerous goods
• Goods in transit
• Cyber

Negotiated cover

• Machinery / equipment breakdown — usually not included, but some cover may be negotiated
• Flood — may be included, and can be negotiated

Read this article and all the other articles from the latest issue of the Journal e-magazine.

Read issue 2 of the Journal