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Our reliance on equipment grows stronger every day. As individuals, we’re attached to our smartphones. Now, living through a pandemic, we’re relying on tech networks that allow us to work from anywhere. From the manufacturing process to storage to point of sales, businesses are super reliant on equipment. And, with advances in technology, it is equipment that is more hi-tech, specialized and interconnected than ever before.

Having been part of an insurance market that insures the breakdown of this equipment for the last three decades, I’ve seen business equipment evolve significantly. While the insurance coverage has changed along with it, the high value and cost of repair is pushing the need for further change. As an insurance market, we may need to be ready to adopt a ‘new norm’ which requires us to work closer together to offer the appropriate capacity needed to protect the growing value of our clients’ equipment.

Quick market overview
Once referred to as Boiler & Machinery insurance, and now more commonly known as Equipment Breakdown insurance is designed to insure a wide variety of equipment and technology used by business today. Equipment Breakdown (EB) coverage may be provided in a business’ property policy, however, if it is, it is subject to sub limits within the property policy’s full liability limits.

Given the growing value of equipment, such limited coverage often does not adequately address breakdown risks and costs. For instance, property insurance specifically excludes some risks, such as mechanical breakdown, electrical arcing, power surges, short circuits or deformation/cracking of pressure containing items. Property insurance also does not cover lost income or the extra expense of getting back in business when equipment is operational again.

All good reasons why many businesses opt for standalone EB coverage tailored to their specific needs with healthy liability limits to address a potential high cost of a breakdown. Today’s Equipment Breakdown coverage provides protection for losses due to mechanical or electrical breakdown of nearly any type of equipment – everything from air conditioning to computers to refrigeration. Available coverage on the market today also helps businesses address costs to repair or replace equipment and any other property damaged by the equipment breakdown; lost business income and extra expenses that result from the breakdown.

The challenge
As mentioned earlier, today’s business equipment is more high-tech and specialized than ever. That means today’s Equipment Breakdown underwriters like me are underwriting some very high value equipment that can be very costly to repair. It is not unheard of to see a food processing business have USD 100 million worth of equipment. A paper mill with USD 60 million in equipment. A manufacturing facility with USD 40 million in specialized equipment.

High tech equipment can be more prone and vulnerable to damage. It can also be difficult to repair quickly, often requiring specialists to fix, along with a longer lead time and more money to do it. Hence, the value of hi-tech, complex equipment continues to climb, right alongside the cost of fixing it.

Here lies the challenge though. Despite the growing value of equipment breakdown exposures, there is less insurance capacity to protect it.

Despite the growing value of equipment breakdown exposures, there is less insurance capacity to protect it.

Capacity crunch
In the past, insurers offered up significant capacity to 100% of a business’ equipment breakdown risk. Today, industry continues to build larger, more complex facilities with increased values. Continued consolidation in some industries, have also increased interdependencies and contingent time element exposures. Bottom line – Probably Maximum Loss (PML) / Maximum Foreseeable Loss (MFL) loss estimates continue to increase. This on higher hazard occupancies, the increased exposures, may exceed the capacity a single insurance company can provide. 

Especially in light of the costs to fix today’s more hi-tech equipment, more businesses cannot rely on the capacity of one insurer. Instead, to cover the true value of their equipment and their breakdown exposure, they need to build up a tower of coverage from a group of insurers on a quota share basis. 

No time for social distancing
While very common practice in the US commercial property insurance market, building a standalone EB program with multiple insurers has not recently been widely practiced in the standalone EB market in the US. Now more than ever, it should be. It really needs to change.

Brokers and insurers have shied away from building towers of EB. While many insurers were willing to insure 100% of a company’s EB exposure, as they began pulling back on capacity, there still was no readiness to approach coverage on a quota share basis. Here lies a big problem though. If our clients have some USD 100 million in equipment but no one insurer is willing to provide more than USD 25 million, how will they protect the rest? 

Quota share arrangements can be complex. It requires different insurance companies working together, especially when claims arise. Insurers’ coverage terms, conditions, limits and restrictions differ. As an industry, we’ve been able to address these differences in other lines of coverage including Property, D&O, and now more and more, Cyber. 

As the value of equipment continues to climb, we need to be ready to collaborate and work together as a market to show our value in protecting critical business assets. 

Businesses’ reliance on equipment is not going to ease up. To help meet our clients’ EB exposures, the insurance market needs to ease up on its usual way of doing things and adopt new ways of insuring its clients’ high value equipment. We’ve got to work together to keep US businesses and their equipment up and running. 


About the Author
Brian Strain is AXA XL’s Head of Equipment Breakdown. He can be reached at brian.strain@axaxl.com.