Insurance Industry Got Closer to Manufacturing Clients During Pandemic

The U.S. manufacturing industry is on the rebound from effects of the global pandemic-driven shutdown more than a year ago. While U.S. industrial production and U.S. total factory orders fell substantially in April 2020, manufacturers overall fared much better than they anticipated by year end 2020, at least in some sectors of the market.

“In terms of sales and payroll and how their business did, I think many were pleasantly surprised with how well they did throughout all the pandemic,” said Tony Hopkins, vice president at The Horton Group, who has specialized in the manufacturing sector for the past 16 years. More than three-quarters (77%) of Hopkins’ current book of business is in the manufacturing space.

But Hopkins noted that where a manufacturing business stood at the end of 2020 depended largely on the specific class and products it produced.

“It has been extremely pocketed,” he said. “A manufacturer that’s making plastic containers that go into a food-related business, they might be booming and might be having a 50% increase in sales from last year, whereas somebody serving the hospitality market or maybe some of the more disposable income type spends might be hurting a little bit more.”

In general, Hopkin’s own book of manufacturing business has reported only slight declines in 2020 compared to previous years.

The pandemic impacted various manufacturers differently, agreed Mike Toth, assistant vice president, commercial lines pricing, at Sentry Insurance.

“Some of our insureds saw increase in demand for their products, while others saw decrease in demand,” he said. “Heck, we even had some manufacturers that switched their operations to make PPE in the shortages when it first started. That was quite a change for them, for their operations, and changed their risk exposure, as well.”

Uneven Recovery

Manufacturing growth overall is forecast to fall by 5.4% in 2021, according to a recent report on Manufacturing.net.

But just as the pandemic’s impact differed by manufacturing class, so, too, is the recovery uneven.

“It’s not uniform across all the various segments, but in general, a recovery,” Toth said.

“None of the clients that I work with went out of business,” Hopkins said. There were a few close calls, he added. “One or two were teetering on the brink of closure, but they’ve now since snapped back and they’re almost back to pre-pandemic levels, at least in the forecast for this year.”

Manufacturers that have survived are facing insurance rate increases. But the rate increases in the manufacturing space are not due to the pandemic. They, like others in most lines of property/casualty insurance, are a continuation of increases that began before the COVID shutdowns.

There are few “negatives” in pricing when it comes to manufacturing, said Bobby Steinsdoerfer, senior vice president, regional underwriting leader at QBE. “But on a relativity basis compared to real estate, hospitality and some other industries that are driving up rates, manufacturing has been on the lower side.”

“We have been seeing rate increases in most lines of business outside of workers’ comp,” Toth said. “We saw increases before the pandemic, and they are continuing now, especially in the commercial auto and umbrella spaces,” he said.

Product liability is one particular line experiencing some pricing pressure for manufacturers Toth said this market has seen rising claim costs in recent years. “It depends on what they make,” he said. “That is something that we’re keeping a close eye on.”

While product liability can be an important part of a manufacturer’s insurance program, so is property. Property insurance rates are rising due to catastrophe claims. Toth noted that the age of facilities in the small- to mid-sized manufacturing market has added to increases in property insurance costs as well.

Fortunately, the one exception to rising pricing trends is workers’ compensation, which tends to be a large percentage of a manufacturer’s insurance portfolio, Toth said.

Price stability in workers’ comp has been helpful to manufacturers during this challenging year. “The workers’ comp market is still pretty friendly, and it single-handedly is alleviating a lot of the hard market burden for manufacturers,” Hopkins said.

In Hopkins’ experience, manufacturers can often expect workers’ compensation costs to total 50% to 60% of their overall property/casualty premium. “So that’s half, if not a slight majority, and with the workers’ comp market being pretty much flat, even though all the other coverage lines are increasing, a lot of times we’ve been able to wipe out those increases with decreases on the work comp.”

Labor Shortage Continues

Manufacturers are still are still finding it a challenge to find qualified talent. Despite employment gains in recent months as the manufacturing sector began to rebound, overall employment levels still lagged by 543,000 fewer jobs in December 2020 than February 2020, according to the 2021 Manufacturing Industry Outlook by Deloitte.

QBE’s Steinsdoerfer believes the pandemic has widened the gap in skilled labor for the sector as workers in some manufacturing operations were furloughed or decided to retire early.

“A different scenario is where people may have retired but are being asked to stay on and continue their expertise,” Steinsdoerfer said. “But that talent shortage, I think, has been exacerbated and now people are trying to solve that through automation.”

Hopkins says the labor shortage is the biggest risk facing manufacturers today but that hasn’t changed since pre-pandemic days. And while labor shortage is not directly an “insurable risk,” it indirectly affects other areas of the insurance market.

Worker safety is a big concern. As employees in manufacturing plants do more with less, safety may be overlooked, Hopkins said. “Sometimes there’s not enough time for safety,” he said. “Sometimes employees are just trying to rush through their jobs.”

Labor shortages can also affect property exposure, too.

Hopkins says that food-related manufacturers, which have seen production increases throughout the pandemic, are seeing pricing pressure from property carriers because of claims outside of catastrophes.

“In the food space where their machinery is operating at almost full capacity right now, they (machines) have a tendency to overheat,” he said. Overheated machines have the potential to cause a fire leading to property damage and worker injuries, he said.

Technology Advances

Manufacturers have been accelerating their use of technology to improve efficiency during the pandemic, according to Steinsdoerfer.

“Obviously, that was a trend already with the industry’s 4.0,” he said. The manufacturing world’s “Industry 4.0” has been taking place for a few years. It focused on making systems and processes smarter, more efficient and more precise through the application of modern technology.

The need for people, or workers, during the pandemic, pushed the industry even further. “Now people are talking about an Industry 5.0,” Steinsdoerfer said.

Industry 4.0 focused on connecting operational chains to generate more value to promote efficiency. In manufacturing, the goals are to reduce waste, improve productivity and operations and make better use of systems and strategies.

Industry 5.0, the next generation of technological innovation, is about adding a “human touch” component to modern manufacturing processes and systems.

“People have started to shift their capital budgets to accelerate that because of productivity,” Steinsdoerfer said. “All this has done is accelerated the trends much faster.”

Cyber Exposures

Like every industry, manufacturing faces cybersecurity challenges that are heightened as it further automates.

Brian Kramer, underwriting officer and industry lead, Middle & Large Commercial Manufacturing, for The Hartford, says that industry 4.0 modernized traditional manufacturing practices using connected technology such as robotics and co-bots.

“The key word there being ‘connected’ technology,” he said.

This phase of technology employs machines with sensors to monitor safety, production, efficiency.

“They’re sensing heat, they’re sensing noise, they’re sensing vibration,” he said.

There are wearable devices designed to avert worker injury. Those devices are recognizing unsafe lifting techniques to prevent that injury before it happens. Some facilities have installed ErgoSkeletons, which are supporting proper posture and lifting techniques.

All of this technology, while helping to create safer working environments, is also vulnerable to cyber attacks.

“Those machines right on the production floor have software that needs to be updated, that needs to be calibrated periodically,” Kramer said. “Those machines also are logging and capturing data, and if you want to take that a step further, all of those machines can be remotely diagnosed, but the common thread there is that they’re all connected.”

All of this connectivity is driving cyber exposures.

“I think that is probably very much a hot topic for manufacturing,” he said. “You’re starting to see more sophistication emerge in terms of ransomware attacks and I would say think manufacturing is definitely exposed,” he said. “The threat is very real.”

At the same time it presents cyber risks, technology is also affecting the manufacturing environment in many positive ways, according to Jeff Cole, assistant vice president, National Accounts Products, Pricing, and Underwriting, at Sentry Insurance. “It is really changing for those companies that are deep into automation, robotics and technology use,” Cole said. “It’s changing the exposure from a work comp standpoint because it’s putting a greater percent of employees in administrative roles, or engineering roles, and reducing the number of employees.”

Outlook

The Horton Group’s Hopkins sees a divided market for manufacturers in 2021.

“There’s the haves and the have-nots out there for insureds,” he said. “What I mean by that is the have-nots would be companies that are getting non-renewed due to losses or some change in their business or some update to the sprinkler system that they haven’t made that would leave them more exposed to risk.”

Those companies are finding a challenging insurance market compared to others that are investing in loss control and facility upgrades, he said.

While the pandemic came with challenges for manufacturers, it also provided opportunity, Steinsdoerfer said.

“This year has brought more people to the table to listen, understand the nuances of these individual businesses,” he said. “We’re trying to work with our clients to make sure that they can continue to keep their employees safe, their customers safe, and continue to generate revenue.” Now is the time for manufacturers to team up with their insurance advisors, he added. “It’s been a great opportunity for the industry to partner with a very important part of our economy.”