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By Matt Roles and Matt Lacy

The engineering and manufacturing sector is set to undergo a digital  transformation, with huge implications for its risk profile and insurance needs.

The engineering and manufacturing sector remains the life blood of the world economy. Manufacturing contributes GBP6.7tn[1] to the global economy, while in the UK it generates around GBP177bn of economic output and employs approximately 2.7m people.


The public perception of engineering and manufacturing is of an industry in decline. The reality is it’s a sector in flux but one that continues to grow.


Digital and global

Today, manufacturers are more likely to be global and specialist, producing single components as part of a global supply chain, rather than entire products. Some manufacturers have abandoned physical manufacturing all together, focussing instead on research and design, leaving manufacturing to others.


And the transformation is far from over. With advances in technology, manufacturing over the next three decades will look very different from today, and will be virtually unrecognisable from that of 30 years ago. Emerging technology, like artificial intelligence, robotics, 3D-printing, Blockchain, the Internet of Things and Big Data are all expected to have profound implications for UK manufacturing, from the products produced to materials and processes used to make and deliver them.


Technology is predicted to lead to smart factories and digitalised supply chains. It will create opportunities for increased automation, including creative or professional areas like design and engineering. Sensors and data analytics will increasingly enable manufacturers and their suppliers to monitor and act upon data, driving efficiencies and new business opportunities.


UK manufacturing in the future is also expected to become even more global than it is today, with UK manufacturing companies increasingly integrated into a global supply chain.


Risk implications

Technology and more integrated global supply chains will have significant implications for the risk profile and insurance needs of the manufacturing sector.

Traditional property and liability exposures will remain relevant, but are likely to change considerably. For example, changes in the manufacturing workforce will have implications for employers’ liability while greater reliance on technology and supply chains could increase business interruption exposures.


“Values are increasing as factories become more automated requiring high value sophisticated equipment that is expensive and time consuming to replace. At the same time businesses are growing increasingly vulnerable and reliant on their supply chains and technology, creating large exposures for customers,” says Matt Roles, UK Director of Property at QBE Business Insurance.


New and emerging risks will grow in importance. Technology and changing business models are already creating new risks for manufacturers, such as cyber and non-damage business interruption, while intangible risks like reputation, data and intellectual property are expected to become more material.

Supply chain vulnerability

Manufacturing business models are evolving with digitalisation and the growth of complex international networks of supply.


Leaner just-in-time supply chains can be vulnerable to business interruption events while an increased reliance on technology is also giving rise to cyber liability and dependency risks.


"With globalisation, business interruption and business continuity has become pivotal for our manufacturing customers, many of whom now rely on logistics and suppliers in faraway places. And when there is a business continuity event, the consequences for manufacturers are now far greater, with lost business opportunity, the cost of work-arounds and contractual liabilities,” says Roles.


Cyber threat

Technology offers efficiencies and new opportunities, but it also presents risks, which many companies are only now beginning to understand. Whether it’s a cyber-attack or failed system upgrade, increased use of technology can expose manufacturing companies to sizable financial and reputational damage.


Manufacturing companies are now an attractive target for cyber criminals as well as nation-state hackers. According to a recent EFF survey[2], almost half of UK manufacturers now admit to having experienced a cyber incident.


There have been many high-profile examples in recent years of large business interruption events affecting the manufacturing industry, as well as the theft of IP and cyber extortion.


"Many manufacturing plants still run on outdated computer systems (such as Windows XP), which do not benefit from critical security updates from the manufacturer. This is a significant risk as known vulnerabilities can be more easily exploited so it is important to ensure production equipment is segregated from the corporate IT network", says David Warr - Underwriter, TMT and Cyber at QBE.


Most cyber policies will cover the IT forensic costs and loss of profit following an incident, but also the increased costs of working to mitigate potential profit loss and a well tested incident response plan can help reduce the financial and reputational impact significantly.


People risks

The evolution of the UK manufacturing sector is leading to a shake-up in the size and make-up of the workforce, with greater emphasis on highly skilled workers and a reduction in manual workers. Automation and increased productivity are expected to cut the number of UK manufacturing jobs in half by 2050[3] according to a UK government report.


A move to high-value manufacturing, as well as a greater focus on workplace safety, has resulted in a gradual reduction in the frequency of workplace accidents and disease claims. Yet with changes in practices and processes, manufacturing workers are now more exposed to other injuries, such as musculoskeletal disorders (like carpal tunnel syndrome or back pain) and mental health issues (such as stress or depression).


Reliance on fewer and better qualified people means that workplace absenteeism – resulting from injury or stress - can have a greater impact on a business and a company’s earnings.


“Skilled and qualified people are an important and increasingly scarce asset. In order to attract and retain talent, it has become critical to protect employees and provide a safe and attractive work environment,” says Lacy.


Value of insurance

The UK manufacturing sector has much to be optimistic about. The industry continues to punch above its weight in terms of innovation and is well positioned to benefit from advancements in technology and globalisation.


In order to remain competitive UK manufacturers will need to be able to adapt and embrace emerging technologies, business models and markets. In a period of rapid change and uncertainty, the most successful companies are likely to be the ones that are best able to take risks in an informed and managed way.


Insurers also face the same challenges. QBE is working to ensure that its offering adapts to changes in the risk landscape, such as the growing relevance of intangible risks, cyber and supply chain exposures. These exposures require an increased focus on risk prevention and mitigation, as well as greater use of data and analytics to better understand customers’ risks and needs.


“QBE has developed a risk advisory offering that is bespoke for each client, and that enables us to share the knowledge, trends and best practices we see when engaging with clients across the engineering and manufacturing sector,” says Lacy.


It’s a new dawn for the Engineering and Manufacturing sector and based on current growth trends the UK could resume its position as a top five manufacturing nation by as early as 2021. It won’t be all plain sailing and just as practices and processes evolve at pace so too do risk profiles. In times of change, businesses need an insurance partner that understands their sector and the risks they need to take to embrace the future.

Sources

[1] https://www.themanufacturer.com/articles/manufacturing-sector-goes-from-strength-to-strength/

[2] https://www.eef.org.uk/resources-and-knowledge/research-and-intelligence/industry-reports/cyber-security-for-manufacturers

[3] https://www.gov.uk/government/publications/future-manufacturing-high-value-manufacturing-implications-for-employment