There is no substitute for adequate insurance when it comes to critical industrial equipment. Warranties – inherently limited in scope and constrained by time – simply do not suffice. Two specialists from a multi-industry insurance broker and risk advisor, Marsh Middle East and Africa, underscore this point in an interview with Machinery Maintenance Matters.
By Jimmy Swira
Companies in African heavy industry need their mission-critical equipment to be reliable (available) all the time to meet their production targets. Usually, where applicable, they rely on the warranties covered in aftermarket service from OEMs.
However, though they may assist in some respects, warranties do not provide comprehensive protection, observes Neil Beaumont, Industry Leader for Mining and Heavy Industry at Marsh Middle East and Africa. “Warranties only cover defects in manufacturing and design for a limited time. Unfortunately, they don’t protect against the real causes of value loss in heavy industry, such as wear-and-tear, operator error, or extreme duty cycles.”
Moreover, typically, most failures in mining and industrial equipment occur well after the warranty period has expired, during what is known as the “wear-out phase.” So how do organisations mitigate downtime during this phase (out of the scope of warranties)?
Insurance Cover for Machinery Failure
Unless they have heaps of cash lying idle, which is not usually the case, repair and replacement costs are always a financial burden. This is particularly true during unplanned shutdowns. This is where insurance cover becomes handy by bridging the financial gap, suggests Romano Vermaak, Valuations Practice Leader for Marsh Africa.
Overlooked or Unnoticed Risks
To underscore the importance of insurance cover, firstly Vermaak highlights the following commonly overlooked or unnoticed risks related to mission-critical equipment:
- Latent degradation mechanisms: such as corrosion under insulation, fatigue cracking, or liner wear in cyclones.
- External shocks: like power surges, lubrication contamination, or flooding.
- Human factors: including improper preventative maintenance or training gaps.
Warranties can lapse before an accident happens
Vital Purposes
“Thus, insurance bridges this gap by providing protection against unplanned losses that warranties don’t cover,” explains Vermaak. He adds that it is not a drain on overstrained financial resources but serves two vital purposes: a form of financial redundancy and valuation.
“As a form of financial redundancy, insurance acts as a buffer against low-probability, high-impact failures. For instance, a two-day unplanned outage in a smelter or concentrator can cost millions. This far outweighs annual insurance premiums. Skipping it is like running a critical asset without spare parts, saving money now but risking catastrophic downtime later.”
From a valuation standpoint, insurance stabilises earnings volatility. It reduces cash flow shocks and lowers the cost of capital. Hence, instead of a sunk cost, it should be viewed as a strategic tool for value protection. This ensures operational and financial resilience.
In the end, companies must always find the optimal balance between risk retention and risk transfer, Vermaak advises. “If companies have the ability to retain risk and maintain production, then the requirements for risk transfer will be less and hence a lower insurance cost.”
While companies must ensure that their equipment is covered, are insurers meeting their needs and providing relevant solutions?
Scope of Insurance Cover
It is worth noting that there are no standard or uniform insurance product packages and solutions for heavy industry clients with operations in Sub-Saharan African countries. Instead, the level of cover available for various perils depends on the location of the risk and insurer appetite, Beaumont clarifies. He notesthat the nature of the market determines the products offered, referencing South Africa as a case in point.
“In South Africa, the State-Owned Insurer, SASRIA, is in place to insure companies against events such as strikes, riots, and civil commotion. Conversely, in other countries, state-owned insurance is not available. Cover can be purchased from the Political Violence insurance market, which is predominantly London-based.”
“All-Risks Basis”
Generally, however, the typical scope of insurance for heavy industry is on an ‘All-Risks basis’, meaning all perils are covered unless specifically excluded. This includes cover for Physical Damage (replacement of the asset), machinery breakdown, and business interruption (loss of revenue, profit, fixed costs, or a combination being insurable Gross Profit). Cover extends to perils like fire, flood, or lightning.
Climate Change – A Grey Zone
Moreover, effects of climate change, such as extreme rainfall, are increasingly being addressed through enhanced clauses. Coverage can still be a “grey zone,” states Vermaak.
“It is crucial for companies to have robust maintenance and condition-monitoring data to demonstrate that a failure was ‘sudden’ rather than the result of ‘progressive degradation’ or normal wear-and-tear. These are typically excluded.”
Determining Assets to Be Covered
After evaluating the risks they face and insurance cover available, the most critical step for companies is determining which assets are to be covered. However, the reality is that not every asset needs to be insured, says Vermaak, stressing that prioritisation is critical.
“In considering assets to be insured, the focus should be on high-consequence assets, such as single points of failure, environmental risks, and production bottlenecks.”
Increasing Liability for Insurers
While insurance companies are doing their utmost to meet contemporary industry needs, unique risks are increasing their liability. Conspicuously, a surge in claims driven by the following factors:
- Ageing asset fleets: leading to more frequent wear-out failures.
- Climate volatility: resulting in an increase in flood, storm, and heat-related events.
- Cyber-physical risks: a rise in hacks on industrial control systems (ICS/SCADA) that impact equipment.
- Extended supply chain delays: increasing the mean time to repair (MTTR) and raising claim payouts for lost production.
- Higher utilisation rates: the boom in energy transition metals is causing plants to run at higher utilisation. This accelerates wear.
Naturally, these risks are leading to stricter underwriting and rising premiums. This makes proactive reliability management even more critical for clients, Beaumont observes.
Industry-Insurer Collaboration
To achieve equitable insurance coverage, industries and insurers can collaborate more effectively to minimise risk to equipment, underscores Beaumont, raising two crucial points.
On the industry’s part, collaboration begins with data. When industries share accurate condition monitoring and maintenance data (such as CMMS or oil analysis reports), it demonstrates a proactive reliability culture. Insurers can reward this with better premiums and terms.
Insurers, in turn, can offer loss-engineering services, site surveys, and risk reduction recommendations. Firms with strong insurer partnerships and reliability programmes can reduce expected cash flow volatility and the cost of capital. This, in turn, increases asset and enterprise value. This partnership transforms insurance from a reactive safety net into a proactive tool for value creation.
All things considered, warranties expire, but operational risks don’t. For this reason, aligning insurance with reliability data protects enterprise value. It converts unpredictable downtime into a managed, insurable cost. For industries as asset-intensive as mining, this is not just protection – it is risk-adjusted value creation, Beaumont emphasises. “In essence,where Warranties Fail, Insurance Bridges the Maintenance Gap.”
Reliability Tools
On its part, Marsh assists clients in this process by using reliability tools such as Failure Mode & Effects Analysis (FMEA) and Reliability-Centred Maintenance (RCM) to help identify which assets truly need financial coverage.
“By combining engineering data with financial exposure analysis, we help tailor insurance programmes. We can use failure histories and condition assessments to negotiate lower premiums,” Beaumont demonstrates.
