In this episode, we have our guest Michael Schlagenhaufer, who discusses how insurance companies evaluate manufacturer insurance coverage and their risk profiles. He also shares his insights into how your risk profiles can impact your bottom line because of increased premiums, denied claims, or inability to be insured. Finally, he discusses several issues related to manufacturers’ risk profile and their insurability, such as cybersecurity issues, equipment breakdown, and shop floor injuries.
Chapter Markers
- [0:26] Intro
- [2:33] Personal journey and current focus
- [3:16] Perspective on growth
- [4:52] The importance of manufacturing expertise for insurance companies
- [7:37] Common insurance coverage risks for manufacturers
- [11:17] The importance of data for manufacturer insurance coverage
- [14:09] Manufacturer insurance coverage for cyber security incidents
- [19:41] How the cloud can affect your manufacturer insurance coverage
- [22:43] How partnering with cyber security can reduce your manufacturer insurance coverage risk
- [24:56] The impact on manufacturer insurance coverage due to preventative maintenance
- [31:27] Common risk exposure for SMB businesses
- [33:40] The impact on business and insurability because of major incidents
- [37:26] Closing thoughts
- [39:24] Outro
Key Takeaways
- Workers’ compensation is something that happens to an employee on a work-related accident, your insurance picks up certain medical costs, even certain hourly pays or monthly payments to the employer because if they can’t work right now, they need the weekly income.
- A lot of insurance companies will offer you a partnership that says you give us the data. And we’re gonna help you look at the data. And once we have the data, we can work With you. We can not only help you get you covered, but can also help you with your operational efficiency.
- As a manufacturing unit, you need to partner with somebody that can protect you. You might need to pay for the repair for the computer, but you may get taken into court because your customers’ data is corrupted or your employer’s social security numbers got pulled from your human resource system. And if you get dragged into court, is your insurance carrier willing to defend me into court?
- When you bought a brand new machine and if the machine breaks, your production is impacted. Your delivery to the customer is late. You may have to bring overtime in to make up for that. That’s all costs, and some of that cost, depending on our policies, can be covered by Equipment Breakdown insurance.
- If your company is high risk, insurance companies don’t want to deal with you. They don’t have to insure you if you have too high of a risk. If it’s mandated manufacturer insurance coverage, you have to go to an exchange or to a pool, and your premiums are usually very high, plus a lot of the coverage is limited.
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About Mike
Michael Schlagenhaufer has been in manufacturing for over 40 years, working for multinational and small companies, assisting them with the process and operational improvements. Mike led the implementation of an ERP system to manage over 40,000 pieces of tooling and machinery. Mike has spoken at numerous industry events like FABTECH, MWFPA, NEWMA, Indiana Safety counsel, and others.
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Full Transcript
Michael Schlagenhaufer 0:00
I have a shop, and I have a lot of repetitive motion injuries, anything from tennis elbow to carpal tunnel to shoulder replacement when I have a claim every month, but guess what? My insurance company says they’re going to raise your rates. Or they’re going to drop you from the program completely.
So for me as a manufacturer, I need to understand where my injuries are coming from and how to prevent them. And a lot of insurance companies will offer you a partnership.
Intro 0:26
Growing a business requires a holistic approach that extends beyond sales and marketing. This approach needs alignment among people, processes, and technologies. So if you’re a business owner, operations, or finance leader looking to learn growth strategies from your peers and competitors, you’re tuned into the right podcast. Welcome to the WBS podcast, where scalable growth using business systems is our number one priority. Now, here is your host, Sam Gupta.
Sam Gupta 1:02
Hey everyone, welcome back to another episode of The WBS podcast. I’m Sam Gupta, your host, and principal consultant and digital transformation consulting firm ElevatIQ.
The risk profile of manufacturers plays a critical role in how insurance companies and regulatory agencies perceive them, including their cybersecurity standard operating procedures, their ability to prevent injuries, and their consistency to hit their KPIs. All of these factors may have significant growth implications for manufacturers.
In today’s episode, we have our guests Michael Schlagenhaufer, who discusses how insurance companies evaluate manufacturers’ risk profiles. He also shares his insights into how your risk profiles can impact your bottom line because of increased premiums, denied claims, or an ability to be insured. Finally, he discusses several issues related to manufacturers’ risk profile and their insurability, such as cybersecurity issues, equipment breakdown, and shop floor injuries.
Let me introduce Michael to you.
Michael Schlagenhaufer has been in manufacturing for over 40 years, working for multinational and small companies, assisting them with the process and operational improvements. Mike led the implementation of an ERP system to manage over 40,000 pieces of tooling and machinery. Mike has spoken at numerous industry events, like Fabtech MWFPA, NEWMA, Indiana Safety Council, and others.
With that, let’s get to the conversation.
Hey, welcome to the show, Mike.
Michael Schlagenhaufer 2:30
Thanks, Sam. Glad to be here.
Sam Gupta 2:33
Of course. My pleasure. Just to kick things off. Do you want to start with your personal story and your current focus?
Michael Schlagenhaufer 2:38
Well, I’ve been in manufacturing for 40 years been involved with manufacturing back in the 1970s. I worked for a multinational company and started my own business. We were so successful that we sold out shortly after that.
And I have worked for companies after that from as small as ten people to as large as hundreds of 1000s in multiple countries. Manufacturing career from me, I was able to work with as simple things as machining steel to as high tech stuff as computers and aerospace or in the automotive industry.
Sam Gupta 3:16
Okay, amazing. So we have one of the standard questions that we ask every single guest that come on the show, and that is going to be Mike, your perspective on growth when you think of business growth. What does it mean to you?
Michael Schlagenhaufer 3:27
Well, first of all, I hear multiple things. And one of the indicators that I look at is the PMI purchasing manager index that gets put out by the supply chain industry, and for manufacturing on it covers all 15 sub-segments. It’s been growing. It’s actually in February advice the highest in six months.
So that is a basic indicator that shows manufacture, what are the orders that are sitting out there on waiting to be fulfilled. On the other side, if you listen to the facts on the government, they are forecasting anywhere between a 3-6% gross in manufacturing throughout the year 2021.
So as a manufacturer that showed the highlight a lot of good things for growth, expansion, the only thing that I kind of see for the manufacturing sector is that the supplies chain is still a little bit shaky. One of the supply chain issues that might be an issue later this year is the steel supply. We do have trade barriers implemented for steel from Asia or specifically China, and that if those barriers stay in place, and the industry really grows at 6%, we might have to think a little bit different on increasing our steel production in the United States over changing some other trade barriers that we have implemented in the last few years.
The importance of manufacturing expertise for insurance companies
Sam Gupta 4:52
Okay, amazing. Thanks for those thoughts. And I always like to connect the dots. So, Mike, I think we were discussing this during our last meeting and during the pre-show that you have a very interesting background because you were doing a lot more manufacturing. You ran your own manufacturing business. And now you are focused on insurance.
So typically, I will not see anybody who has the manufacturing dealing with the insurance right now. So why is manufacturing expertise so important, number one, for the insurance company? Is it to develop a better understanding of approving claims or evaluating what premium they should be paying? So tell us why subject matter expertise of manufacturing matters in case of evaluating which insurance manufacturers should be buying?
Michael Schlagenhaufer 5:38
It’s a two-fold answer you’re saying. One is for the insurance industry, especially for my company, we insure about 6500 manufacturers in the United States. Okay, we need to understand what their business is, a manufacturer, and basically, when you ask people what’s manufacturing, they will tell you the main things well. The government classifies manufacturing, and we cover everything from food manufacturers to automotive industry, and in between ready mix word everything.
So my expertise to the company comes in by understanding those segments, what actually happens to make whatever they do to make that widget, if your bakery, your manufacturer, what does it take for a bakery to make a good product?
Michael Schlagenhaufer 6:21
What are the risks to that Baker? And the other hand, we also need to understand what the risk to a sawmill is? What’s the risk to a machine shop? What’s the risk to a computer manufacturer. So that’s where I bring my Industry Insight to the insurance industry that every business has different risks.
We need to evaluate this risk. We need to analyze this risk. That’s where I come in working with our loss control to say, Okay, this is a good manufacturer, the risk for product recalls specific in the food industry is high or low, we’re going to accept the risk, uncover them, or we’re going to turn them down as we are not willing to take that risk because you don’t have safety, things in place to prevent a product recall.
On the other hand, my expertise comes in for the customer. If they have a policy with us, they can call me and say, hey, we have an issue here, we want to implement a cybersecurity policy, we want to implement lean manufacturing, we have a lot of lost time due to broken equipment, what can we do? What should we do to be better manufacturing to increase our bottom line to grow the business? How can you help us to increase our OEE, which is overall equipment effectiveness, which is a very good measurement of how your operation run.
Common insurance coverage risks for manufacturers
Sam Gupta 7:37
We are going to be talking a lot more about risk. Because when we look at the insurance, especially in my experience, there are two ways to pay for the insurance company. Number one, you can actually have all the policies that insurance companies care for, not the policies, the procedures, and the things that they care for, right.
And then you might not have to spend as much on your premium. Your chances of getting approved for the claims may be higher if you design your processes as per the insurance companies or the way they care for you and if you reduce the risk from their perspective. So let’s talk about some of the risks that you commonly see in your experience. Let’s say the risk is going to be higher. Obviously, they are going to be paying a lot more in premiums. What are some of the common risks that you see across the manufacturing? And let’s say if you were running these manufacturing shops, what would you change for them so that it’s a win-win for you as well as for them?
Michael Schlagenhaufer 8:31
I think Sam. You hit on the head here. Insurance is really based on risk assessment. So let’s say, for example, everybody, most states require you to carry workers compensation for your employees. Basically, when workers’ compensation is something that happens to an employee on a work-related accident, your insurance picks up certain medical costs, even certain hourly pays or monthly payments to the employer because if they can’t work right now, they need the weekly income. So workers’ compensation is something that in most states in the United States you have an employer has to carry.
In some states, the rates are set by the state insurance board. In some rates, the insurance company can set its own rate. So the way rates of service are higher, your risk is higher. So, for example, if I have a shop and I have a lot of repetitive motion injuries, anything from tennis elbow to carpal tunnel to shoulder replacement when I have a claim every month, but guess what my insurance company says they’re going to raise your rates or they’re going to drop you from the program completely.
Michael Schlagenhaufer 9:42
So for me as manufacturers, I need to understand where my injuries are coming from on how to prevent them. And a lot of insurance companies will offer you a partnership that says, okay, you give us the data. We’re gonna help you look at the data. And once we have the data, we can work With you. Let’s go back to repetitive motion injuries very, very often you see that we can come in with the insurance carrier comes in some insurance carriers have their own workplace, workplace ergonomics, some contract that they come in, and they look at the workstation with you.
Michael Schlagenhaufer 10:16
And let’s say you have your manufacturing process requires putting a square peg in a round hole. Well, we can look at the evidence as well, if you raise the table, if the employer stands, if we make the part lighter, if you make it heavier, we can reduce that risk of injury on hand to help you lower your policy.
Again, you know what the product needs to be looking like. We can help you once we know where the issues are, reduce them by alternatives, and a lot of times and things like this, I hate to say this, a lot of people don’t like to hear it. Automation is very good to help you reduce repetitive motion injury. But going back to this, we need the data. Where did it happen? How did it happen? We can analyze the data with you, or you could even come to us as I got the data analyzed. I know that my problem is, but I don’t understand the ergonomics part or that I can help them with. Hey, you got an expert on staff that understands the automation part. Can you come in and help us with how to automate that?
The importance of data for manufacturer insurance coverage
Sam Gupta 11:17
Okay, so let’s talk about the quality of data, right, as is, especially in the SME manufacturing space, I don’t know how reliable the data is going to be, let’s say even if they produce, because a lot of time, as you know how they compile the data, it’s probably going to be even if you have, let’s say, some sort of ERP system, they are probably going to be doing a lot of their processes on the spreadsheet.
So I don’t know from your experience when you work with these manufacturers. Do you trust their data? How reliable is the data, how consistent is the data with respect to the processes that they might be conducting on the shop floor? What are the chances of approval? In your experience, many look at this data. When you look at the story, do you feel that the story is believable?
Michael Schlagenhaufer 12:07
I think, first of all, data hygiene and data cleanliness are very critical in statistical process control. I think under that make some of these things the rules that he applied, like, understand how the data is collected, you mentioned spreadsheets, and I can give you an example that years ago, I took over machine shop on retail tracking machine downtime, plant downtime, parts output, and part quality. When I ran these three shifts seven days a week, when I would come in, and I would have literally printed out on clipboards written numbers to problems, it wasn’t real-time.
Second of all, I hate to tell you this, but people write numbers down the wrong way. Instead of 312. They write down 322. If it is a real problem, plus, I’m sitting here in the office. The person that wrote that number down isn’t here.
Michael Schlagenhaufer 12:58
So for me, the data becomes less accurate, less relevant, because it’s delayed. And then I need to wait. Let’s say I call this employee. But he is sleeping right now. I don’t get hold of him till three o’clock in the afternoon. What was it 312? Or was 322, but that’s all delay for me to respond to that information that data that he had let’s say we had a quality issue, but if they threw 312 parts away is at 322 parts. What is that number?
How critical is it for me to respond so that our accuracy? How is it collected on data transmission? And I believe I’m a strong believer in real-time data. So if you can automate data collection, for example, you put the vision system behind the machine, one part makes it through the image matches it, immediately upload that to your data system, your ERP and MES system, and you have real-time information, I can look that up any time this is all at one o’clock this afternoon. Seven good parts made it off the machine rather than relying on a manual tracking system. That’s hours, days, or even weeks delay.
Manufacturer insurance coverage for cyber security incidents
Sam Gupta 14:09
Let’s touch a little bit on the other topic. Now with respect to cybersecurity insurance, obviously, there is a lot of fear overall in the manufacturing community about cybersecurity. In fact, I’m actually going to tell you one story from my experience. So I was talking to one of the manufacturing executives, and they wanted to explore the ERP implementation when I walk into the shop floor and the manufacturing executive for me that I go to a lot of different conferences I go to NAM, and these guys keep talking about the cybersecurity issues, and I’m extremely afraid.
So one thing that I don’t want you to do is I don’t want you to touch any of the machines. You are going to be doing the finance. You are probably going to be doing a little bit of inventory, but you don’t touch my shop floor because I cannot afford to stop my manufacturing. So let’s say if you analyze the story, Mike, what would you say to this executive? Are their approach for cybersecurity issues in the right manner? Secondly, as we have discussed is that insurance can cover a lot of different cybersecurity outages. So should manufacturing executives be worried about any of the cybersecurity issues from the ERP perspective?
Michael Schlagenhaufer 15:23
Yes, because your ERP system is an electronic data system, it all depends. If you store the information on site, if you store it on the cloud, however, you store it, but your systems are usually connected. So let’s say you have an ERP system, you run your email system on the all running through a server on your site, you get an email coming in a phishing email, or spam or whatever.
One of the employees clicks on artists, cyber security hack, email can infect your whole system. So yes, any system that uses any kind of data or electronic information that is connected can be hacked. The other thing is a story out of my life is I put a machine shop with 65 CNC machines and Bluetooth communication. So there were no more wires where Bluetooth could be hacked. So you need to have, First of all, I think cyber has two or three avenues.
Michael Schlagenhaufer 16:19
There are external avenues people, they literally out there that say I want a benefit of somebody’s loss, I break into their system I hacked, and this is, the other thing is you have an internal loss and the internal loss, there are two ways could be accidental, I go into the file, a shared drive and help drive, and I hit delete by mistake, I delete all your information or corrupted in another way.
The other thing which is actually for some manufacturing has been manufacturers has become a real risk is a disgruntled employee. Yeah, usually, you put somebody in corrective action. I have access to your mainframe where you store your drawings, your proprietary info, I go in there, and I send that out to the world, or I corrupt the information in a different way.
So a lot of times, what I recommend is to have cyber security protocol like an SOP established for your company value addressing what devices can employ as companies or contractors, people like yourself. When you go in you bring a smartphone in if that’s how you walk around to my facility, how can I ensure that it doesn’t infect my system.
There is a lot of physical security that you can put in, but you also need to put education into your people, for example, any financial transaction, I love to see when our customers say, hey, we have to send authentication factors. So the CEO and the CFO need to approve any purchase any expenditure over $2,000. Money could be higher or lower depending on what kind of rescue. If I don’t see this, that’s a little bit scary that one person can authorize a transaction of $50,000.
Michael Schlagenhaufer 17:56
So that’s some of the things that I look at when we talk cybersecurity. What do you have in place? For example, any machine today has an external USB port, can any employer plug their headset in their smartphone, their laptop, whatever they bring in an infected device?
So if you have locked up USB ports, certain people can only access that if you have vendors coming in? Do they have a guest network for the vendors to log in? That is it separate from your operational network? Do you scan their screen their computers that they bring in a month? That’s all since that I would look at it and say, You have none of this? The risk on the recommendation for me to provide cyber coverage? You probably are not if you have all of those systems in place. Yes, I would say you think about it. You take it seriously.
Michael Schlagenhaufer 18:46
On the other hand, I would also say that as a manufacturing unit, you need to partner with somebody that can produce just say often something happens, I pay for the repair for the computer, but you get taken into court because your customers’ data is corrupted or your employer’s social security numbers got pulled from your human resource system, and if you get dragged into court, is my insurance carrier willing to defend me into court?
So there is a lot of questions as a CEO or CFO. You should be asking your insurance carrier, how far do you cover? What kind of coverage do you provide? Are you just buying a new laptop because my laptop was hacked? And the other thing for manufacturing, which is probably most critical, your reputation, your name? How do you restore it? If they would say, well, Sam got hacked, all his information is out there? I’m not doing business with Sam anymore. How does your carrier help you reestablish your reputation as a good business?
How the cloud can affect your manufacturer insurance coverage
Sam Gupta 19:41
Okay, so let’s talk about some of these touchpoints based on cloud technology, and I don’t know how familiar you are with cloud technology. In the case of the cloud, obviously, you are reducing your risk a bit, but I don’t know how many manufacturers truly understand what cloud really is, to be honest.
Okay, so in the case of cloud, let’s say if you are utilizing cloud versus on-prem. In the case of the cloud, you are not really the custodian of data that is not really hosted on your premises. So even if you are hacked, you are probably not going to be jeopardizing the data as much as you would if you are storing this on your premises, and some of these companies that are actually building some of these bigger systems, you talk about any of the bigger systems such as your CRM systems, or your ERP, or MES or e-commerce, right?
Sam Gupta 20:26
These companies are far better equipped in terms of protecting your data in terms of having the right security analysts that can get a better position to be able to handle such threats. So what would you say? Let’s say if you have two different scenarios here. 1) a manufacturer hosts everything on-prem. They have their Bluetooth devices exposed. They have their laptops exposed. 2) you have another manufacturer that utilizes cloud technology. Would you think that both of these scenarios are going to have a similar level of risk, or the cloud one is going to have a lower or higher risk? What would be your perspective on that?
Michael Schlagenhaufer 21:12
Well, the cloud, as you said, is definitely a safer way. So I agree with you that the cloud provides better protection. And the other thing is about I want to mention at this time it if you small manufacturing, a lot of times we don’t understand that kind of technology. And that risk, it’s really good to partner with a cyber security company, I know there’s a cost involved, but you need somebody coming in to tell you because you again, I go back to the roots of manufacturing: you’re good at making that widget, the data warehouse is a protector.
So what you need to do is you need to find somebody, if you don’t have the IT staff that is skilled in this to say, Okay, I’m gonna, I’m gonna help you this. Our company, for example, we hire our company, they get paid to try to hack our system every day 24 seven, they try to break in when every time they find the gate into our system, they let us know, and we put a patch in there. We put a security system in there where they can get in from.
So it’s the same thing as your product. If you don’t test your product, if you don’t measure your product, you have to look at cyber the same way measure it protected as good as you can. And if you don’t have the expertise, partner with somebody that has that expertise.
How partnering with cyber security can reduce your manufacturer insurance coverage risk
Sam Gupta 22:43
Okay, so in terms of partnering with a cybersecurity firm in case of cybersecurity also there are different areas. So what would be your recommendation in the case of cybersecurity? On the one hand, you have OT folks who look at health and safety and operational risks on the shop floor. And then there is like the real cybersecurity or IT security folks. They look primarily at IT and cybersecurity.
So when you are partnering with these firms, and when you are recommending partnering with these firms, Mike, do you typically recommend that they should have both of these experts? They should be hiring multiple people who have the expertise? What would your recommendation be to the manufacturing executive?
Michael Schlagenhaufer 23:24
Well, my thing is, as a manufacturer that says, Okay, I don’t understand my cyber risk at all, I need a professional coming in. And you kind of touched on it, there’s IT risk, and then there’s the operational technology risk, you buy in a machine you bring in technology.
So you need to ask questions, just like when you buy a new car, you go to the dealership and say, okay, what’s the fuel consumption in there? What are the safety features? So when you select a cyber partner, there are questions to ask. What is your experience? Do you have only IT expertise? And OT as well. Or do you do both? Or where are you on if you don’t have one or the other?
Who do you pass that risk on? Because every manufacturing has that? Then the other question, I always like to ask any people that I do businesses, who are you doing business with? When can I talk to those people?
And that’s a good thing, for example, I know you, Sam, and if somebody has an ERP question to me and I say, talk to Sam, because I have done business with him.
So that gives you a good thing is asked the same question as you buying a car or TV, go to the specialist and ask them the tough question says, What can you do? How do you do it? And what do you protect on? Can I talk to some of your customers? If they don’t let you talk to any of their customers. I would say that’s a little red flag. They’re not telling you the whole story.
The impact on manufacturer insurance coverage due to preventative maintenance
Sam Gupta 24:56
Okay, so let’s touch a little bit on the preventive maintenance side of things. Story and I think that also has some sort of implication on the claims, especially if, let’s say, the manufacturers are trying to ensure some of those equipment rights.
So I don’t know how closely these manufacturers track this equipment how knowledgeable they are in terms of finding out whether a specific claim is going to be eligible or approved or not. So what is your recommendation? Let’s say if a manufacturer is coming to an insurer, what would be your recommendation with respect to having the preventive maintenance process so that they are not paying, let’s say, as much on the manufacturer insurance coverage or on the premium.
Michael Schlagenhaufer 25:38
So the manufacturer insurance coverage that you’re probably referring to coverage would be called something like Equipment Breakdown coverage. The way we look at this and I go back to the car as an example. You buy a new car, the OEM guy says, you know, every 5000 miles, do an oil change.
When you bought this brand new machine for $200,000, you put it on your shop floor, you run it 24X7 for three years, and the machine breaks. Your productivity or production is impacted. Your delivery to the customer is late. You may have to bring overtime in to make up for that. That’s all costs, and some of that cost, depending on our policies, can be covered by Equipment Breakdown insurance.
And again, there are different products out there it’s different levels of protection and but for me saying okay, what do you do to prevent this car, this machine to break down, and then if I usually talk to the maintenance manager, the operation manager they say oh, we have the booklet from the original equipment manufacturer, and they say to change the oil every 5000 miles and do this every 10 hours and do this, and we follow this, and I said well how do you know that your maintenance actually does it?
Michael Schlagenhaufer 26:46
Well, they just put a checkmark on this sheet by the machine, and I’m like, that’s not very good. So my question would be, do you have a computerized maintenance management system that links to your ERP system, and data may be captured through a barcode scanner. You have an equipment asset that can track this and say: okay, at five o’clock this morning; the maintenance went in that they did the oil change. If you have a work order history that actually documents every activity, that to me is a very good manufacturer that takes care of preventative maintenance.
Now the next step to this is if you use AI, machine learning, and the ERP system that has a good maintenance management model, you can actually take that a step further to predictive maintenance to say, okay. The manufacturer said if this machine runs 3000 hours, you should do that oil change.
However, if you run that machine at 50%, that capacity spindle load or 100, that was different. So the predictive model they’ll tell you bearing temperature is getting hotter at 2000 hours, it will freeze or seize up at 2500 hours, so you need to do something about this before it breaks. So I would really highly recommend it to our people is because they’re not just doing what the OEM said. They actually do real-time data analytics of the equipment for today.
Michael Schlagenhaufer 28:24
There is a lot of aftermarket sensors that, for very low cost, are installed even on legacy machines that are older than me. Again, if you can buy something new, it’s better because usually, your communication works better.
In case of the retrofits, you have to add PLCs and stuff to come to get communication collected and then transfer it into a system but think about this when I look at your car, Sam Yeah, and it has things dents, nicks, and scratches on it, and I say I need to check your profile and the title of the car. I don’t know how much of a risk are you to me versus, wow Sam, this car looks brand new, and you said it is actually five years old because I wash it every day. I checked the profile every day.
And then I have all these little sensors that tell me exactly which part of my car gets stressed more because we had a bit of stormy on the temperatures drop below freezing, so my coolant and my windshield washer fluid were stressed more. I’m going to change it next week.
So can I go back to what we talked on the beginning? You mentioned that your risk assessment you yourself look at the car is all the dents, the rough spots on the tires fall off, you go into a shop that a guy says I have 10,000 data points of this machine. And here’s how what we do and how we respond to these data points.
Sam Gupta 29:47
Yeah, so let’s talk about this one. The risk exposure is a bit right from the practical standpoint, so many look at, let’s say if you’re getting 100 claims in a day, what is the risk exposure of standard SMB manufacturer or being insurable or the not insurable. What is the score? Let’s say on a scale of one to 100? What do you see typically?
Michael Schlagenhaufer 30:06
Well, we work in our industry, my company, we work with independent agents. So what they do is they actually interact with the customer when they have a question on the answer sheet, so they are answering some of those questions. And they go in, and they say, Well, how is your production plan running to the operational plan?
And they say, well, we miss it every week, what that tells me is that their equipment breaks down a lot. So right there, we can say, we don’t even want to talk to them, right? Or if they say, oh, our on-time delivery is 99.8%. But the next question might be from the, how did you get to 99.8%? Oh, we got this preventative maintenance program, or now we’re going to like them.
When we’re going to look at the application of being a processor on we’re going to consider all of that information in the rate analysis, but then we send the loss control personnel, because the agent works at a higher level, recent action or loss control personnel that looks at some of those things specific that we said, okay, out of the ten criteria might look really good.
We’re gonna have to check on those two a little bit more. But then they bring that information back to underwriting, and underwriting can look at it and says, Okay, this is still a good risk, they give them a good premium, there is no surcharge for higher risk or any of this.
Common risk exposure for SMB businesses
Sam Gupta 31:27
Do you want to touch a little bit more on that? So when you look at the SMB landscape, do they trust insurance? Do they always carry the manufacturer insurance coverage? What kind of risk exposure do they have? And I don’t know if everybody carries the Equipment Breakdown coverage. Or if everybody carries the cyber coverage? Do they even try to get it? If they don’t get it, do they try to improve their infrastructure? So I’m looking at the common risk exposure of these small to medium-sized businesses.
Michael Schlagenhaufer 31:58
So if we, for example, look at your application, we say, boy, this guy’s super risky, we don’t want them. The question is, wherever you go, there is some mandatory manufacturer insurance coverage that the government requires of you.
For example, in a lot of states, you are required to have workers’ compensation. So an example would be if we would say the risk is too high, the agent takes it to the next company, and they say, the risk is too high, the risk is too high.
What you do, on the one hand, you get told that you have to, what do you do is you go to an exchange, it’s very similar, like flood insurance, and you need to pay what you need to insure you need to pay what they but that who are basically asked you, which is usually not low cost, it’s usually higher than what the market would ask you.
But you’re high risk. We don’t want to deal with you. We don’t have to insure you if you have too high of a risk. And we can say no. If it’s mandated manufacturer insurance coverage, you have to go to an exchange or to a pool, and your premiums are usually very high, plus a lot of the coverage is limited.
Michael Schlagenhaufer 32:00
For example, in a cyber case, we only pay $10,000 in debt versus if you come to us and say, okay, here’s my risk, we say okay, we’re going to protect you to x million dollars. So it really depends on how good the risk profile is. And if we don’t take you, you usually have to go to a pool or self insure yourself, which means every month you have to put money aside, because if something happens, you have an obligation to pay that.
So a little bit complicated at that time. You really need to talk to an insurance expert because the law varies by state.
The impact on business and insurability because of major incidents
Sam Gupta 33:40
Okay, so let me tell you a story that I heard on this podcast. So I don’t know whether you have heard the episode with Carol Marzouk, and she actually does a lot of consulting from the HR perspective. And she was telling me one of the stories of the manufacturer from the shop floor, there was a person who was inside the machine, and the other person actually turned on the machine.
And because of that, there was a casualty on the shop floor. So I asked her, okay, what was the reason? I mean, this is crazy. This is something that nobody wants to see on the shop floor. But this happened. And she mentioned that this was primarily the way they actually did the scheduling, the way they actually did their process coordination. And scheduling was really done on the spreadsheet.
This is the case of the 90% of the manufacturers, that we know that even though they might have an ERP system, but they don’t really utilize it. They don’t really adapt. So in my mind, if I look at this story, Mike, then the risk of workers comp is almost like 80%. But I can almost guarantee that they were insured from the workers’ comp perspective. So the guys do not see this as a risk?
Michael Schlagenhaufer 35:02
Actually, what you just mentioned, I had did not hear that on your show, but I have heard that literally 100 times where life got lost. And there’s one thing is you probably all heard of OSHA, the Occupational Health and Safety and Health Organization, there is actually a procedure that you have to follow. It’s called lockout, tagout.
The equipment needs to be de-energized before you can work on equipment. We all have procedures. If you drive a car, it says 50 miles an hour speed limit. You go 60. The procedure said you should be going 50. You go 60. So, just because OSHA on the regulatory body says you have to have that does mean people comply with this.
And this is where a lot of insurance companies will actually ask you that show me your procedures. Let me talk to those people. Just because you wrote it on a piece of paper that you have to de-energize the equipment on lockout-tagout. It doesn’t mean you follow it. So the question is, can we look at historical trends and evidence that the procedure is being followed?
Michael Schlagenhaufer 36:09
So again, the risk goes up, and we probably won’t do business with you. On the other hand, we provide the service you carry on this is the question you need to have with your agent or your carrier. What services do you provide me? Man, I have worked with some of our customers to develop a lockout tagout procedure because OSHA audited their shop, and they didn’t have it documented.
The shop foreman knew it in his head, but it wasn’t written down anywhere. So also OSHA said, That’s not good enough. So they call the insurance carrier. As we came in, we sat down with them, we said, here’s what you need to do, we need to qualify as an acceptable program by OSHA.
That is really I go back to what I mentioned during the cyber discussion. We had this reputation of that manufacturer because this is gonna leak out that fatality happened because by not having a procedure or not following a procedure, your customer might start looking for a different supplier. So there’s a big risk, not just from insurance and an injury point. There are also big risks that might be out of business if you lose three or four of your top customers.
Sam Gupta 37:26
Yeah. All right. Amazing. That’s it for today. Mike, this has been insightful. Do you have any last-minute closing thoughts, by any chance?
Michael Schlagenhaufer 37:32
Well, I go back. I do have some thoughts. And this is what we talked about in the beginning how manufacturing is growing. And I think one of the things that manufacturers continue to struggle with is the skills gap of finding the employers that they need on.
So it’s an easy thing, the stigma in manufacturing, and I’m going back to the 60s. First, the notion that manufacturing is dirty, dark, and dangerous. So you, as a manufacturer, have an obligation to change that stigma.
And that is, every year, we have manufacturing that invites people to make sure the safety is in place, bring high school kids, bring middle school kids into your school bring their parents in because kids learn from their parents. They might ask, dad, why don’t you work there anymore? Well, people got injured, it’s a dirty job, it’s a boring job. So update your image.
Michael Schlagenhaufer 38:20
You have as much a role in this as the whole industry. So that’s one thing I would like to throw out there as the skills gap. And then I’m going to throw something else out there. You all have a passion for big data, right? It’s been around. A lot of companies collect data, and they don’t even know what they are collecting on. Why are they collecting?
I go back to lean manufacturing, go to the basics, say, okay, what are my 5-10 key performance indicators? And how do I ensure that I have the information so I can look at these key performance indicators and make adjustments to hit my goals to reach my goals?
Carly Fiorina, the former CEO of HP, said that one time, the goal was to turn data into information and information into insight because you can have all the data in the world if you don’t look at it. This is information for me, and then turn that information into the insight of understanding your cyber risk, understanding your workflows, understanding your machine breakdown, with understanding your customers.
Sam Gupta 39:24
Yeah, my personal takeaway from this conversation is going to be yes, you might have SOPs documented. Yes, you might have processes, but you have to really mean those processes if you don’t want to increase the risk exposure for your company and get penalized by insurance companies. So on that note, Mike, I want to thank you for your time. This has been fun, Sam. Thanks for having me.
I cannot thank our guests enough for coming on the show for sharing their knowledge and journey. I always pick up learnings from our guests, and hopefully, you learned something new today. If you want to learn more about Mike, head over to acuity.com. Links and more information will also be available in the show notes.
If anything in this podcast resonated with you and your business, you might want to check out the later episodes, including the interview with Chuck Coxhead from Procensis, who discusses warehouse mobility trends in the enterprise and SMB markets. Also, the interview with Martin Cloake, who discusses different barriers associated with artificial intelligence and industry 4.0 adoption.
Also, don’t forget to subscribe and spread the word among folks with similar backgrounds. If you have any questions or comments about the show, please review and rate us on your favorite podcasting platform or DM me on any social channels. I’ll try my best to respond personally and make sure you get help. Thank you, and I hope to get you on the next episode of the WBS podcast.
Outro 40:48
Thank you for listening to another episode of The WBS podcast. Be sure to subscribe on your favorite podcasting platform so you never miss an episode. And for more information on growth strategies for SMBs using ERP and digital transformation, check out our community at wbs.rocks. We’ll see you next time.
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