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Industry 4.0: What It Means for Insurance

The topic of Industry 4.0 has been discussed at many conferences in recent times. When you talk to participants and colleagues, you quickly realize that everyone associates this buzz phrase with something different. To make matters worse, the term is now used in almost every industry as a synonym for the digitized, automated and connected world, also known as the “smart factory.”

This article discusses the term Industry 4.0 and examines its impact on property insurance.

Industry 4.0 is a new level of organization and control over the entire value chain of a product – from idea and design, to flexible production of customized products and delivery to the customer. Customers and business partners are directly involved in the processes.

The term Industry 4.0 is synonymous with a range of available automation, data exchange and manufacturing technologies to increase production flexibility and efficiency/profitability and to advance the value chain conceptually in industrial production and manufacturing. The basic principle is the intelligent networking of machines, workpieces and systems as well as all other business processes along the entire value chain, in which everything is regulated and controlled independently.

The ultimate vision of Industry 4.0 is to create an intelligent factory in which all production and business units, machines and devices communicate with each other – as much as possible without human intervention, but involving both employees and external suppliers.

It should not be forgotten that the term Industry 4.0 is used synonymously for digitized production with the ultimate goal of increasing production at significantly lower costs.

Design principles

The design principles of Industry 4.0 can be summarized as follows:

    • Networking/interaction: Machines, devices, sensors and people can network with each other and communicate via the Internet of Things, or the Internet of People.
    • Information transparency: Sensor data extend information systems of digital factory models to create a virtual image of the real world.
    • Decentralization: Cyber-physical systems are able to make independent decisions.
    • Real-time decisions: Cyber-physical systems are able to collect and evaluate information and translate it directly into decisions.
    • Service orientation: Products and services (of cyber-physical systems, people or smart factories) are offered via the Internet.
    • Modularity: Smart factories adapt flexibly to changing requirements by exchanging or extending individual modules.

See also: The Unicorn Hiding in Plain Sight  

Challenges for Industry 4.0

Although the goals of Industry 4.0 sound promising, a number of challenges remain to be resolved, including:

    • Availability of relevant information in real time through connectivity of all entities involved in the value chain
    • Reliability and stability for critical machine-to-machine (M2M) communication, including very short and stable latency (real time)
    • Progress in network technology toward real-time actions
    • Need to maintain the integrity of production processes
    • Increased vulnerability of the supply chain
    • IT security problems
    • Data, network, cyber and device security, etc.
    • Need to avoid unexpected IT errors that can lead to production downtime
    • Protection of industrial know-how
    • Lack of adequate skills to drive the Industry 4.0 revolution
    • Threat of redundancy problems in the IT department
    • Ethical and social impact on society – what would be the impact if a machine were to override the human decision

Challenges for the insurance industry

The insurance industry will continue its interest in collecting data and information for underwriting, and preparing and evaluating it by linking new algorithms and artificial intelligence principles. For example, information collected at the operating and machine level could help to identify certain patterns and predict when maintenance work or servicing is required or when a machine is nearing the end of its life. This allows a more detailed assessment of the actual exposure, which in turn can have an impact on all business areas of the insurance industry – so that the insurance principles might have to be redefined accordingly.

In the future, a claim will affect several lines of business simultaneously, which will often make it difficult to identify a person liable for a loss and to assign the loss to a line of business; this in turn will ultimately complicate claims settlements. The probability of business interruption losses – caused by fire or natural catastrophe, for example – will increase due to the virtualized value chain that is the result of the optimization of systems and their dependency on the environment or on suppliers, customers, energy supply, etc. Ultimately, this could lead to a significant extension of the recovery period following a loss event, which will, in particular, be a consequence of the search for causes, the substitution of destroyed machines, plants, networks and communication channels.

As a further consequence, the complexity of the linked systems and technologies will also result in exposures not yet known, with serious but also unexpected outcomes. For example, a cyber attack or security failure could lead to an interruption of production/supply, whereby cascade effects can ultimately even lead to a complete collapse of the entire value chain. For the insurance industry, the outcome of such an event could be comparable to current losses from natural catastrophes or a pandemic event.

The problem is that industry and insurers generally have little, if any, experience with the real but intangible and difficult to quantify risks arising from the networking and automation of business processes.

Options for insurers

The economy is doing everything it can to make Industry 4.0 a reality as quickly as possible. One example is the Mindsphere initiative launched by Siemens, a cloud-based open IoT operating system that can already be used today by the companies involved. It was developed for three purposes:

    • To simulate plant and machine behavior before conversion and modernization
    • To monitor machines set up at customers’ businesses
    • To compare production, quality and maintenance data with other machines, and thus increase efficiency and the ability to identify problems – for example, imminent defects – so that repairs can be carried out early and a prolonged production downtime can be prevented

Currently under discussion is the extent to which the insurance products available today in the property and liability lines of business offer sufficient cover for this concept. As Industry 4.0 is controlled via networks and data streams, protection against cyber attacks will certainly be taken increasingly into account in the current coverage concepts.

In addition, however, new risks will arise with integrative and automated production, and new insurance solutions will have to be developed to cover these risks. The use of the new technologies will result in new and different liability scenarios for all market participants. One of the difficulties will be to determine, for example, what caused the damage and who could be held liable. In other words, is there insurance cover for a specific loss and, if so, under which insurance policy?

In this respect, it is necessary for the insurance and reinsurance industries to address the topic of Industry 4.0 at an early stage and to support policyholders in the implementation of their Industry 4.0 concepts – to recognize the associated changes in risks and their implications for the liability and property insurance cover. To establish the insurance industry as an important know-how carrier and partner for the respective policyholder, a discussion with policyholders must be conducted as a matter of urgency regarding potential risk scenarios and possible protective measures.

Furthermore, insurers should support the industry from the outset in the development of necessary protection and prevention measures – such as predictive maintenance, defense against cyber attacks, business continuity plans and measures against the failure of critical infrastructures – to identify and avert potential risks before their manifestation so that a possible loss can be avoided (i.e., preventive risk management).

In addition, the insurance industry should promote the development of its own concepts for the analysis and assessment of new risks, including:

    • Turning away from burning cost toward risk models
    • Developing new loss prevention measures
    • Developing artificial intelligence
    • Introducing more extensive data analyses and forecast models to mitigate losses before they occur

The use of big data/IoT technologies can, for example, help insurers identify new risks and, if necessary, develop appropriate insurance solutions. This will include the development of new insurance products that meet both the challenges and exposures as well as the loss prevention and mitigation measures of policyholders, e.g. model terms and conditions for an Industry 4.0 all risks policy. Ultimately, the decisive element will be development of new ways to cope with accumulation scenarios by Industry 4.0 loss events with the focus on major losses.

In addition, the internal and external business processes of insurance companies (keyword: digitization) will be affected, for instance, in the areas of communication, transparency, claims handling, preparation of proposals, etc.

See also: 3 Major Areas of Opportunity  

Conclusion

If Industry 4.0 is implemented as planned, it will lead to a revolution in existing business processes that will also affect the insurance industry, which will need to adapt both its processes and current insurance products.

In accordance with the promoted goals, Industry 4.0 can create an enormous added value, especially for industrial companies and not least for our global economy and society. It will be accompanied by the generation of enormous data streams that can be evaluated and used for resource-efficient and high-quality production. Ultimately, it will affect our well-known world of manufacturing and selling products and finally our whole lives.

However, this concept will also entail new risks, such as cyber, data protection, failure of critical infrastructure and uncorrelated effects.

Industry 4.0 will change the insurance industry as a whole and our currently well-known and widely used strategies for defining risks, insurance, underwriting exposures and insurance products. This means that the Industry 4.0 concept will also be a revolution for the insurance sector.

This requires those in the insurance industry to follow developments and inherent changes in the industry as closely as possible and to adapt current insurance products to the new realities. In this respect, one can ultimately speak of today’s insurance industry as moving toward an Insurance Industry 4.0.

Ready for Fourth Industrial Revolution?

Every generation or so, technology takes a giant leap forward. Steam power, electricity and computing – each revolutionized the way we live and work. Where once it was the loom, the lightbulb and the mainframe, today it’s the internet’s turn.

Since its creation in the 1980s, the World Wide Web has grown at an explosive rate and can now do so much more than help people share information. Today, the web is evolving – to bring together people, businesses, machines and logistics into the Internet of Things (IoT).

The IoT is leading the fourth industrial revolution – known as “Industry 4.0.” It has the potential to transform our understanding of how everything can be connected and deliver enormous value to the world. Recent studies have estimated that it could add $14.2 trillion to the global economy by 2030. But if the IoT is to deliver on its immense potential, then businesses also need to get serious about tackling the new risks this era of connectivity promises.

A Brief History of Industry 4.0

Before the 1780s, people worked with their hands – there was no such thing as “industry.” Then came the steam engine, enabling high-speed transportation and mass production in factories. The world was transformed in that first industrial revolution. The second began in the 1870s with the widespread adoption of electricity, oil and steel – leading to such inventions as the light bulb, the telegraph and the internal combustion engine. In the 1970s and 1980s, the silicon chip heralded the third industrial revolution with the rapid rise of computing and robotics.

Today, we are in the midst of Industry 4.0. This is being driven by the global spread of the internet; new technology such as wireless sensors; and the dawn of artificial intelligence (AI). Like its predecessors, Industry 4.0 will transform the way we live and work.

See also: Welcome to the Robot Revolution  

How Industry 4.0 Will Change Everything

At a fundamental level, Industry 4.0 could unite the digital and physical worlds to offer a whole new universe of opportunities to gather and use information. This has the potential to improve efficiency and encourage innovation on a massive scale.

Operational efficiencies: When sensors can be placed almost anywhere, businesses are able to gather detailed insight into how their machinery and processes are operating. For example, imagine a company warehouse – it’s been run the same way for years and is functioning effectively. The company decides to install IoT sensors in the warehouse to monitor how the staff pick and place goods on the shelves. Analysis of the data from the sensors shows that forklift drivers are taking 30% longer journeys than necessary. New routes are devised, and productivity increases with minimal investment.

IoT can also help improve maintenance processes. Predictive maintenance – which can identify maintenance issues in real time – allows machine owners to perform cost-effective maintenance before malfunctioning technology becomes critically damaged. A key value proposition of industrial IoT is being able to determine ahead of time machinery that might fail, and take action based on that information. For instance, a company in Los Angeles could understand if a piece of equipment in Singapore is running at an abnormal speed or temperature. The company could then decide whether or not the equipment needs to be repaired.

Improved understanding of risk: Better visibility into operations helps organizations identify risks and take steps to mitigate them. Many industries say that IoT is helping, or has the opportunity to, lower overall risk in the organization. In 2014, for example, 20% of worker deaths happened in the construction industry. Providing construction workers with wearable tech devices can give companies the data they need to understand how employee accidents happen, so they can improve safety procedures.

More sensors collecting device data mean that risk can also be better understood and priced from an insurance perspective. This has already happened in the automotive sector with telematic usage-based insurance. Wireless monitors inside a car or truck can collect precise details on how an individual drives and use that data to construct tailored insurance packages.

The growth of a new data economy: The proliferation of sensors means every business is now potentially a data business. Stankard gives the example of a maker of agricultural equipment, which can harvest the data from its devices to design and sell business optimization plans. In the future, the largest revenue stream that companies will likely have is going to come from selling data and selling production efficiency consulting around their own equipment. It’s a completely new business model for a company that for a hundred years was focused on making and selling capital equipment.

New World, New Risks

The opportunities presented by Industry 4.0 are enormous. But to realize them, we will have to come to terms with an entirely new risk landscape.

Cyber Risks

Up until the IoT, industrial machinery was not online. There was a physical “air gap” between the production process and the web. The connectivity that Industry 4.0 brings means that this is no longer the case. Cyber risk is consequently amplified.

In 2015, hackers in Ukraine compromised sections of the country’s power grid by infecting plant operators’ IT networks with a virus hidden inside an Excel spreadsheet. One study from Kaspersky Labs found that 39% of computers involved in operating industrial infrastructure were subject to a cyber-attack in 2016.

Cyber risks themselves are likely to give rise to risks in other areas. For instance, governments are likely to respond to increasing cyber threats with tough new regulations, which will themselves mean new risks for companies. The EU’s General Data Protection Regulations (GDPR), due for implementation in 2018, governs the handling of any data relating to EU citizens, with heavy penalties for non-compliance.

Understanding these risks and the regulations they may prompt, and putting into place appropriate measures to mitigate them, will be critical – as will nurturing a culture of collective corporate cyber responsibility. In an age where a single misplaced USB drive can corrupt the operational integrity of entire systems, education and accountability are vital if vulnerabilities are not to become gaping cracks in defenses.

Talent Risks

A changing world means that the people and skills that businesses need will also change. The first industrial revolution, centered on the British textile industry, put many weavers out of work, prompting riots across the country. But it simultaneously created demand for machine operators. Industry 4.0 is likely to prompt changes of its own to workforces.

Overall, there’s no clear consensus on whether the mass automation that will likely become part of Industry 4.0 will have a net positive or negative impact on jobs. Some argue that, as in previous revolutions, technologies like automation will increase wealth and productivity without affecting overall levels of employment. Other studies suggest a more pessimistic future of declining rates of employment and pay. What is certain is that talent requirements will change.

It is predicted that there will be a 2 million worker skill gap in manufacturing after the baby boomers start retiring, which will go unfilled between 2015 and 2025. Organizations involved in the future of industry and manufacturing will need to address the lack of skill development with better training and education programs.

See also: How to Respond to Industry Disruption  

Embracing the Future

Industry 4.0 is opening significant opportunities for organizations. From re-evaluating business models to new data-driven revenue streams, the possibilities are limitless.

However, there is going to be significant incremental risk, likely posed by cyber and the immense – and growing – amount of connectivity. There is a risk reduction element here, as well. With such levels of connectivity, Industry 4.0 is likely to isolate and improve quality issues and enhance the overall customer experience. Organizations will need to rise to these challenges to fully take advantage of the amazing new opportunities Industry 4.0 will offer.