Digitisation creates new risk exposures for aerospace

Risk engineering that assesses exposures

The aerospace market is under a lot of pressure to work faster and more efficiently and increase its output to meet growing demand.

Deloitte market analysis suggests the current backlog on aircraft orders is at an all-time high of more than 14,000, with about 38,000 aircraft due to be made over the next 20 years.

Industry 4.0 will help companies meet these challenges and research from global consultancy Deloitte found that 84% of Aerospace and Defence executives believe new digital technologies are key to differentiating their businesses[1].

Two major areas of focus for the aerospace sector are creating more connected factories and digitising their supply chains.

As companies implement these technologies and evolve their operations they must understand and manage the risks that come with new ways of working. They must also remember that existing exposures such as natural catastrophe and political risk have not gone away.  

Digitisation creates new exposures

The transformation to digital supply chains and more connected factories will have an impact on the aerospace sector’s wider risk profile.

On a financial level, investing in fixed assets to create more connected factories puts pressure on companies to then deliver a return on their capital expenditure.

The move to a more digitised model is a strategically important decision for any business and implementing the transition comes with the short-term risks of destabilising operations, reducing performance, and impacting competitiveness. Get the transition wrong and it could be longer than expected before change delivers the uplift desired.

But perhaps the biggest risk created by digitisation is the increased cyber exposure that firms will need to shoulder.

To assist companies in understanding how it affects their risk profile, FM Global has developed a comprehensive Cyber Risk Assessment that details exposures both at individual location and enterprise levels. It also assesses their preparedness, response capability and resilience to a future cyber attack.

The insight provided enables companies to then engineer risk out of their business, helping prevent losses from occurring in the first place and protecting investments and operations of strategic importance.

However, the increasing cyber exposure faced by aerospace companies does not mean existing threats, such as natural catastrophe and/or political risk, are diminished.

Nor should these exposures be underestimated. In the event of disruption from natural catastrophe or political unrest, the impact can be much greater and last for much longer than the cost of making good the original loss.

FM Global researched results from publicly traded companies and found those that reported suffering hurricane damage in annual filings collectively lost 5% of their shareholder value in the 12 months following the storms.

FM Global then examined the performance of its own clients that had been affected by these same hurricanes. The companies that followed all of its risk engineering advice relating to storm protection collectively outperformed the clients that had not by 10%.

These findings underscore the value of the FM Global’s scientific approach to risk engineering.

Scientific risk engineering

Most insurers rely on statistical models, but the speed and scale of digital change and the unpredictability of extreme weather events, exacerbated by climate change, means this approach is increasingly fallible.

For example, a connected factory has a very different risk profile to a traditional warehouse or production line and so statistics relating to these old-styled commercial buildings have little bearing on the risk performance of their more modern, digitised counterparts.

Rather than rely on actuarial tables based on historical risks, insurers like FM Global use engineers to complete physical surveys to understand the exact nature of the actual risk in question.

FM Global has almost 1,900 risk engineers, who make 100,000 site visits annually and collect around 70 million data points in the process. This real-life data gives it an accurate understanding of individual risks, enables it to complete more accurate predictive modelling of potential future exposures, and proactively engineer risk out of existing operations and commercial models.

It empowers the insurer to work in partnership with clients – including a third of the Fortune 1000 companies – and to deliver solutions that bring a scientific level of understanding to their risks engineering, mitigation and transfer strategies.

Resilience has no place for guesswork. Our research and rigorous scientific approach applied to our clients’ business put them at the forefront of risk mitigation. And if companies take a long-term view of property loss prevention and are willing to share some risk, we offer Rent-A Captive alternatives to risk transfer with many potential benefits including reduced operating costs and pricing, and coverage stability.

[1] Deloitte, Aerospace & Defence 4.0, February 2019