Yes, robots don’t need workers’ compensation coverage

Insurance savings typically don’t top the list of return on investment (ROI) justifications for installing automation and controls, but a reengineered insurance program may yield benefits far beyond cost reductions. Automation can lower risk to employees in manufacturing. Forward a link to this article to the appropriate contacts in your company so that lower costs can increase your budget.

By Luke A. Foley and Steve Phillabaum August 15, 2014

Here a bot, there a bot—almost everywhere robots are increasing production and distribution efficiencies while decreasing workers’ compensation claims industry wide. While automation is a lifetime lower-cost solution, there are still more (often overlooked) opportunities to extend cost reductions through a reengineered insurance program.

Insurance savings typically don’t top the list of return on investment (ROI) justifications when it comes to installing automation and controls, but such savings, most often achieved through fewer workers’ compensation claims, have impact far beyond a single plant. In fact, safer workplace conditions across the industry will drive increased productivity and allow owners to attract and better compensate highly skilled workers.

If you thought this was merely about insurance savings, think again. This is about leveraging insurance savings for total profitability-where motivated skilled workers intersect with advanced technologies to yield a plant that can sustain growth from Millennials’ first day on the job through retirement. 

Renaissance upon us

Globally, the manufacturing industry is facing immense pressure to end cheap labor at a time when it’s also facing an aging workforce, a shortage of skilled workers, and the need for increased use of technology and education. Here in the United States, a manufacturing renaissance is underway. The U.S. Bureau of Labor Statistics reports a decrease in the need for manual labor, but a major thrust toward skilled labor and higher education for manufacturing activities.

But this renaissance hinges on far more than robotics. Industrial automation is much more than a technological advance; it is a social process that reflects easily defined divisions and fluctuations within our society. Investing in automation and deploying equipment and automation systems are always confronted by managerial concerns—including insurance.

Overall, those industries and companies that embrace the societal shift and automate are also those in tune with their risk management programs and are likely enjoying lower costs due to newfound control over insurance costs and human capital management. 

Insurance cost control

The mod factor and a plant: The biggest effect automation has on a company’s insurance program is workers’ compensation. The addition of automation leads to fewer injuries and workers’ compensation claims. Automated systems use sensors and controls with software to perform material-handling functions that humans once did. An automated system greatly reduces the incidence of employee injury, such as strains and sprains or even major claims such as dismemberment or death. One of the most common types of injuries manufacturers must cope with results from repetitive tasks that occur over time, leading to carpel tunnel syndrome and other similar injuries. The cost of a typical carpel tunnel injury (from surgery to rehab) is $60,000. Just one of these claims can increase workers’ compensation cost by 3%-5% for three years due to the negative impact. By installing automated systems, the company is greatly reducing the occurrence of these claims and will enjoy a positive impact on insurance costs.

At the individual company level, management’s goal is to earn the lowest experience modification (mod). The Workers’ Compensation Experience Mod is a factor calculated by the workers’ compensation bureau based on a company’s prior loss experience. In simple terms, if ABC Manufacturer has lower loss experience than the average company in its class of business, ABC receives a credit Mod (such as .750). This credit Mod correlates to a 25% discount off of the standard workers’ compensation insurance rates. The lower a company’s loss experience, the less money that is paid for the risk management program and the more money that is available to invest in other company endeavors.

Conversely, if ABC Manufacturer has loss experience that is higher than the average company for its class of business, ABC receives a debit Mod (such as 1.400). This debit Mod correlates to a 40% surcharge to the standard workers’ compensation insurance rates.

The mod factor and the industry: At the broader industry level, decreased loss ratios will help drive down the manufacturing class code costs. Insurance companies will pay fewer claims for these classes of business within the manufacturing sector, in turn creating lower rates.

5 considerations with automation

Insurance implications extend beyond workers’ compensation. The cost of workers’ compensation coverage will decrease most significantly when operations are automated, but there are several other insurance implications that must be addressed. If you’ve recently automated some or all of your operations, don’t overlook these top 5 questions:

  1. Has new automation equipment been appraised and insured to value?
  2. Have property and general liability exposures been reevaluated?
  3. Is it time to remarket the business to insurance carriers? (Automation makes companies more sophisticated and attractive to carriers.)
  4. Increased production leads to more distribution and contracts with new companies. Has your broker reviewed all contracts with business partners?
  5. Have safety procedures been reevaluated to ensure alignment with new automated production processes? 

Control over human capital management

Consider that: right people + right roles + right priorities = innovation. A plant is only as advanced as its technology and the minds behind it. With 10,000 baby boomers reaching age 65 every day through 2032, Millennials are becoming an increasingly important demographic for manufacturers. By next year, 50% of the worldwide employees will be Millennials. Fortunately, another positive outcome of automation is the opportunity to reinvest insurance cost savings into higher skilled and higher educated employees, at increasingly growing salaries.

This human capital investment can allow for having the right people, in the right roles, working on the right priorities-all in a way that maximizes their contributions today and over time by developing them for future success. Automation and the sizeable insurance savings that go along with it provide the opportunity to attract the right Millennials for the right roles.

Based on a formula by Gilles Saint-Paul, an economist at Université Toulouse 1 Capitole, the demand for unskilled human capital declines at a slower rate than the demand for skilled human capital increases. This dichotomy has led to cheaper products, lower average work hours, and new industries forming, such as robotics, computer, and design industries. 

Innovation attracts Millennials

These new industries provide many high-salary skill-based jobs to the economy-and Millennials are taking notice. According to Deloitte’s 2013 Global Millennial Survey, Millennials the world over still believe that things can change—and that business in particular can move the world into a better place. To that end, they want to work at innovative companies that are improving the world in an innovative fashion, and suddenly the manufacturing industry is an ideal fit for this new workforce. In fact, according to the study, most Millennials think that the technology and media sectors are the most innovative, followed by consumer business and manufacturing. In the United States, over 70% of respondents identify themselves as being innovative individuals. Millennials’ knowledge of new technologies will undoubtedly define the culture of the 21st-century workplace, and the bottom line for manufacturers looking to attract Millennials is the need to emphasize their innovative ways and positive societal impacts. 

Millennial risk management

While automation unlocks insurance savings that can be reinvested in higher salaries, it is important to note that the hiring of higher skilled, higher educated employees also brings new risks to manage. The nature of the use of higher technology requires updated safety plans that proactively drive the success of the insurance program. Revised safety plans may focus less on injury prevention because there will be less hazardous conditions. Fortunately, Millennial workers are committed to their personal learning and development, according to PwC’s 2011 Millennial Survey of 4,364 university graduates about their expectations of work. The survey confirmed that professional development remains the most essential benefit they want from employers—a finding that bodes well for manufacturers seeking to create a culture of innovation and safety.

Beyond a revised safety program, the new, more diverse workforce will require the company to place additional emphasis on avoiding uncovered employment practices liability claims such as harassment and discrimination. This would include specific anti-harassment training for all employees on top of a reevaluation of the company’s current employment practices liability policy. Additionally, a stronger consideration toward adding cyber liability (insurance for cyber security incidents) and directors and officers liability policies is advised. The nature of automation entails proprietary information exposure due to remote connectivity, database management, and installing third-party software into operational processes. Therefore, incorporating automation into processes creates a heightened cyber liability exposure that must be managed from the outset.

Workplace safety is an important business tool. Rather than being a cost of doing business, safety programs reduce cost and contribute to the bottom line. As a consequence, many companies have incorporated safety into their lean manufacturing culture. Safe practices reduce absenteeism, increase productivity, and improve efficiency, quality, and morale. The Bureau of Labor Statistics shows that the rate of occupational injuries in manufacturing facilities has been cut in half from 1994-2007, dropping from just over 12 injuries per 100 workers to barely more than 5 injuries per 100 workers.

Total cost of ownership

The cost savings on the insurance program allows manufacturers to expand into opportunities once thought unachievable. Increased automation in the manufacturing sector will help U.S. companies expand into the global marketplace. The companies that effectively plan how their operations will function, how it affects their insurance program, and how to employ the workforce will see the most growth. Manufacturers venturing into new countries will create a need to evaluate current insurance programs, as the exposures worldwide are much different abroad. Automation will have a positive effect for those who expand around the globe, and embracing automation sooner than later creates the foundation for growth.

– Luke A. Foley and Steve Phillabaum are producers for The Graham Company, involved in risk management and insurance for manufacturers. Edited by Mark T. Hoske, content manager, CFE Media, Control Engineering,

ONLINE August: See this article for additional information.

Key concepts

  • Cost savings on insurance allows manufacturers to expand.
  • Automation will have a positive effect, lowering risk and increasing opportunities.
  • Motivated skilled workers and advanced technologies can yield a plant positioned for sustained growth to attract Millennials.

Consider this

Has someone re-assessed risk since your last round of automation?

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About the authors

Luke A. Foley joined The Graham Company in 2014. As a producer, Foley specializes in creating risk management programs for large privately held companies in the manufacturing and distribution industries with complex operations and demanding insurance needs.

Steve Phillabaum joined The Graham Company as a producer in 2014. He is responsible for the design and implementation of comprehensive, cost-effective insurance programs and risk management strategies for clients. Immediately prior, Phillabaum spent several years working for Datalogic Industrial Automation, formerly Accu-Sort Systems and a world leader in the material handling industry.