09 The development of engineering insurances

In the 19th century, the steam engine revolutionised our industrial culture, and introduced risks of an unprecented nature. More than 100 years ago Munich Re established engineering insurances in Germany. They became the motor for rapid technological development in the last century.

Technology needs insurance protection

In the mid-19th century, the Industrial Revolution was in full swing in England. The steam engine changed the face of technology and society. Workshops became factories. The factory worker was on equal footing with the craftsman and gradually replaced him. However, the new technology created new hazards, particularly explosions of steam engine boilers. In addition to countless —often fatal —personal injuries, there were enormous property and fire losses, which affected the factories and their surroundings. The increase in financial risk was unbridled and only partly covered by traditional fire and third party liability insurance. In order to get better control of the new hazards, the British boiler operators founded the Manchester Steam Users Association in 1854 with the aim of regularly inspecting its members' steam boilers for deficiencies and instructing the operating personnel on how to use them properly. The institution of technical inspection was thus established and, at the same time, the profession of an inspection and later of an insurance engineer. Through the work of the association, the number of boiler explosions declined considerably. Although this minimised personal and property risk, the great financial risk of a loss was still an issue. In response to this, in 1859, a number of engineers had the idea not only of preventing damage by way of inspections, but also of offering insurance protection for property damage and personal injuries, and founded —likewise in Manchester —the Steam Boiler Assurance Company. Just seven years later, in 1866, the Hartford Steam Boiler Inspection & Insurance Company came into being in the USA. This company has since become the largest insurance and inspection company for engineering risks in the USA.

Engineering insurances were established by Munich Re

In Germany, the boom in economic development began, somewhat later, in the second half of the 19th century. It led to a wave of new businesses being set up and, as in England and the USA, created a demand for special, technically-oriented risk covers. Chief Engineer Fritz Böhrer, an employee of Munich Re at that time, who had gathered extensive previous experience with losses as technical director of a printing company, suggested to Carl Thieme that Munich Re offer an "insurance for machines and mechanical devices for all industrial companies, electricity, gas and water works, etc." that had not been available in Germany up to that time.It was virtually a revolutionary step for the insurance industry that went far beyond the well-known "boiler and pressure vessel insurance" to include all types of industrial machines. Carl Thieme approved the idea and had Böhrer conduct a market analysis. The engineer carried out a written survey among various commercial and industrial companies in Bavaria. The new product was introduced in conjunction with other participating insurance companies and marketed as "accident insurance" for machinery, supplementary to an existing public liability insurance policy. On 1 January 1900, what was then the Munich Branch of Allianz Versicherungs-AG was granted a licence to sell this machinery insurance —initially for the Kingdom of Bavaria. By 1904, this licence was extended to several primary insurers all over Germany.

Development in the 20th century

With the help of specially selected agents, business with the new product was rapidly expanded and offered for machinery in virtually every sector. Munich Re was soon marketing machinery insurance outside Germany —in Austria, Hungary, Italy, Switzerland, Norway, Denmark, the Netherlands and, ultimately, also overseas. Insurance for financial losses resulting from insured machinery losses —known at that time as operating loss insurance —was introduced on 15 August 1910 as an early forerunner of machinery loss of profits insurance.

In the 1920s, the classical technical facilities of the industrial age were joined by electro- mechanical devices such as telephones, electric clocks, telecommunications systems and medical equipment, such as X-ray machines. The Telephon-Versicherungs-GmbH was founded in Hamburg in 1919, whose primary object was the maintenance and supervision of telephone and other low voltage current systems. The first real German insurer for such low voltage systems was ELEKTRA Versicherungs-AG, established in Frankfurt am Main on 18 June 1923. The invention of the transistor after World War II and the beginnings of mass use of electrical devices gave an enormous boost to electronic equipment insurance (EEI). The subsequent invention of semi-conductor and computer technology have fuelled the demand for these insurances in the industrial and private sectors to this day.

In the crisis years following World War I, the capital goods industry began to look for the most comprehensive insurance protection possible against risks to the calculated earnings of the contracting companies and their suppliers during the construction of technical facilities. This demand was met by erection all risks insurance (EAR), which was launched on the market by Atlantic-Versicherung and Allianz in 1924 with the support of Munich Re. Erection all risks insurance offered the contractor the benefit of having simple, complete cover based on the all risks model. The advantages of the new product were so convincing that it rapidly asserted itself in continental Europe and overseas. The worldwide spread of risks by way of reinsurance helped this difficult class of business become a success and confirmed the concept of Munich Re's founder Thieme of establishing the company as a reinsurer with global operations.

In 1934, when severe restrictions were imposed on the possibilities for creating reserves for outstanding losses to the detriment of the building contractors, "Bauleistungsversicherung" was introduced in Germany on the basis of erection all risks insurance.

Without insurance protection, technical developments over the past hundred years could not have made such rapid and successful progress. Such insurance protection makes it possible to plan, build and operate innovative technical facilities with a calculated and thus limited risk to the companies involved in manufacturing and operating sectors.

Engineering insurances boom

In 1960 Munich Re took the modest machinery insurance unit based in the Miscellaneous Property Division and created an independent engineering department.

At the same time, Munich Re stepped up its activities abroad. Engineering insurances became a door opener to new client relationships. The first engineering contact office was set up in Karachi in 1963, which made it possible to handle engineering risks on site. This was followed by further offices in Hong Kong, Mexico City, Tokyo, Sydney and numerous other cities. Policies and rating guidelines were drawn up in Munich and locally and solutions thus adapted to local markets. In some markets pools were formed with a view to providing financial security for young primary insurers building up their engineering business. To this day, the intensive transfer of knowledge and experience by Munich Re to the benefit of its local clients provides a solid foundation for our business relations worldwide. The "Union of Machinery" pool established in Japan in 1956 was thus instrumental in making Munich Re the leader on the local insurance market.

Engineering insurances today

The premium income in the order of DM 50m (€25.5m) that was earned in 1960 grew to over €1.4bn by 2001. Since 2001 respective regional divisions and the special division Corporate Underwritig/Global Clients (CUGC) have been in charge of engineering insurances at Munich Re. A knowledge management system ensures the cross-divisional transfer of knowledge and experience.

Today, in engineering insurances, Munich Re works with its innovation teams to find solutions for future-oriented fields like environmental technology or renewable energy. Meeting ongoing new challenges in technology requires us to fully commit ourselves to keeping our expert knowledge up to date and strengthening our opinion leadership position.