Maintenance – a strategic

management tool

The upkeep of technical

systems is evolving from
the craftsman’s trade into a
strategic management tool.
This creates opportunities
but also entails risks that
have to be factored into
underwriting.

Focus Report
Maintenance – a strategic
management tool
Until just a few years ago, providing
care and maintenance for technical
systems was seen as a necessary
evil. Today, its potential for innovative
opportunities to assure and even im-
prove quality, competitiveness and
productivity is widely accepted.
Maintenance is evolving from a pri-
marily technical procedure into a
strategic management process.
While this development could lead
to new business prospects, changing
maintenance practices could also
have an impact on technological
risks in one way or another.
In order to identify these changes in
the risk landscape in good time and
to assess them correctly, the insurer
must be familiar with not only the
technical background but also the
policyholders’ maintenance manage-
ment philosophy.
Simple checklists are no longer en-
ough. Instead, the insurer has to
piece together innumerable soft fac-
tors to obtain an overall picture of
the risks involved that also accurately
portrays its clients’ businesses and
employees. This calls for an in-depth
exchange between policyholder and
insurer.
This report is intended to help both
insureds and insurers gain a better
understanding of each other’s needs
and interests and work together to
formulate the right questions.
Maintenance as an opportunity
There are five basic categories of main-
tenance procedure:
Run-to-failure or breakdown mainte-
nance
The technical system is run without
maintenance until malfunctions become
apparent. This is the equivalent to pa-
tients going to the doctor only when
they are seriously ill.
Scheduled or time-based maintenance
Maintenance is performed on the system
at regular intervals, for example every
four weeks or after a certain number of
operating hours, regardless of its actual
condition. This is the equivalent of going
for regular medical check-ups.
Predictive or condition-based mainte-
nance
This method depends on the actual con-
dition of the technical system: mainte-
nance work is performed only when it
is really necessary. The medical equiva-
lent: doing more exercise if the bath-
room scales tell you that you are over-
weight.
Risk-based maintenance
A risk-based approach concentrates on
those functions of a technical system
whose unscheduled outage would re-
sult in particularly high costs or dam-
age; this is comparable with the prophy-
lactic screening of military aircraft pilots
for heart conditions.
Integrated maintenance
This form of maintenance takes into
account the fact that care and mainte-
nance affect all aspects of a company
and are themselves influenced by all
of these aspects. The aim is thus to
recognise the various interconnections
between maintenance and – for exam-
ple – customer satisfaction, product
quality, the ability to deliver on schedule,
manufacturing processes, business
location, workforce skills, regulations
2 Swiss Re Focus Report: Maintenance
and liability, and to influence these cor-
relations for the better – in a way com-
parable to giving an athlete dedicated
medical care to improve his or her per-
formance.
A paradigm shift has taken place in re-
cent years as traditional run-to-failure
repairs have developed into today’s inte-
grated maintenance approach. Where-
as maintenance originally served only to
keep technical systems going, the focus
is now on ensuring the availability of
their functions and performance. This
trend is similar to one that has evolved
in the transportation sector: originally,
the job consisted only of moving cargo
safely from A to B, whereas these days
transportation companies often offer all-
round logistics services.
Take workplace lighting for example: if
a short period without light would have
no adverse consequences, it is enough
to replace the fluorescent tubes when
they start to flicker. But if poor lighting
affects productivity, it is advisable to
replace the tubes according to a set
time schedule. With this approach, some
tubes will be replaced too early, and
others too late; the system interferes
with production and causes unneces-
sary expense. To avoid this, maintenance
can be scheduled for certain times when
those tubes that are already showing
signs of wear can be replaced with a
minimum of disruption. If workplace
lighting is crucial to the process, for in-
stance where production involves high-
precision craftsmanship, the employer
would be well advised not only to pro-
vide regular maintenance for the lights
but to replace the fluorescent tubes by
innovative lighting technology.
We can see that the idea behind mod- But this does not mean that the aim
ern maintenance procedures is not limit- should be to simply cut the cost of
ed to cutting costs. The real advantage maintenance. As experience shows,
is that they afford an opportunity to opti- such short-term savings, on their own,
mise the benefits of maintenance in re- often result in significant extra expense
lation to the cost: either by reducing the due to more frequent and longer break-
maintenance effort required to achieve downs.
the same level of availability of the tech-
nical system and/or by enhancing the A better understanding of maintenance
utility of the equipment. processes is essential if attempts to op-
timise them are not to prove counterpro-
Cost savings can be achieved, for in- ductive. Depending on the technology
stance, by not performing more mainte- involved, this may call for considerable
nance work than is necessary. Accord- investment, for example in developing
ing to estimates by Dankl+Partner diagnostic techniques that permit main-
Consulting, a business consultant in tenance to be precisely timed so as to
Salzburg specialised in maintenance interfere with ongoing operations as
management, reducing the maintenance little as possible.
effort from, for example, 8 to 7 percent
yields the same improvement in the The extra expense can be well worth-
overall operating result as increasing while, as a study by the US maintenance
turnover by 33 percent. specialist Turvac Inc. shows, taking
power plants as an example: the more
sophisticated the maintenance system,
the lower the production cost in USD
per installed horsepower (HP).
Maintenance philosophy Production cost per
installed HP per annum
Breakdown maintenance
Time-based maintenance
Condition-based maintenance
Integrated maintenance
In short, optimising maintenance does
not mean simply reducing the cost of
care, upkeep and repair. It may also
mean increasing overall expenditure in
order to achieve greater reliability.
3 Swiss Re Focus Report: Maintenance
Maintenance as a risk
Maintenance is normally more of a safe-
ty than a risk factor, as it serves to avoid
technical breakdowns – comparable
with fitness training, which is generally
good for your health, although you can
hurt yourself doing it. Maintenance can,
however, turn into a risk if it is not or in-
adequately performed.
But what is the risk of such omissions?
To look at just the immediate conse-
quences, any technical breakdown
affects the value invested in the system.
And the probability is a simple function
of the maintenance performed: the bet-
ter a machine is kept in shape, the less
likely it is to be written off as a loss.
If potential secondary damage is taken
into account, the situation looks differ-
ent again. Even simple technical break-
downs that are relatively harmless in
themselves can trigger damage proc-
esses of catastrophic dimensions. On
the morning of 6 July 1988, a compres-
sor on the Piper Alpha gas production
platform in the North Sea was taken off-
line to remove and service a pressure-
USD 18 relief valve. At 9.45 pm, the second
USD 13
compressor broke down. Then the first
USD 9
compressor was started up again by
USD 6
mistake, although it had not yet been
overhauled. Twelve minutes later, the
first of a series of explosions occurred.
167 men died. With a loss of USD 3 bil-
lion, the event remains the highest in-
sured loss caused by a technical acci-
dent to this day.
Of course, such secondary damage is
hardly ever attributable to inadequate
or faulty maintenance alone. The Piper
Alpha tragedy, too, was the result of a
long chain of design errors, organisa-
tional shortcomings, misunderstand-
ings, mistakes, breaches of rules and
coincidences: a long list of missed op-
portunities to prevent, if not the techni-
cal breakdown, at least the disaster
that followed. To name but one detail:
the fire-fighting system was set to man-
ual at the time of the accident. This was
a safety measure intended to prevent
divers working in the vicinity from being
sucked into the fire pumps if the pumps
started up automatically. However, after
the first explosion the button to start up
the pumps could no longer be reached,
so they could not be used to combat the
incipient fire.
Maintenance cannot eliminate technical
risks. At best, systematic inspection,
care and repair can help to reduce them,
just like a healthy diet reduces the risk
of falling ill but is no guarantee for per-
petual good health.
Maintenance is thus an inherent element
of technical risks. It is always involved to
some extent, even if its contribution to
the overall risk can rarely be assessed
accurately. It is neither possible to pre-
dict with any certainty how errors and
omissions in inspection, upkeep and
repair will affect a future loss event, nor
to positively trace back damage and in-
direct consequences to specific deficits
in maintenance.
The Challenger example: conventional
wisdom has it that the explosion on
board the space shuttle was due to a
maintenance error that led to failure of
the seals during the launch on 28 Janu-
ary 1986. However, a reconstruction of
the sequence of the accident revealed a
complex chain of causes, starting with
the design of the vehicle itself and end-
ing with the decision to go ahead with
the launch despite icy conditions – even
though there had been express warn-
ings that the seals become brittle and
might fail at sub-zero temperatures.
Whether Challenger, Concorde, Piper
Alpha, the Flixborough chemical plant
explosion, the Chernobyl disaster, the
Seveso chemical release or any other
man-made disaster: time and again, it
turned out after the fact that there would
have been many ways to prevent the
catastrophe. In practically all cases, the
possibility of a failure had been fore-
seen. The real problem is not technology
but the decisions taken in dealing with
it: in May 2005, an international airline
was banned from landing in many Euro-
pean countries because of technical de-
fects in its aircraft. A wise decision? The
aviation safety authorities are convinced
they prevented a catastrophe: from the
perspective of the airline concerned, the
ban was an overreaction that caused
tremendous economic harm and almost
irreparable damage to its reputation.
It is often argued that, if only for ethical
reasons, technical systems must always
be maintained to the highest possible
standards. The fact is, however, that
aircraft, cars, ships, trains, factories,
refineries, power plants, traffic control
systems, offshore rigs and similarly
complex machines and systems will al-
ways have something worth inspecting,
checking, maintaining or improving.
In practice, maintenance is geared not
towards ensuring the maximum possible
safety but towards achieving the level of
reliability considered adequate.
4 Swiss Re Focus Report: Maintenance
Maintenance as a management
function
But when is a technical system reliable
enough? On 28 April 1988, a section of
an Aloha Airlines aircraft’s fuselage blew
off at 24 000 ft. A flight attendant was
sucked out of the plane, while the other
passengers and crew escaped with no
more than a fright, thanks to a superb
emergency landing.
Given the loss event, the plane would
be considered unreliable. However, it
had been properly maintained at the
prescribed intervals. So why did this ac-
cident happen all the same?
The rule books had not taken into ac-
count that a plane used for island-hop-
ping in Hawaii performs an above-aver-
age number of take-offs and landings,
with the cabin being pressurised and
contracting again every time. Besides,
because it operated at low altitudes on
its short hops, it was almost constantly
exposed to a saltwater-saturated, highly
corrosive atmosphere. Combined, these
factors led to premature material fatigue
that culminated in the sudden rupture
within the scheduled maintenance in-
tervals. Condition-based rather than
time-based maintenance would proba-
bly have revealed the unsuspected con-
sequences of the extremely material-
stressing short-haul duty in time to pre-
vent the failure.
This incident goes to show that, to
achieve adequate technical reliability,
it is not enough simply to stick to the
rule books. It is also necessary to check
whether the intended usage is compati-
ble with preventing material failures and
unscheduled outages. This, however,
is not just a technical issue but primarily
a management function that starts with
defining the required reliability and struc-
turing the maintenance process so as to
achieve these defined objectives in the
context of the actual service conditions.
Precisely for this reason, it would be
wrong to claim that condition-based
maintenance is always better than time-
based maintenance, and that an inte-
grated maintenance philosophy is better
than both. The fact is that innovative
maintenance technologies afford nu-
merous possibilities – but whether and
when these can be applied expediently
must be decided from case to case.
For example: condition-based mainte-
nance of a steelworks calls for several
hundred sensors that constantly meas-
ure vibrations, temperatures, pressures,
flows, voltages and currents. These must
be backed up by alert personnel to de-
tect strange noises or unusual smells.
All of this has to be correctly interpreted
and then translated into appropriate ac-
tions, which may range from tightening
a loose nut to shutting down the whole
production line.
Condition-based maintenance thus calls
for many more decisions than a time-
based approach, in which the mainte-
nance intervals and actions are precisely
specified. In some cases, these may be
decisions on which not only a specific
machine but the company’s entire repu-
tation may depend.
In the worst case, a sophisticated detec-
tion system may identify a serious de-
fect earlier than would previously have
been possible at all, but for some reason
or other it takes longer to respond to the
defect than before. This, to continue our
analogy to the field of medicine, would
be equivalent to diagnosing cancer in
the early stages but not starting treat-
ment immediately.
5 Swiss Re Focus Report: Maintenance
Implications for the insurer
Technical breakdowns can trigger in-
sured losses in all lines of insurance.
Of course, this applies above all to the
property and liability lines. But business
interruption insurance is also particularly
important in this context. The increasing
functionality and productivity of techni-
cal facilities make it all the more likely
that the consequential loss of profit may
be many times greater than the property
damage that causes an interruption in
the first place. For instance, loss of a
transformer can close a business down
for months on end if a replacement first
has to be built.
In the long term, the influence of main-
tenance processes on technical risks is
self-controlling: if the losses suffered
due to technical breakdowns increase
significantly, this will ultimately be rec-
ognised as a sign of deteriorating tech-
nological reliability, and corrective action
will be taken in the context of mainte-
nance. Conversely, if the loss history is
very good, maintenance efforts will tend
to be more relaxed.
In this respect, slight fluctuations in the
overall losses incurred as a result of
technical accidents are only to be ex-
pected within large risk populations, for
example civil aviation as a whole. Nev-
ertheless, ever more rapid technological
progress may trigger abrupt changes in
loss patterns.
Personal observation and interpretation are
an important element in maintaining technical
systems
Under increasing pressure to innovate
in response to global competition, it is
becoming more common for materials,
processes and products to be put onto
the market before they are technologi-
cally fully mature. This shifts some parts
of what is actually research and devel-
opment work into the maintenance con-
text. As a result, serious defects may not
be detected until the new technology is
already in widespread use. For example,
a natural gas supplier used plastic pipes
without knowing their service life or
examining the ageing process in detail.
After a number of years in service, there
was a series of serious explosions be-
cause the pipes were leaking gas due
to unexpectedly rapid ageing.
A second challenge to the insurer stems
from the widening maintenance quality
gap. It is not as though the entire techni-
cal world were on the way to integrated
maintenance. In fact, quite the opposite
applies: while many companies are us-
ing maintenance as a strategic tool to
gain market shares by providing top
Even where systems are optimally maintained,
is management’s responsibility to ensure that
guidelines are observed
quality and just-in-time delivery, others
are laying off service staff and effective-
ly practising old-style breakdown main-
tenance.
This makes it all the more important for
the insurer to be able to identify differ-
ent qualities of risk, whether it be to turn
down poor risks or to acknowledge high
maintenance standards that clearly miti-
gate the technological risks to be cov-
ered. While there is usually little leeway
for premium reductions, the insurer can
often accommodate the policyholder by
customising the terms and conditions,
for instance by relaxing the scope of
cover or by lowering the deductible.
6 Swiss Re Focus Report: Maintenance
Risk assessment
The insurer’s function is to spread risk
across a wide group of parties, the in-
sured pool. For this purpose, the insurer
estimates how much any individual risk
contributes to the overall risk.
That would be easy to do if all compa-
nies in a given sector were to maintain
their technical systems in precisely the
same way. If this were the case, mainte-
nance would be less of an issue from
the insurer’s perspective, since all indi-
vidual risks would be exposed to the
same influence.
In fact, maintenance practices often
differ not only from sector to sector
but even within one and the same com-
pany – for instance between factories at
different locations.
However, it cannot be up to the insurer
to assess the efficacy of maintenance
itself, much less to prescribe specific
procedures, since this would entail me-
diating between the various stakehold-
ers involved and deciding – in the role
of an umpire, as it were – what is right
and what is wrong. This should be the
duty of the company’s management,
and in some cases that of the lawmak-
ers.
The purpose of risk assessment in the
context of insurance underwriting is to
identify deviations from the collective
average. That is to say, to check whether
maintenance procedures are state of
the art.
Today, maintenance procedures are far
too complex to be accurately judged
merely on the basis of simple checklists.
For instance, a checklist could require
information on whether the company
practises time-based or condition-based
maintenance. But the answer would
reveal nothing about the actual reliability
of the technical systems, because this
does not depend on recognising the
need for maintenance alone. The neces-
sary maintenance work also needs to
be carried out in good time, which calls
for suitably skilled personnel, for priori-
ties to be set correctly, for replacement
parts to be available, and for other con-
ditions to be fulfilled that cannot be
appraised in any way from outside the
company.
For instance, it would be necessary to To gain a reliable picture, the insurer
establish how much maintenance work and policyholder must work together
is outstanding at any one time. Or how closely. The greater the transparency,
maintenance management responds the greater the benefit for both parties.
to the fact that more automation and Insurers can offer adequate protection
remote monitoring in the plant means only if they are fully informed about
fewer people employed on the shop the risks to be covered. It is thus in the
floor, where they are in a position to policyholder’s own interest to specify
notice unusual noises, smells and maintenance procedures and to discuss
incidents, early detection of which has them with the insurer.
in the past been the key to averting
many a disaster.
Important questions
The focus of discussions between policyholder and insurer should be on mainte-
nance management, as this defines the level of reliability that is to be obtained.
This involves posing questions such as:
 How much importance does the company attach to maintenance?
 Is maintenance seen only as a cost factor or also as an entrepreneurial
opportunity?
 Which strategic objectives is maintenance management intended to serve?
 How is technical reliability measured and which targets have been defined?
 How is target compliance monitored, and how is non-compliance detected
and corrected?
 Is there an early-warning system to identify shortcomings in new materials,
processes and products before these come into widespread use?
 Is there an anonymous whistle-blowing system that enables employees to report
disorders and misconduct (also on the part of their supervisors) without having
to fear retaliation?
 How are downtime, production defects, malfunctions, incidents documented
and analysed?
 Does the maintenance budget show any apparent trends and what are the rea-
sons for any cutbacks or extra spending?
 How are employees trained and fostered?
 How are in-house conflicts of interests resolved, for example if the risk of a
machinery breakdown has to be weighed up against the risk of losing an impor-
tant customer if an order cannot be delivered on time?
 Are standards or customary procedures waived or exceptions made?
 If so, what reasons would be given for this in the event of a loss? Have the associ-
ated liability risks been investigated? Can it be substantiated that departing from
standard practices did not increase the risk of failure?
7 Swiss Re Focus Report: Maintenance
 Experience and dialogue
Insuring technical risks obviously calls
for a high standard of technical knowl-
edge, for instance in order to judge po-
tential maximum losses. Or to identify
new risks, such as those stemming from
nanotechnology, in good time and to
obtain at least a rough estimate of their
potential dimensions. Even so, the ques-
tion is not limited to how technology
normally works or fails to do so. The big-
gest risk (and safety) factor continues to
be the human being who designs and
uses the technology. Only the human
masters can decide which risks they
want to take and how they want to deal
with them.
© 2006
Swiss Reinsurance Company
For that reason, assessing technical
Title: risks always involves looking at the safe-
Maintenance – a strategic
ty and risk culture within a given com-
management tool
pany, which ultimately means assessing
Author: how individuals take their decisions and
Christian Brauner
act. This task presupposes mutual trust,
Contributions: which can only evolve from a proper
René Favre, Andreas Schraft, Ulrich Straub,
understanding of the roles played by all
Oscar Treceno, Ernst Zirngast
concerned. Underwriters must appreci-
ate the difficulties faced by their clients
when, in a tough competitive environ-
ment, they focus on the opportunities
opened up by technology. Insurers and
insureds must get together to identify
and discuss the risks posed by the vari-
ous technologies. Precisely because in-
surers and policyholders view the same
subject from opposite perspectives,
they are in a position to gain a broader,
more complete picture.
To live up to the ideal of an insurer who
is competent and able to provide assist-
ance on all risk-related issues, however,
the insurance industry must itself create
the requisite platform. Assessing indi-
vidual risks calls for expertise and pro-
found experience in specific technologi-
cal disciplines, especially if, apart from
the hard technical facts, there are also
soft factors such as a company’s safety
culture that need to be taken into ac-
count. This is the challenge both for risk
engineering and for underwriting.

Translation:
Swiss Re Group Language Services

Editing/Production:
Content Management,
Marketing Support & Publishing

Graphic design and production:

Logistics/Media Production

Photographs:
Cover: Getty Images
Page 5: Getty Images
Page 6: Swiss Re

Swiss Reinsurance Company

Mythenquai 50/60
P. O. Box
8022 Zurich
Switzerland
Telephone +41 43 285 2121
Fax +41 43 285 2999
publications@swissre.com

Swiss Re publications can also be downloaded

from www.swissre.com

The material and conclusions contained in this

publication are for information purposes only,
and the author(s) offers no guarantee for the ac-
curacy and completeness of its contents. All
liability for the integrity, confidentiality or time-
liness of this publication or for any damages
resulting from the use of information herein is
expressly excluded. Under no circumstances
shall Swiss Re Group or its entities be liable for
any financial or consequential loss relating to
this product.

Order no.: 1501361_06_en

3/06, 1500 en