Choosing the Right Insurance for Manufacturers and Buyers in China (Expert Advice)

Buyers and manufacturers in China need to be aware of the risks and their mitigation and insurance options. Two China insurance experts from Asian Risks Management Services explain the risks, and how insurers will structure your policy. They also provide valuable insights into the types of cover that might be helpful and risk mitigation activities that could reduce your risks.

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What are the major risks that companies who are manufacturing or buyers having products manufactured in China need to keep in mind?

Internal operational risks – accounting, employees, mistakes made by staff
External risks – related to providers or suppliers, disruption in the supply chain
Legal compliance risks – regulations must be followed
Reputational risks – the way customers and the authorities perceive your business, injury or damage caused by your products may lead to their complaints or lawsuits
Cyber risks – via IT there are more risks of embezzlement, ransoms, etc
Natural and man-made disaster risks – fire, equipment failures, etc

For example, a fire that destroys your supplier’s factory could lead to a loss of your products and serious damage to your business, but are buyers from China paying enough attention to this risk? Also, can product liability where a product leads to injury or damage and heavy losses be insured? (01:54)

How can these risks be mitigated?

Here is the process you should follow to mitigate risks:

Identify the risks.
Run a risk assessment.
Based on the results, decide which risks are less serious that you can assume on your own and which are most serious and must be insured against based on their potential impact on the business (for example, some water damage that needs some painting to be done for a few thousand RMB does not need to be insured, but a fire that destroys millions of RMB worth or equipment does need to be covered).

For the risks you do not want to assume, you pay the insurer a premium for them to take on the risk for you. Another way is to implement risk management measures to mitigate risks. If you can eliminate the risk, no further action is required, but if residual risks remain, that’s when insurance may be required.

The insurer will usually be there to maintain the continuity of your business and cover risks that can affect its cash flow or lead to bankruptcy. (06:04)

How does insurance work?

An insurer provides financial coverage to its clients and pools financial resources by covering a lot of them. It does a risk assessment to ascertain if it can provide relevant coverage based on your business, location, processes, asset values, etc, and calculates your premium which is influenced by your turnover, location (due to natural disasters, for example), and how hazardous the industry is. If the client agrees with the premium they can start paying and the coverage begins.

If they have a claim, they lodge it with the insurer who will then usually use a loss adjuster to assess the claim to check if it falls under what can be covered and then they will settle it.

There are usually two kinds of policies used by businesses and businesses need to know the difference as it can affect what can be claimed for:

Named perils – Specifies the precise risks that are covered by the policy. Anything not named cannot be claimed for. The policyholder must prove to the insurer that there is a claim.
All risk – The policy covers all risks unless they are specifically excluded in the documentation. The insurer must prove that your claim is not covered.

Some insurers may also provide risk management services where they assist you in putting in place infrastructure or measures to mitigate risks, such as fire suppression equipment in a factory. (10:02)

Why national safety regulatory compliance is not necessarily enough to save a business when the worst happens.

Take a factory fire, for example. If the fire is bad, complying with China’s fire safety laws may save people’s lives by letting them escape the building safely, and that’s critical for the government. However, the business may still lose its facility, equipment, and inventory, killing the company.

Many manufacturers in China do not proactively insure against property and supply disruption losses, perhaps believing that regulatory compliance with safety laws is enough. There is still some reluctance to proactively accept that there are risks out there that need to be covered, and these are often caused by staff making mistakes that could be avoided if a risk assessment was done and then risk management measures were put in place to mitigate the risks flagged in its results. (15:07)

What kind of insurance policies are available in China for manufacturers and buyers?

In China, the insurance offerings are similar to elsewhere in the world. There are 2 key types:

Coverage for assets you own and business interruption – this covers products, etc, and the loss of income due to property damage. Transport insurance covering the products while they are being transported to you from China is also in this category.
Liability insurance – coverage for damage and injury caused by staff and accidents, such as staff being injured due to a wet floor, or a factory fire destroying your neighbor’s property. This also includes product liability where your products cause injury or damage to customers or their property, and covers injury, damage, and legal costs. Also, employer’s and public liability insurance to cover work-related injuries to staff and health or death award costs, or injury to the public and legal costs related to this. (20:30)

Changing EU liability laws will mean product liability insurance will be even more important in Europe.

Product liability is already a well-established topic in the USA, but it’s set to become more important in the EU. The new EU product liability law will declare products defective by default unless the importer proves otherwise (by complying with the regulation’s requirements and showing the correct documentation). This has insurance ramifications because if your product is said to be defective you could be open to legal challenges if anything goes wrong.

Importers, distributors, and manufacturers will also no longer be able to use contracts to relinquish liability, now the authorities or customers, such as retailers, will be able to sue and hold all supply chain actors liable for issues related to the products they have made or imported. Therefore, product liability insurance will now be a must for almost every importer or manufacturer. (25:12)

Why work with an insurance broker instead of going direct?

Insurance brokers provide these time, money, and labor-saving benefits for a very similar cost to working with an insurer:

They can cut through the jargon and explain policy wording clearly leading to a better understanding of the options.
They take care of the buying process and fill all forms correctly and without errors, also ensuring that the insurer has the facts they need and that no important risks are missed from the policy.
Select the best insurer for your needs based on their experience removing your need to shop around, and will compare proposals for you outlining their differences.
Obtain discounted rates that people outside of the industry will not be able to access.
Support you when you need to make a claim, and will negotiate with the insurer to assist you to get a fair settlement.
They work for you and defend your interests, whereas an insurer defends its own interests first. (26:34)

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