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Securely networked

The Internet of things is revolutionizing our everyday life. In 10 years time the car will be produced via a 3D printer, the first “smart city“ will no longer need traffic lights and people with chronic illnesses will have implants and tattoos which release medication as required or call for help in emergencies. This new technology will no doubt also harbor new risks. What awaits us in the future and how we can prepare ourselves for it?

Michael Bruch is Head of Emerging Trends at AGCS in Munich. He concerns himself with the risk landscape of the future and with the question of what challenges and solutions this entails for the risk management of companies.

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agcs.momentum: Industry 4.0 - Internet of things – smart factory. Do all these terms actually mean the same?

Michael Bruch: Machines, vehicles and smartphones exchange data among themselves. Chips and sensors installed in product components constantly send information to product machines, which autonomously order individual parts from suppliers - and all of this in a faster, more efficient and cost-effective manner than hitherto. This internet-based networking of humans, machines and goods is known in the anglo-saxon language area as "Internet of Things (IOT)". This new trend will radically change communication, the world of work and industrial development. In the future production will take place in "smart factories", fundamentally changing business and value-added processes.
In German-speaking countries the term "Industry 4.0" has established itself for this development, based on the "Future project Industry 4.0" of the German Federal Ministry for Education and Research. It is meant to enable the German industry to equip itself for the future of production. But why are we talking about the future - the new phase of industrialization is already in full swing.

What is the revolutionary aspect of this development?

The far-reaching digital connection will influence all of our areas of life, including the way in which we move, live, work, communicate and produce things. Companies will enter new markets. While automobile manufacturers have previously concentrated on the product "auto", today they are exploiting the entire area of mobility via car-sharing models, entertainment, navigation services and monitoring of driver behavior. To this end the main driver for the manufacturing companies is customized mass production, that is to say products are able to be manufactured quicker, more cost-effectively, with fewer resources and errors and tailored exactly to the needs of the customer. Business models are extended to include digital services, and new players will turn existing business models upside down - as can already be evidenced by Uber and Airbnb.


New technologies such as 3D printing are expected to raise liability issues - especially if several companies are involved in the production process. (Picture: Shutterstock)

In which industry / sector does this transformation proceed most rapidly?

When comparing the future models of smart home, smart health, smart car, smart city and smart factory, the smart or connected car is the most advanced one: WLAN inside the car enables automated warning signals if there is a danger of an accident, if speed limits are exceeded and in the event of other safety-related deviations (lane and distance assistant).

According to a study by McKinsey, the market volume for connectivity services is expected to increase fivefold (to €170 billion!) by 2020. McKinsey estimates that 20 % of customers, as many as 40% of frequent drivers, would be willing to change their auto brand for better connectivity offers. According to the study, 35 % of drivers state that they would disclose their user data to the insurer if they were to receive a 10 % discount for their auto insurance cover. For this reason automotive manufacturers must have an interest in not losing control of this topic to Internet companies.[1]

Where are the opportunities of Industry 4.0 - as far as the minimization of conventional industrial risks are concerned?

On the one hand, damage to machines and any resulting business interruption can be prevented or reduced: deviating operating states of machines are able to be immediately recognized via so-called "predictive maintenance" and preventive measures are able to be initiated.

Moreover, there will hardly be any defective products and in the event that there should be any, it will be easier to trace back an error. In the Siemens electronics plant in Amberg production already takes place the way it could be standard in ten years time: Here, products are controlling their own production[2]. They convey their requirements to the machines via a product code and indicate which subsequent production steps are necessary. Given an unchanged production space and hardly any more workers, the plant's production volume has meanwhile increased sevenfold. The quality also increased considerably: In 1989 500 errors were counted per one million error possibilities. Today they have been cut back to a mere 12. Hence, the plant produces 99.9988 percent quality, while the few errors that occur are detected by various checking stations[3].

A further point: Each year more than 3 million persons are seriously injured in occupational accidents and approximately 4000 persons are killed as a result of accidents at work.[4] Autonomous machines, sensors and warning devices help to prevent accidents by warning workers in good time of dangers such as an explosive atmosphere or poisonous emissions or by entirely replacing people with robots at exposed workplaces. 

Positive effects do not, however, eliminate certain risks: While automation on the one hand results in an improved monitoring of operating processes and thus in reducing undesired interruptions, the large-scale failure of a data network can on the other hand cripple entire industrial sectors, including critical infrastructures such as power and transport networks or water supply systems.

With Industry 4.0 we are experiencing a real data explosion. This surely makes companies extremely vulnerable.

The mass of data is already gigantic today. In 2014 more data was produced than in the whole history of mankind. And this is only the beginning. Indeed, the cyber risks of companies will significantly increase, since every connection with the Internet offers a potential entrance gate for hacker attacks. Today we are already confronted with organized cyber crime. A scenario in which hackers paralyze the power supply in the whole of Europe may be somewhat unrealistic, yet the breakdown of criticial infrastructure systems is feasible.

The new technology will certainly raise liability issues ....

Let's take 3D printing as an example. In 2014 we had already pointed out the product liability issues connected with this production process. If a printed product (e.g. the component of an aircraft or an artificial joint) is defective, we have a classic liability situation insofar as prototypes or components have been produced for own products. The situation becomes more difficult when we are dealing with production processes in which several companies are involved; if, for example, one company is responsible for the blueprint, another company for the 3-D production and a third one for the distribution. And what is the situation if blueprints are downloaded from an online platform, adapted to one's own requirements and printed out? Companies must understand the consequences of individual alterations to their printing template and know who is responsible for any deficiencies that result from them.

Industry 4.0 is an extremely dynamic trend. Can potential risks be at all calculated?

New risks are difficult to quantify, as only little experience with loss scenarios - let alone real loss data - is available.
For example, completely new "ethical" risks will emerge, which we as a society will have to discuss. Intel estimates that implantable chips capable of creating a connection between the brain and computers will be available as early as 2020.[1] Surfing in the Internet via the power of thoughts - that is an interesting but uncanny idea. The fact that this will result in beneficial developments, particularly for people with physical disabilities,  is without question. At the same time, however, there are topics such as data security and data protection or the risk of data misuse and reputational risks (for the manufacturer) that need to be considered. These so-called intangible risks, which can hardly be quantified, already play a big role today and will gain in importance for companies in the future. At least there are already initial attempts to assess such risks, and even first insurance solutions for partial aspects.

Consequently, insurers will be faced with huge challenges. They will have to adjust to the new risk landscape.

We have already started to do this. We are working together with risk experts of other insurers and reinsurers within the framework of an "Emerging Risk Working Group" in Chief Risk Officer Forum (CRO ERI). Here we are concerned with the early identification of new risks and trends and with creating an awareness for the changed risk landscape in the future. This year the joint position paper is entitled "The Smart Factory – Risk Management Perspectives".

As already pointed out, cyber risks will continue to increase in line with the digitalization of the production chain. However, our experience shows that around 80% of cyber damages can be prevented as a result of professional internal risk management. We are already offering a workshop with our own loss control engineers and external IT experts to companies with complex cyber exposure in order for them to be able to better understand and manage their risks. In the future too, our main focus will be on innovative and precisely tailored solutions for all types of IT risks.

In other areas too the focus is on loss prevention. I have already mentioned "predictive maintenance". We are closely collaborating with our customers to determine the best possible point in time to carry out maintenance work during operating processes. The aim is to limit the frequency of maintenance cycles, and the costs associated with these, to the minimum and to extend the lifespan of machines.

What could the relationship between "smart factory" and industrial insurer look like in the future?

I believe that as an industrial insurer we have to further develop ourselves from a risk carrier to a holistic risk-management partner for our customers. Companies expect an overall solution comprising all aspects of risk management - independent of pure risk transfer. The focus will be heading towards the provision of services. If we were interacting with companies 24/7, we would be closer to the specific needs of customers, would be able to provide support through early warning systems and emergency services and settle claims digitally.

Of all the challenges that Industry 4.0 will bring along with it, which do you consider to be the toughest?

I see two major topics here:
Data security and data protection are a prerequisite for companies and consumers to be willing to work in a digitalized and widely networked world. In the case of many "smart" solutions there is still a considerable lack of data protection. For this reason companies do not store sensitive production and machine data in the cloud. Yet, the opportunities offered by Industry 4.0 do not arise until data are widely networked and exchanged. Security standards will have to be developed to which we as insurers can contribute.

Perhaps an even bigger challenge for the industry and its insurers will be to create an innovation culture within their own enterprise. In addition to experienced experts, there is also a need for new talents to extract the potential inherent in a world of "Internet of Things" and to manage the accompanying risks in a responsible manner. AGCS SE has embarked on the first steps in this direction: a dedicated team was established this year to advance, coordinate and support innovative activities around the globe. The topic of innovation must receive a stronger weighting, become the "new normal" – in the same way as our close cooperation with our customers.

Our expert

Michael Bruch is a loss control engineer at AGCS in Munich. He joined Allianz in 2001. As Head of Emerging Trends he deals with new technologies and other trend-setting developments as well as with the new risks that arise from these for companies. Since 2014 Bruch has also been heading up the newly created "ESG Team" which specifically monitors ecological, social and governance aspects.







[5] Beschrieben im Roman von Marc Elsberg, BLACKOUT – Morgen ist es zu spät, München 2012