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While the immediate fire suppression advantage of sprinkler protection is not difficult to appreciate, the wider cost-benefit implications are often harder to grasp. Jonathan O’Neil and John Stephens examine the arguments.
Sprinklers were originally developed to protect property and businesses and were first used in the UK to protect cotton and woollen mills. The first sprinkler installation standards were published in 1880 in the UK by the FOC and there has been continuous development of products and standards since that time.
Most businesses give serious consideration to the issue of risk transfer in respect of fire, as it represents one of the hazards which can result in a total loss of building and contents. Businesses must take a decision whether to carry a potential loss on the balance sheet or look for a third party (insurer) to carry or share potential losses.
One of the advantages of insuring against fire is that insurers have both the experience and knowledge to assess risk and hazard, and can provide appropriate advice as well as insurance cover. While the business of the insurers is to take on risk, they will only take on those they consider to be reasonable. If there are minor adverse considerations they will either ignore them or introduce a loading to the premium – and so on up the scale. Eventually a point will be reached where the hazard may be so great as to make the risk not commercially viable. The question then is can the fire hazard be changed and will sprinkler protection reduce the fire hazard to the extent that the risk is insurable?
There are however, other considerations, with management and housekeeping being a significant factor. There is an underwriters’ adage that no matter how good the actual property is, if your insured is bad you will always have a bad risk. In the UK sprinklers have generally been specified by insurers for risk reduction purposes to protect property (and business) against fire. As a consequence, the standards to which sprinklers are installed offer a sound level of protection with the objective of controlling or suppressing fire.
If an insurer’s decision is only to take on a risk if it is sprinklered, the probability is that the same decision would be made by the business owners if they were carrying their own insurance – providing they are equally well informed. It is interesting to note that whereas the CBI fiercely resists any suggestion for mandatory requirement in the building regulations for sprinkler protection, many of its members already routinely fit fire sprinklers as part of their risk managed and risk reduction strategies.
Economic lifeline
Perhaps some businesses are not aware that many businesses do not survive a major fire – with or without insurance. More than 50% of businesses go under after a serious fire, so installing a correctly designed and well maintained sprinkler system may make economic sense for business recovery reasons alone. In high risk occupancies, insurers have traditionally given incentives (in the form of large discounts) if a sprinkler system is installed and maintained. It is argued that for certain classes of risk the payback in insurance discounts can be less than 10 years.
Insurance cycle
It is almost universally recognised that the insurance market is cyclical. Hardening insurance markets lead to increasing insurance premiums and increased underwriting returns, which tends to attract new companies into the market or for existing ones to increase the capacity of their business. This in turn leads to an insurance market which is over provided with intensified competition, resulting in reducing premium rates and a softening market. As the insurance market softens (which it has continued to do in recent years), the premium discounts for sprinklers narrow and consequently, it becomes less financially advantageous to install them if the primary consideration is savings on your insurance premium. In the UK we are nearing the bottom of the cycle – it will be interesting to see what effect the global credit crunch has on the availability of risk capital for insurance companies and what in turn this will do to insurance premiums. However when the market does turn and the appetite for risk diminishes, it is likely that insurance specified sprinkler systems will increase.
While sprinkler systems are designed to common codes and standards, no two sprinkler installations are the same – each is individually designed to protect the building and the contents. This consideration has resulted in a relatively small sprinkler industry ‘regulated’ to insurers needs. For many years most fire professionals (including FPA) argued that the government should set targets for fire and rescue services, whose primary consideration is, quite correctly, life safety and safe evacuation. This, combined with the flexibility encouraged by the introduction of fire engineering, has seen building materials moving away from the traditional, largely non-combustible (or fire resistant) to flimsier structures, some of which may result in untimely collapse during a fire.
Building collapse can have devastating consequences – as was so tragically demonstrated most recently in Warwickshire – and it is not uncommon that immediately following such incidents there are widespread calls for sprinklers. Guidance notes to Integrated Risk Management Planning (IRMP) did highlight economic loss as a consideration, but they also assumed a ‘massive’ investment in built fire protection systems, which numerous studies have found to be unsound. Experience is now showing that there are frequent breaches of passive fire protection barriers within recently constructed buildings and worryingly, insurance losses are now increasing. The provision of sprinkler protection, however, may not in itself be sufficient to reverse this trend as it is also highly dependent on adequate separation and good business management.
Risk aware?
The success of the Fire Precautions Act in creating a safe working environment and the move to less prescription embodied in the Regulatory Reform (Fire Safety) Order is welcome, as long as it is properly ‘policed’. If self regulation and greater flexibility for the building owner results in increased risk to property, the Fire Safety Order will have failed, as it was identified as an important strand of community risk reduction, which in itself was argued would give fire and rescue service greater operational flexibility.
We are aware, however, that there is a lack of detailed information on various factors which contribute to property protection planning including:
We are aware, however, that there is a lack of detailed information on various factors which contribute to property protection planning including:
– How much was saved by the sprinklers?
– How did the building materials perform?
– Were fire safety measures being properly maintained?
– Were they designed to protect against or mitigate loss?
These unknowns raise the question whether fire and rescue services are making response plans on unsound assumptions.
Fire and Rescue Services should take great pride in the success they have had in recent years in reducing deaths and injuries, and in hitting all of the Public Services Agreement (PSA) targets which included an element of property protection – the arson reduction target. However the insured loss figures tell a different story which shows a steady increase in losses over time.
What price?
There is a perception that sprinkler protection is expensive. But what price to save a business considering lost production, lost jobs. (not just to the area but often to the UK as whole), lost assets and pollution? But where the sprinkler industry does provide cost figures to justify sprinkler protection, it is important that they are accurate.
Recognising the difficulty that the industry has in providing ‘ball park’ costings for justifying sprinklers, it still needs to get its act together. While government (and the Treasury) continue to evaluate the efficacy of sprinkler protection based on lives saved, it will be difficult to argue that we should see a widespread increase in recognition for sprinklers within ADB on these grounds alone.
There have been suggestions that the local building Acts be repealed. However as they afford a degree of property protection it could be argued that we need more, not less, of these if Integrated Risk Management Planning is really to fulfil its true potential of community risk reduction. Assuming ‘community’ has a wide definition Under the Civil Contingencies Act – local government has a responsibility for business continuity planning – local planning guidelines could easily make reference to property protection being a goal. Fire and rescue services, insurers and the sprinkler industry should work with local government to make the case for increased recognition of fire suppression for business continuity.
It is often argued that the polluter should pay, but the usual consequence of a serious fire is that the community pays either in terms of contamination or damage to adjacent property, or loss of resources at a local or national level. Where properties such a school or hospital disappear in a cloud of smoke, how is the disruption to a student’s education or the reduced care or added discomfort to a patient costed and brought into the equation?
In the insurance industry there is the concept of ‘moral hazard’, where insured parties are less concerned about the negative consequences of their behaviour having transferred the burden of risk to the insurer. Does the issue of moral hazard apply where properties of importance to the community remain unsprinklered?
Jonathan O’Neill is managing director and John Stephens is principal consultant at FPA