Ensuring Better Insurance Rates

In a persisting hard market, pellet producers and other wood product manufacturers are struggling with high premiums, but there are some ways to help achieve the best rates.
By Anna Simet | May 25, 2022

When Lumbermen’s Mutual Casualty Co. was founded in 1912, it set out with a focus on insuring sawmills. The company was successful for many decades, and at one point was among the largest and most profitable property and casualty insurance companies in the U.S. By the end of 2000, it ranked in the top 20, as well as the top five largest workers compensation insurers in the U.S., with $2.7 billion in net premiums and more than $2 billion in surplus, according to court documents. However, that success came to a near-screeching halt in 2003, with a rapid amassing of industry claims, and ensuing financial catastrophe.   

“All they did was insure wood product manufacturers—from biomass to sawmills to pellet manufacturers,” says Will Downing, an insurance broker from CapriCMW. “They went bankrupt because they just weren’t making money paying out so many claims all of the time, and subsequently went out of business.”

That left all the company’s clients with a short notice and accompanying scramble to find new insurance. “There was this surge of wood product manufacturers needing insurance, and carriers charged more than double than they were currently doing,” Downing says. “But they really didn’t have another option.”

Insurance premiums for North American wood product manufacturers have soared over the past decade. Patrick Tomkow of Aon Risk Solutions, a risk management and insurance brokerage company with clients in over 120 countries—and a practice in Vancouver focused on wood products manufacturers—says that pellet mills go for roughly $1 to $4 per $100 of value, depending on construction type, protection and loss history, as well other variables, including whether the mill has silo-type storage or is a stand alone facility, which will typically land in the higher in range, vs. collocated, which are typically on the lower range. “The pellet plants that we do are typically only a portion of the overall clients’ facilities,” he says. “They have other locations that are less volatile in terms of historical losses or risk, so we are able to obtain terms that include the pellet plant and all the rest of the clients’ risks. There is some give and take by the insurers.”

Tomkow says the company’s clients do includea few stand-alone pellet producers, but that generally, they will have a more difficult time getting favorable terms in the insurance market. “This is because of historical losses in this space, and no other values to insure to offset the insurer’s exposure to the pellet plant,” he says. “And as well, insurers wanting top dollar for their capacity.  Other items that make these rates fluctuate include deductibles—approximately $500,000 to $2.5 million—and values, as an insurer’s ultimate goal is an acceptable premium. So, higher-value facilities may get a rate break due to size.”

Downing says the insurance industry is currently experiencing a hard market—a period of time, often two to three years, during which insurance carriers increase premiums or stop writing business to increase profits. “Then, they will start writing business again—it has been a factor for the past three or so years.”

As for keys to getting the best rates in the market whether hard or soft, Downing says it begins with finding a broker who is knowledgeable in the space.

Finding the Right Broker   
From Downing’s perspective, knowing who to work with for risk management is critical. “We’ve had clients tell us their previous broker got them to pay for a risk report, only to find out that the report wasn’t accepted by the insurance carriers for not meeting NFPA or FM Standards,” he says. “Often, I have run into those who are having trouble finding someone who understands their business. Basic things you should ask include, do they insure any associations related to the industry? Is the brokerage involved in any conferences or speaking events? There just aren’t that many that specialize in a specific area of manufacturing, which is a problem because if you work with a broker who doesn’t understand the industry or who they should be approaching, they may be overcharged by underwriters.”

While Downing focuses primarily on sawmills, he says the company does have a couple of wood pellet manufacturer clients, and there is a lot of crossover in terms of the same problems—it’s difficult to get insurance and premiums are very high. “We’re trying to change that, because it’s just painful going back to a client saying, ‘This is the only option we can get for you, and its 50% more than what it was last year,’ ” he says. 

Two fatal, catastrophic sawmill explosions in British Columbia in 2012 had an impact that reverberated across North America, and insurance rates have been on the climb since. A post-investigation report indicated the main underlying factors in both incidents included ineffective wood dust control measures, ineffective inspection and maintenance, as well as inadequate supervision of clean-up and maintenance staff. “Today, these are some of the biggest concerns for insurance carriers when assessing the operations of wood product manufacturers,” Downing explains. “In B.C., the standards have been raised, and WorkBC makes frequent visits to see whether an operation has a dust control policy and if it’s being enforced. Now, companies will get fined if they aren’t implementing good risk management practices. In 2013, it might have been a $15,000 fine for not implementing safe controls on machinery, or poor dust control—now, it is north of $650,000 for that same thing.”

Downing says his firm has been in discussions with insurance carriers to determine how the situation can be improved. “They have been pretty good about letting us know which items we should have in place for them to look at reducing premiums and becoming a better risk, so they become more comfortable writing that type of business,” he says.

Another item to check off the list is to ensure brokers are remarketing your business to insurers when appropriate. “I find that when we take on a new client, we’ll go out to all our insurance carriers and present the business to them, and you would be very surprised at how many businesses are not getting remarketed to insurance carriers on a 3- to 5-year basis,” Downing says. “And when I say remarketed, I mean taking that business to all the insurance carriers that want to write that business. Some may not be doing that because they think it’s too difficult to place, too much time and effort required, or that they already have them with the best option. But in doing this, we have found there may be a new insurance carrier that would be very interested in writing this type of business.”

In an example, Downing says one carrier his brokerage uses hired a risk engineer with significant experience in the wood products manufacturing industry, expertise they didn’t previously have. “So now, that insurance carrier is much more comfortable writing that type of business,” he says. “When I submit an application, it gets passed straight on to the engineering department. If they have engineers with a background, they can ask the right questions, and they know how to look at the risk, whether it’s good or bad one, and be more comfortable with it. The only way you find out about these new insurance carriers is speaking with them on a regular basis and asking questions. It’s something that some brokers just aren’t doing.”

Downing adds that three to five years is the standard for remarketing, unless a facility has made some significant changes within that timeframe. “Generally speaking, you won’t see too much change from year to year—it normally takes around three years for carriers to want to be more competitive,” he says. “And if you stay with carrier for long enough time, we’re in a good position to negotiate as well—we might be able to say, ‘Over this five year period, look what they did for risk management and policies put into place, as their track record.’ They will likely come with more favorable terms if they want to keep the business.”

As for a pellet manufacturer can do to show carriers they are actively reducing risk, Downing says there are a few things.

Reducing Risk
Third-party risk inspections, documentation and reporting and monitoring, as well as annual maintenance reports are some key bullet points when it comes to reducing risk, Downing says. “These are 100% relevant to wood pellet manufacturers and are still the number one way on improving your insurance premiums,” he says. While U.S. wood pellet manufacturers and all other facilities with combustible dust hazards were required by OSHA to have completed a dust hazard analysis (DHA) completed by September 7, 2020, they may be completed in-house by a “qualified person” and currently, there are not any specific certifications they must have. Under NFPA 652, the DHA recommendations/findings must be completed within two years, and DHAs reviewed and updated every five years. “The main thing is that the risk report is accepted by the insurance carrier, it should be of high quality and according to NFPA and FM standards—having them conducted by engineers who have worked for FM Global or are very familiar with those standards is another thing,” Downing says.

Beyond a risk report, documentation and monitoring is critical, Downing says. “For dust control, how often are you cleaning, who is doing it and when, and is it documented? It’s all good having a policy in place, but actually getting it enforced is more challenging. It can be a bit of a change in culture, giving somebody a responsibility to make it happen and get it done on a day-to-day basis. There is technology that improves safety, but a lot of it is housekeeping and preventable.”

In one example, Downing says he has seen businesses use their phones to take pictures on a daily or weekly basis to track dust levels, or keep track of cleaning and checks in an Excel document.

As for annual maintenance and upkeep, Downing says it should be focused mainly on the sprinkler and fire protection systems. In some cases, he says seen operations that haven’t had their on-site fire hydrants and fire extinguishers checked or inspected for five-plus years, or placards on sprinkler systems updated. “There is a budget and cost to having all these things done, but it’s a necessary cost of business,” Downing says. “We had a wood pellet manufacturer have a risk report done and it came with recommendations of what needed to be implemented—not all quick fixes. But if they work throughout the year at all of the recommendations, if all of those things have been ticked off at the next renewal, they can show that they put in the money, time and effort to reduce risk. They will look at that more favorably, and it will likely put them in a position to negotiate your premium down—that’s exactly what happened with some clients of ours this year.”

To give a rough calculation as to costs and ultimate savings, a third-party risk report and other recommended risk management items may cost annually $10,000 to $15,000 for a $4.5 million wood processing facility. “However, you could see savings of $22,500 per year or $112,500 every five years in insurance premiums,” Downing says, adding that risk reports are generally considered valid for about three years. “For a best-in-class manufacturing plant compared to one without great housekeeping, poor dust management and sprinkler systems that aren’t updated or inspected, you could be looking at a $30,000 to $50,000 difference in premiums.”

Brand new facilities are often in a better position that existing facilities, depending on the company’s experience. “If you have a building that’s steel-on-steel construction, 100% sprinklered with a couple fire hydrants on-site, immediately that looks like a much better risk,” Downing says. “Then, they’ll look at experience level—being totally new to the industry might be a red flag, but 20 years of experience in wood products, a risk report and even maybe a health and safety officer on-site to go over documents they will need, with everything tracked and reported, it would be a better risk.”

Despite the difficulties pellet manufacturers and other wood products facilities face, underwriters do want to write this business, Downing says, but they must be comfortable that what they’re taking on isn’t a ticking bomb. “And each person has different opinions around risk management. We have had cases where we’ve  told people, for us to get insurance options for them, that they get a risk report done, and they won’t actually allow it to happen—I’m not sure why, either they don’t want to spend the money, or they are uncomfortable with someone coming into their facility.”

 Tomkow says insurers want to see less losses—both in frequency and severity—before rethinking premium calculations, and that for pellet plants, this year likely won’t see much relief.

Insurance companies are out to make a profit, and if they’re having to pay out significant losses frequently, then they’re not making money, Downing emphasizes. “They’ll just decide not to write that type of business, or charge a significant premium,” he adds. “It’s very important to be working with a specialist insurance broker that understands the business and the requirements. Underwriters have to get more comfortable with writing your risk, so you really need to find a broker who can present your company in a favorable way, highlighting all of the good stuff that you’re doing.”

Author: Anna Simet
Editor, Pellet Mill Magazine
[email protected]

Printed in Issue 2, 2022 of Pellet Mill Magazine