The increase in premiums, the coverage limitations, and all of the headaches and frustrations businesses are battling with the insurance industry today actually started over a decade ago. What was first seen in the wood products manufacturing industry has, in essence, grown and spread out across the insurance landscape. This article explores the impact of catastrophic claims on insurance costs in this sector, drawing insights from the book The 10 Laws of Insurance Attraction and other industry sources. More importantly, we will focus on the lessons learned that have helped the wood products industry insurance world improve since then that may help businesses today.
The Rising Tide of Catastrophic Claims
The wood products manufacturing industry has been hit hard by a series of catastrophic events in recent years. These incidents have not only resulted in tragic loss of life and injuries but have also had a profound impact on insurance premiums across the sector.
One of the most notable examples comes from 2012 when explosions at the Babine Forest Products and Lakeland Mills sawmills resulted in four deaths, over 40 injuries, and significant property damage. The financial impact was staggering, with insurance carriers facing estimated costs between $25 to $100 million for just one of these claims.[1]
These incidents marked a turning point for the industry, leading to steady increases in insurance premiums and significantly reduced availability of coverage. Speaking to one wood products manufacturer, they went from having $80 million in property coverage with one insurance company at a premium of $182,000 to having 11 insurance companies provide that coverage for a $1,642,000 premium. These layered or quota-share programs (multiple insurance companies, each taking a percentage) are now used with many risks today.
The Frequency and Severity of Claims
Data collected by Dust Safety Science reveals that the wood and wood products industry was responsible for 20.3% of all industrial fires. Notably, dust collection systems were identified as the known cause in 12.7% of these incidents. [1] This high frequency of fire-related events has put the industry under intense scrutiny from insurers.
The severity of claims is equally concerning. With over $1 million in claims monthly in the wood product industry, insurers faced significant financial pressure. That led to a dramatic increase in premiums, with some businesses seeing rates as high as $2.00 per $100 of property value. In comparison, a retail facility may be paying $0.20 per $100.
Factors Contributing to Catastrophic Claims
Several factors have contributed to the high frequency and severity of catastrophic claims in the wood products manufacturing industry:
- Ineffective Wood Dust Control Measures: Poor management of wood dust has been identified as a major risk factor, contributing to explosive environments within manufacturing facilities.
- Inadequate Inspection and Maintenance: Failure to regularly inspect and maintain equipment, especially dust collection systems, has led to preventable incidents.
- Insufficient Supervision of Clean-up and Maintenance Staff: Lack of proper oversight in cleaning and maintenance procedures has resulted in overlooked hazards.
- Outdated Fire Prevention Systems: Some facilities have not kept pace with advancements in fire prevention technology, leaving them vulnerable to catastrophic events.
- Inadequate Risk Management Strategies: Many businesses in the industry have failed to implement comprehensive risk management plans, leaving them exposed to potential disasters.
The Insurance Industry’s Response
In response to these challenges, insurance companies have taken several steps:
- Increased Premiums: As mentioned earlier, premiums have risen significantly, with some businesses seeing rates double or even triple.
- Stricter Underwriting Criteria: Insurers are now applying more rigorous standards when assessing wood product manufacturing risks.
- Reduced Capacity: Some insurance carriers have limited their exposure to the industry or exited the market entirely, reducing available coverage options.
- Emphasis on Risk Management: Insurers are placing greater importance on businesses demonstrating robust risk management practices.
Learning From the Past: Strategies for Mitigating Insurance Costs
Despite these challenges, there are several strategies that businesses can learn from the wood product manufacturers’ challenges that can be employed today to help reduce insurance premiums:
- Implement Robust Safety Protocols: Developing and enforcing comprehensive safety measures can significantly reduce the risk of catastrophic events.
- Invest in Improvements: Wood product manufacturers spent significant funds improving their facilities, particularly with their dust collection and fire suppression systems. All businesses should focus on upgrading their facilities and management systems to help prevent fire and explosion risks.
- Improved Maintenance and Housekeeping: Wood product manufacturers had to dramatically improve their maintenance and housekeeping. Businesses can follow suit to control insurance premiums better.
- Regular Third-Party Risk Inspections: Insurance company inspections are not enough. Certified third-party inspections every two to three years can provide valuable insights and demonstrate a commitment to risk management. However, as the condominium collapse in Florida on June 24th, 2021, demonstrated, a business must take action to address any negatives found in the report.
- Thorough Documentation and Monitoring: Maintaining detailed records of risk management efforts, maintenance schedules, and clean-up protocols is crucial for insurers’ assessment.
- Embrace Technology: Adopting new technologies for risk monitoring and management can improve safety and potentially lower premiums. Thermal imaging sends a positive image to insurance companies, as these scans can identify problems that can be addressed before they turn into costly and catastrophic claims.
- Consider Higher Deductibles: Opting for higher deductibles can lower premium costs, though businesses must be prepared for higher out-of-pocket expenses in case of a claim.
The Role of Insurance Agents and Risk Management
The role of insurance agents and risk management professionals has become increasingly important in navigating this complex landscape. As emphasized in the book, businesses need to go beyond simply obtaining insurance quotes. Instead, they should focus on making themselves more attractive to insurers through better business management and risk mitigation strategies.
The book introduced the concept of an “Outsourced Chief Risk Officer,” highlighting the importance of having a knowledgeable partner who can help businesses navigate the insurance marketplace effectively. This approach involves securing coverage and implementing strategies to reduce risk and improve overall business operations.
The Future of Insurance
As the insurance industry continues to grapple with the impact of catastrophic claims, several trends are likely to shape its future:
- Increased Focus on Prevention: Both insurers and businesses will place greater emphasis on preventative measures to reduce the likelihood of catastrophic events.
- Data-Driven Risk Assessment: Advances in data analytics will allow for more accurate risk assessment and pricing of insurance policies.
- Alternative Risk Transfer Methods: Some businesses may explore alternative risk financing options, such as captive insurance arrangements, to effectively manage their insurance costs.
- Regulatory Changes: Increased scrutiny from regulatory bodies may lead to stricter safety standards and compliance requirements for the industry.
Conclusion
The impact of catastrophic claims on wood products manufacturing industry insurance premiums was significant and far-reaching and has grown into other industries. While the challenges are substantial, businesses that take a proactive approach to risk management and work closely with knowledgeable insurance professionals can navigate this difficult landscape more effectively.
By implementing robust safety measures, embracing new technologies, and demonstrating a commitment to ongoing risk mitigation, businesses can improve their risk profiles and potentially secure more favorable insurance terms. As the insurance industry continues to evolve, businesses that can adapt and prioritize risk management will be best positioned to thrive in an increasingly complex insurance environment.
[1] https://www.woodbusiness.ca/3-ways-wood-product-manufacturers-can-reduce-insurance-premiums/