Pallet companies know the struggles they have had getting insurance coverage over the last few years. The number of carriers offering coverage continues to dwindle as insurance companies look for more attractive sectors. High risks associated with fires and other incidents have been a factor driving up rates. Some pallet companies with safety and strong fire preventative programs have even faced cancellations and skyrocketing rates.

John Smith, the president and CEO of Pennsylvania Lumbermens Mutual Insurance (PLM), commented, “I concur, it’s happening. I think there are insurance carriers taking huge increases out there, and pricing risk similarly without a distinction between risk or client…We strive for long-term rate stability reflective of the individual risk as opposed to wild swings based on market cycles.” He suggested that some companies, not PLM customers, but some are seeing 35-40% increases or higher.

A major reason is that some companies without a long history in the pallet and wood sectors are deciding to get out of covering these type of businesses. These providers are now reviewing that book of business, and the risk factors have them, or their underwriters concerned. They either send out non-renewal letters or call for rates that force customers to look elsewhere. Smith did clarify that adjusted for inflation, rates were actually higher 30 years ago. Where some carriers have charged inadequate rates over the last several years, companies may find themselves getting non-renewed or unable to find anything close to what they previously paid.

Smith explained, “Most insurance providers are what’s known as frequency underwriters. They look at the frequency of loss, and they are looking for a lot of small losses because they are more predictable. They may not understand the pallet industry or its risks. At PLM we are severity underwriters. We don’t have a lot of frequency of loss, but we know when our insured suffer a loss, it can be huge.”

Most insurance providers covering this sector are regional players. And some of those are opting out of the sector due to the risks. This has driven up rates over the last several years. But the good news is that the huge year-over-year increases are starting to mitigate. Companies have set in at rates that are more sustainable for the associated risks.

Paul Quandt, senior vice president of commercial insurance for HUB International Northwest, projected, “Renewal rates might go up again a little bit this year compared to last year, but it won’t go up as much as it has in the past…I have seen the rates level off a bit if you have a clean loss history. If you’ve had a loss, you’re going to get an increase for sure.”

Some risk factors driving rates are not isolated to the pallet industry. As more data and information have become available, climate risks and exposures, such as severe storms and wildfire increasingly play a role in risk review. Building condition and structural resilience to these exposures are also important as the carriers are better able to target specific risks to individual regions and companies.

The reality is that you can’t just be average or get away with the bare minimum. Quandt warned, “You’ve got to do everything you can to be best in class. You must pay attention to your fire exposure. You need to hire high quality drivers, have a top notch safety program, one that includes a return to work program for your employees. You want a safety committee that drives safety and looks for continuous improvement.” If you don’t, you might struggle to find coverage or have to pay extremely high rates for it.

So, let’s look at what you can do to improve your chances in the insurance market. You have to go beyond just good housekeeping practices.

Carriers that are committed to sustainably supporting the pallet industry are going to rely on a strict set of underwriting rules that must all be met. For Smith, the big three are a sound approach to hot works, a commitment to stronger pallet storage standards, and improve equipment maintenance.  Hot work is a common concern.  If you are doing any work with welding, grinding (sparks), or other exposed fire/flame, you must have established procedures that follow OSHA standards and are monitored for compliance. All employees working in those areas and functions need to know the procedures.

When it comes to pallet storage, Smith requires clients to go beyond the minimums established by some of the fire code standards. Smith recognized, “The NFPA is not risking its balance sheet, but an insurance company is. Now someone will say to me, you’re telling me how to run my business, and my response to that in a pallet and sawmill business, is you’re exactly right. You don’t have to do these things. But if you want us to insure it, this is what you have to do.”

In regards to equipment maintenance, Smith pointed out, “A lot of fires start because equipment, especially motors, overheat.” Some companies try to cut costs and don’t have a licensed electrician do critical work. They just have a maintenance person handle it when you are talking about massive electrical loads running through those wires. Smith suggested that pallet companies hire a licensed electrician for any electrical work. He also recommended investing in thermal imaging to locate hot spots in your machinery and plants. His company even works with clients to locate service providers that can handle this service.

Some sawmills are also installing AI-equipped camera systems to identify trouble spots before they become a fire. See sidebar 1 on the Avian system.

There are a lot of factors that go into assessing your rates and renewal risks. How close is the nearest water source and fire station? Is your facility appropriately secured, lighted and monitored? Are homeless encampments nearby? What spark or ignitions sources occur at your facility? What type of neighbors are nearby? Smith noted, “There are pros and cons to being in both urban and rural areas. The real issue is pallet storage, the size of the lot and other practices.”

What type of building do you have? Does it have sprinkler protection? Quandt advised, “While having sprinklers may not be required for a decent rate, it opens up the number of companies that will cover a facility. All insurance providers are going to charge a higher rate for non-sprinklered facilities.”

Also, what is in a pallet plant has changed over the years, especially over the last five years with more advanced automation. Quandt explained, “Insurance has changed a lot, and your business interruption and your exposures have changed due to automation and more expensive machinery that must be covered. You don’t have just a $20,000 saw. You have a lot of automation that costs $500,000 or more each.”

What are things that can be done to reduce premiums? Well, you can always raise the deductible. But that transfers risk from the insurance provider to the customer. If you move the deductible up from $100,000 to $1 million, you have increased your risk liability by ten times.

Smith warned, “You got to have a strong backbone and a big financial statement when you end up self-insuring or raising your risk to a really high deductible.”

Quandt agreed, “We can try to play with the deductibles. It all depends on the company’s risk tolerance. If you raise the deductible, you can increase the number of carriers willing to quote the business. Do you want that risk? Do you have enough cash reserves?”

There are some opportunities opening for group insurance or captive pools. Quandt admitted that some of the biggest companies are already in those arrangements because they can save money. It can be hard to develop those pools for the greater pallet industry as a whole because the risk profile for each business can vary so much. But Quandt suggested that he is working to explore those options for workers compensation, general liability and umbrella coverages. He said, “I’m actually trying to work behind the scenes to create a program for those coverages.”

Ultimately, there are many things you can do to improve your safety and risk profile. See sidebar 2 for a list of suggested actions.

Both insurance providers quoted in this article suggest that any company that gets dropped call them for a quote. While they can likely offer coverage if all underwriting criteria are met, the rate may not be cheap if the last rate was insufficient to maintain sustained coverage over the long-term. You can always see if you can find another cheap option out there. But don’t be surprised if you are in the same predicament in a year or so.

The Avian system identifies hot spots and sends notices to management so that they can fix it before a real problem arises. These cameras can also identify excessive wear areas to improve the lifespan of equipment and conveyors.Sidebar 1

Avian Offers AI Camera Systems to Identify Hot Spots in Your Operation

What started with beating the world champion in a drone racing competition in Europe, led to the development of a game changing hot spot detection system for sawmills and other wood products facilities in Europe. Thomas Laengle, CEO of Avian, recalled, “After winning the competition, the biggest sawmill in Switzerland approached us because they had a huge fire, which resulted in difficulties getting insured.”

Laengle explained, “Our system is a thermal camera that can measure temperature over a long distance up to 100 feet. We analyze different machines and parts, such as bearings, rollers, motors, etc. and then our system learns the typical operating temperatures of these machines.”

The Avian system identifies hot spots and sends notices to management so that they can fix it before a real problem arises. These cameras can also identify excessive wear areas to improve the lifespan of equipment and conveyors. It has been deployed in U.S. sawmills and throughout Europe in large sawmills and pallet operations. The company offers U.S.-based support for its clients.

Laengle added, “The big difference from our system versus your annual thermographic inspection is that we monitor 24/7. With the data collected from our system, we create a profile to know what the proper running temperature is to identify operational or wear patterns that are dangerous. Our approach detects hotspots before they become a major problem. The system is really adaptive learning over time. It can be used for fire prevention and predictive maintenance. Because we can detect when a bearing or motor starts to fail.” It has also been used to identify misaligned conveyors and other problems.

Although cameras can just be installed on problem areas, such as grinders or saws, most sawmills look to cover a majority of the machinery process. These cameras provided 24/7 protection compared to occasional thermal imaging studies that some companies may do from time to time.

Laengle commented, “ROI depends on a case-by-case basis because every company has different risks and different insurance premiums. But generally, our system results in a 5-20% premium reduction, which normally leads to a ROI of two to 3-4 years. – and that’s before any savings from our predictive maintenance algorithms which can result in substantial downtime reduction.”

Avian is all about prevention. Laengle added, “Small issues can become big problems, and our system helps identify those issues when they are small and can be easily fixed.”

For more information, see the ad on page 35, or visit https://www.avian-iot.com/

Sidebar 2

Action Steps to Reduce Your Insurance Risk Profile

These are some best practices that insurance providers suggest for pallet companies:

• Conduct regular safety walk throughs with managers and supervisors.
• Set up good, formalized housekeeping and cleaning practices. Focus on reducing combustion risks, fall/trip hazards, etc.
• Establish sound hot work policies, put them in writing, train on them and most importantly adhere to them.
• Stress with all departments good housekeeping practices. Put in dust collection systems where appropriate. Reduce dust accumulation in doors.
• Pallet storage to ensure adequate separation of pallet stacks. Each insurance carrier may have a different standard.
• Establish formal machinery maintenance policies. Periodically monitor for excessive wear or heat. Consider using thermal imaging.
• Develop relationships with your local fire department. Bring them onsite and create accessible corridors. Check your water supply and ensure that you have enough water available for your property.
• If you have a sprinkler system, maintain it and test it. Don’t turn it off if a leak develops. Fix it!
• If you are doing recycling, put in spark arrestors. Move the sawdust pile away further from the building. Periodically check for dust on the roof.
• If you are in a wildfire area, follow the IBHS Wildfire Preparedness Guidelines (www.wildfireprepared.org)
• Fence in your property, lock up tight at night, and install cameras and security lighting.
• If you have fine dust, you might be required to have a baghouse depending on the jurisdiction. If you have a baghouse, you’ve got to have spark protection suppression.
• Invite not the broker but the insurance underwriter to meet you and walk the premises. Get their suggestions to reduce your risk exposure.
• Shop coverage periodically. Make sure your coverage is adequate for your true risk. Know what is covered and any gaps in coverage to your real needs if a catastrophic incident were to occur.