Robert Pellerin
Robert Pellerin
Damage Insurance Broker

Robert PellerinRobert Pellerin

Vice President, Client Executive, National Practice Leader - Forestry





Since the withdrawal of LUA in 2011, many insurers have seen their market shares in the lumber industry increase dramatically. Indeed, at that time, insurance products were particularly sought out by sawmill owners who, were slowly emerging from a market plagued by one of the most dramatic crises experienced by their industry.

Since, insurance capacities in the lumber industry have changed, so to speak, permanently. It has taken many insurers to replace the void left by the withdrawal of Lumbermen’s. In 2015, what is the status of the insurance market available to the lumber industry? Although apparently stable, it could fluctuate and, in a flash, return to the state it was in four years ago.

One of the reasons why insurance in this industry is so complicated relies on the catastrophic nature of the risk. To understand properly what is at stake, just think of the seriousness of damages incurred by a sawmill when faced with its biggest foe, fire. These past few years, damage frequency has been better controlled, thanks to higher deductibles and the onset of several control measures. Formerly, it wasn’t surprising to see sawmills insured with deductibles as low as $25,000 (even less in some cases)! Today, the minimal standard is around $100,000.

Despite the reciprocal nature of LUA, the insurers who absorbed capacities left after its withdrawal are all corporations. Therefore, their aim is, within a certain ratio, to pay fewer claims than premiums received. This is one reason why all insurers on the market will now implement limits on participation. It also explains why a single risk might be shared between five or six of them.

While this is now understood by the majority of owners, it becomes essential – in order for them to benefit from the best rates for insurance capacities available on the market – to protect assets. For instance, it is almost impossible to get insured without automatic sprinkler systems. Other measures can be taken to show insurers that the risk is properly managed, such as annual testing of the sprinkler system, yearly thermal analysis of the electrical system, using a hotwork permit and displaying precise safety instructions for welding tasks, as well as a maintenance plan coupled with an well-trained emergency team. At the time of underwriting, these items will principally serve as basis to lay down the available insurance terms and conditions for a sawmill.

What about the future of the insurance market? The question has been raised on various occasions over the past few years. We don’t foresee any real change in the near future. At best, the market will stabilize, but only provided that catastrophic claims don’t disrupt the current state of affairs; this would affect available capacities drastically. Worst, if the lumber industry has to undergo another crisis, the insurance industry might react preventively and many players could be tempted to withdraw.

At the beginning of March, Lumbermen’s, who was still active in the United States, filed for bankruptcy. This does not bode well, even though the case is set in the US. It can only lead to uphold the strict underwriting rules currently applied while forcing a strengthening of those in place in the States. Those who could still profit from Lumbermen’s presence in the United States may have to reevaluate their strategy and seek new innovative solutions.

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