Insurance is difficult to navigate right now. As the barriers continue to get larger, what can prudent business owners do to keep their doors open?
By Nathan Brainard
Let’s face it, everything related to insurance is extremely painful right now. This is not even waste and recycling industry specific, rather a serious issue with the insurance industry itself. If we were to take a quick survey around the country, we would find companies like Nationwide and their portfolio companies preparing to non-renew large portions of their book of business because they have become unprofitable in so many areas. In fact, in many places they are not writing any new policies at all. The same is true if we look out in California where companies like State Farm have announced they will no longer offer homeowner’s insurance due to the threat of wildfires. For those living in the plains states, how easy is it to find affordable insurance coverage for a flood? The crazy part is, most of what is mentioned above is related to personal insurance not commercial insurance, but the issues are quite similar.
Many of my clients have told me at one time or another that they feel like insurance is a huge scam. They are forced to buy it, the costs only go up, they rarely, if ever, come down, there are “critical recommendations” the carrier requires them to comply with (or risk cancellation) and those can have large price tags attached to them (in cab camera systems, thermal imaging cameras at processing facilities, etc.). Then, when they do have a claim, they feel the adjusters do whatever they can to minimize their payment to the policy holder.
Insurance is difficult to navigate right now and sadly there is little hope that it will get better any time in the near future. As the barriers continue to get larger, what can prudent business owners do to keep their doors open?
Insurance Related Issues
For the past 20 years or so the waste and recycling industry has faced one insurance issue after another. It started with worker’s compensation back in the late 1990s. Then the issue transitioned to automobile coverage. Rates doubled over the course of a year or two before they finally settled down, then the new issue became Excess liability/umbrella coverage. Consumers saw their premiums skyrocket and, in most cases, had little course of action to take as they were contractually required to carry certain limits, meaning they either had to terminate a contract or bite the bullet and pay the premium increase. For those who were carrying higher limits as a precaution, they likely had to reduce the amount of coverage they were purchasing due to cost or available capacity. We managed to get through that issue and now here we are squarely facing a huge issue as it relates to property insurance.
Of all the insurance related threats facing waste and recycling companies over the years, this may be the most serious issue. Per the report Ryan Fogelman at Fire Rover shares annually, 2022 was a banner year for facility fires and 2023 is shaping up to match and possibly surpass the numbers set last year (see Figure 1).
Many companies are having a hard time finding any carrier to offer them terms for their processing facilities due in large part to the ongoing presence of lithium-ion batteries in the waste stream. The continued presence and increased issues related to these items is front and center when it comes to insurance. Even if you have a full fire suppression system installed, many carriers feel that is not enough. Some companies have invested in secondary systems as an added layer of protection, and still the insurance industry scoffs. Maybe not as loud as they would without the secondary system, but they still are not sold in many cases. This can be a result of the materials you are processing, the age and configuration of the facility, etc. The real
insult comes when you have a new facility (say five years old or less) with a full suppression system and a secondary system in place, but you cannot obtain full limits to cover the building, the equipment installed to process, and potential business interruption.
Let’s say we need $45,000,000 in total values for the building and operations described above. Odds are the client and their agent are going to have to use multiple carriers and do what is known as a layered or stacked placement. This is when you have multiple carriers participating to create an insurance tower of coverage. The first carrier might take $5,000,000 and the second carrier might take another $5,000,000, so on and so forth until you achieve the necessary limit.
The problem is there are only so many carriers willing to offer coverage to this industry and their total capacity is far less in 2023 than it was in 2022. Insurance carriers buy insurance just as your company does, but there is a finite number of reinsurers in the world. Last year there were several articles put out discussing how most of the reinsurers were going to increase their premiums and offer less capacity to the insurance companies seeking a deal with them. This has resulted in a tighter environment for companies seeking coverage. The amount of scrutiny underwriters are taking on property insurance for the industry right now is unprecedented. Anyone who has gone through his or her renewal recently has likely experienced this. To be clear, I am not talking about the large publicly traded companies here, rather the larger middle market haulers and smaller companies who do not have the luxury of leveraging multimillion dollar premiums. These are often family run businesses, many of which are generational, that are now having to make some very uncomfortable decisions on how to proceed. The increase in premiums and lack of availability is forcing these companies to consider action steps that five years ago would have never been considered. Do they sell? Do they bring in a private equity partner? Do they go to their bank and try and get them to agree to accept less insurance on their loan? The issues are very real, and we have not even gotten to the part where geographical issues come into play, such as hurricanes in Florida and the Southeast, flooding and tornadoes in the plains states, hail and flooding in the Southwest, or wildfires out West. The natural disaster scenario is the second half of the equation and is a key contributor to the situations like Nationwide and State Farm mentioned earlier in this article are facing.
Insurance should not be the catalyst deciding whether or not a long-term family business has to make one of the above decisions, yet here we are. To be fair, these companies are in business to make money and they have to take appropriate measures on their side to keep their doors open. Therefore, the obvious question is, “what can be done to rectify things?” Honestly, I am not sure there is a single answer to address this issue due to the number of variables needed to be
considered.
Changing Strategies
Over the past year and a half, insurance agents have had to deliver some tough news to their clients without any real guidance on what can be done for their situation. Personally, I have had conversations ranging from the client electing to self-insure the facility, to buying parametric insurance (primarily for wind prone areas such as Florida), to creating a Co-Op of sorts with some of their peers and colleagues in the industry. Each situation has been slightly different as has the end result.
We have had clients who had some success getting the bank to accept a lower amount of insurance. For example, if the client
received their loan eight years ago and have made all payments, but the bank had not amended the amount of coverage they would accept. In today’s environment, we have found most banks are at least willing to have the conversation, especially if you are in an area prone to natural disasters where carrier capacity is already scarce.
Parametric Insurance
Parametric insurance is new vernacular to most consumers. This option is for folks who are only concerned with catastrophic events, specifically wind/ hail. It works based off proximity and sustained wind speeds and can be an option if you do not have a lender on your facility, or if your lender is willing to let you roll the dice. In a condensed version, parametric insurance works like traditional insurance, but the triggers are different. For example, if you are in Florida and there is a hurricane, the policy will identify specific latitude and longitude coordinates where it will begin to apply. Once it is inside this “box”, the sustained wind speed will be monitored. If you sustain damage at wind speeds listed in the policy, the carrier will pay $XXXX towards the claim. Because this policy form is based on the sustained wind speeds, the amount available for payment of the claim will vary as the sustained speeds are registered. The higher the sustained wind speeds, the larger the potential payout is for incurred damage. If there is no damage, there is no payout. Additionally, you can have damage to your building, but if the sustained wind speeds are below what is listed in the policy, the carrier will not pay anything. It should be noted anyone electing this type of coverage needs to be very well versed in how the policy will respond in various circumstances. While becoming more widely available, this is not something we would recommend if traditional insurance is available at a reasonable premium.
Co-Op Insurance
As for the Co-Op approach, I have had and heard this conversation many times over the years. Some have actually gotten it off the ground, but to my knowledge none have been able to sustain themselves. In this type of arrangement members are essentially pooling their premium dollars in anticipation of a claim. Where the issues begin to emerge is when one member has a large loss (say $20,000,000). If the Co-Op is in its infancy, it is unlikely it would be able to sustain this sort of impact. Even Co-Ops that have been around for many years could have an issue taking a hit like this. What happens if two members sustain large losses in the same year? Further, there could be additional issues at the site that need to be addressed depending on the types of material present at the time of loss. For example, if the entire facility is lost in a fire and had household hazardous waste (HHW) onsite, there could be a pollution component to the claim. The Co-Op would have to decide up front what they want their program to cover and what would need to be purchased in the open market to avoid this sort of situation.
By no means am I saying this approach is not viable, rather it is hard to sustain because of the values in play and potential issues at a site above and beyond a fire or other type of loss. Should you consider this sort of approach, choose your other Co-Op participants carefully. Your partners need to be quality operators who are safety focused and financially stable. It will only take one claim to test the wherewithal of the group.
Insurance is Cyclical
As much as we would like to tell you there is hope on the horizon for the property insurance market specific to the industry, that is not possible at this time. Companies should continue to support their risk management teams and invest in preventative measures and training so that in the event of a fire it can be contained and extinguished before it gets out of hand. Like most things, the insurance industry is cyclical and eventually we will get a handful of good years under our belt and rates will begin to stabilize and come down. When this happens, we will likely see new entrants into the marketplace, which will bring more capacity and rate relief. Unfortunately, it is anyone’s guess when we will see this cycle start to shift. Until then, the only course of action is to stay the line, be vigilant in training and providing resources, and update the facilities as needed to ensure they are in the best condition possible. | WA
Nathan Brainard, AAI, is Regional President and head of the Environmental Division at Insurance Office of America (IOA) (Longwood, FL) and a member of the NSWMA Safety Committee. Nathan has been with IOA for eighteen years and specializes in Environmental Insurance with an emphasis on insurance for the Waste, Recycling, Remediation and Demolition industries. He can be reached at (407) 998-5287 or via e-mail at [email protected].