Managing risk in the pulp and paper industry has seldom been easy due to the complexity of the operations, but recent withdrawals by property insurers have made the task even tougher, experts say.
In an already stressed market, in which insurers are cutting exposures and limits, and pricing and deductibles are increasing for numerous industries, property insurance for paper mills can be hard to find, they say.
The shift comes as the surge in demand for paper packaging and tissues that producers experienced at the start of the pandemic slows and the overall economic outlook for the industry deteriorates. In June, Verso Corp. said it would indefinitely idle paper mills in Duluth, Minnesota, and Wisconsin Rapids, Wisconsin, to offset the “unprecedented market decline” due to COVID-19. The decision resulted in some 1,000 layoffs by the Miamisburg, Ohio-based company.
Moody’s Investors Service Inc. predicts the global paper and forest products industry’s operating income will decline by 4% to 7% over the next 12 months (see chart).
The insurable value on a large integrated mill can easily exceed $1 billion, in many cases, said David Arick, Memphis, Tennessee-based assistant treasurer, global risk management, at International Paper Co.
“It’s a very large single facility for a lot of property insurers to write. Only a few insurers have the experience and expertise of working with forest products companies,” Mr. Arick said.
There have also been some large losses affecting both paper mills and the forest products industry in general in recent years, experts say.
An April 15 explosion in a digester at the Androscoggin Mill in Jay, Maine, owned by Spring Grove, Pennsylvania-based Pixelle Specialty Solutions, caused extensive damage.
Another prominent loss was a Jan. 30, 2019, fire that destroyed the Marcal Paper mill in Elmwood Park, New Jersey, owned by Soundview Paper Co. LLC and Atlas Holdings LLC.
Historically, there have been some large losses in the industry, so the potential severity can “thin out” potential underwriting markets, said John H. Murbach, chief operating officer of Aon PLC’s national property practice in Chicago.
Recent mill losses haven’t necessarily driven the change in the property market for paper mills but have increased “the sense of urgency and the pace of that correction,” Mr. Murbach said.
Property insurers have revisited their portfolios, as they look to restore profitability after years of underpricing, and some have pulled out of the forest products market altogether, sources say.
FM Global, the dominant player with an estimated 70% share of the pulp and paper industry in North America, is reducing its exposure to the sector and realigning with larger paper operators that can invest in loss prevention and risk reduction, sources say.
“All decisions are made on an account by account basis. We look at overall risk quality, risk improvement, and profitability of a given account,” said Mark McAdams, principal underwriter for pulp and paper at FM Global in Johnston, Rhode Island.
Getting coverage for paper mills right now is “really difficult,” said Gary Marchitello, chairperson of Willis Towers Watson PLC’s North American property team in New York.
A risk that is well protected from a capital point of view and has effective personnel training is an “ideal circumstance,” Mr. Marchitello said. Anything outside those parameters must be pieced together in the global market, “so you might have 20 to 30 markets cobbled together.”
David Provost, deputy commissioner of captive insurance with the Vermont Department of Financial Regulation in Montpelier, recalls a phone call last year from a paper mill owner in upstate New York who asked: “Is there anything a captive can do for us?”
The mill’s insurer had told the company one month before renewal that it was “no longer insuring paper mills” of that size, Mr. Provost said. The company’s peers, other small and mid-sized mills, had a similar experience, the mill owner said.
Many paper mills are located on a river or other source of water, which means that they have flood exposure, which can also be problematic for insurers, Mr. Provost said.
Many forest products companies are “looking for alternatives,” Mr. Arick said. “There are not a lot of alternatives that will write paper companies, so as a result you see increased deductibles, reduced limits, drastically increased pricing and even reduced coverage in some circumstances,” he said.
Rate increases range widely but can reach triple digits in some cases, experts say.
“We’ve seen some (increases) over 100%. Losses would make it worse. Even a well-engineered risk is seeing severe double digits to 100%,” Mr. Marchitello said.
One risk quality factor that FM Global considers is loss history and also how a policyholder responds to its engineering consultants, Mr. McAdams said.
“Loss accounts are seeing much larger increases, and depending on the situation it could be just pricing, it could be pricing and deductibles,” he said.
Mr. Arick said he has heard about firms trying to renew and the quote from the expiring insurers being “in excess of 30% to 50% increased from expiring, along with increased deductibles.”
“It’s a very tough pill to swallow from a budget standpoint,” he said.
