Sawmills, which saw demand for their products surge during the pandemic as DIY projects increased, are facing their own supply and demand issues in insurance.

Insurance capacity has shrunk as the lumber sector continues to experience significant losses, with large fire losses an ongoing concern, industry experts say.

Insurers in the sector have struggled with profitability, said Jay Hanna, president of Woodus K. Humphrey and Co. Inc., a Shreveport, Louisiana-based specialty managing general agency and a unit of Amwins Group Inc.

Many insurers have exited the market, and “now it’s a true supply and demand issue,” Mr. Hanna said.

Several large industry losses this year resulted from inadequate hot work protocols, Amwins said in its state of the market Q2/Q3 report released in August. “The insurers that remain take loss control very seriously,” Mr. Hanna said.

Capacity is difficult to find, and pricing reflects that, said Matt Little, Atlanta-based executive vice president at McGriff, Seibels & Williams Inc., part of Truist Insurance Holdings Inc.

“There’s tremendous pressure on premiums, terms and conditions, retentions and deductible levels. As of Sept. 1, there doesn’t appear to be any relief in sight,” Mr. Little said.

In such a tight market and with few insurers willing to underwrite the risk, capacity is being deployed “very carefully,” he said. “In the last 12 months we’ve seen pricing go up greater than 50% on certain risks, and, on average, double-digit increases are the norm,” he said.

Deductibles have also increased. “It was not uncommon in the past to have a $5,000 deductible or a $10,000 deductible, and now for any mill that’s over $20 million total insured value that deductible is rarely below $100,000 and typically climbing up to $500,000,” Mr. Hanna said.

Sawmill insurance is a severity-driven business, said Sean Briscoe, assistant vice president-underwriting at Pennsylvania Lumbermens Mutual Insurance Co. in Philadelphia.

“It’s tough. You have fewer insurers that want to come into the niche and write the exposures because of the losses,” Mr. Briscoe said. Pennsylvania Lumbermens Mutual has been insuring the lumber and woodworking industries for 126 years.

A sawmill’s total insured value and heavy fire loads mean that insurers are taking on significant exposures, he said. “If you do have a loss, it’s normally going to be a large loss upwards of $100,000, sometimes a couple of million dollars. When insurers think about that they have to weigh whether the risk is worth the reward for writing this type of business,” Mr. Briscoe said.

In the event of a loss, the potential for significant downtime or business interruption for mill owners is a concern, a factor that has been exacerbated by the pandemic, experts say.

Supply chain problems have increased the cost of materials and delayed the replacement of specialized equipment, for example. Demand surge is another factor as lumber prices remain elevated, despite dropping from record highs seen earlier this year.

Business income or interruption limits have increased “dramatically,” by around 30% to 40%, due to the demand, Mr. Hanna said. Mill owners “want to be made whole if they have a business income loss. To be made whole at current lumber prices, they have to increase their limits,” he said.

Adequate valuation on a property policy is important, Mr. Little said. Policyholders should ensure that they have selling price valuation on their inventory and stock, so that “if you’re selling inventory for $1 million today and you have that fire or windstorm, the underwriter will pay you that million dollars,” he said.

Mill owners need to understand their total insurance to value, Mr. Briscoe said. “A good starting point is to do a commercial appraisal on the buildings as well as the equipment. It really alleviates a lot of the guesswork from the insurance perspective,” he said.

Longer than normal wait times on equipment can make it more difficult to get back up and running after a loss. “If you were to buy a piece of equipment new it would be a one- to two-, or even a three-year waitlist to get that piece of equipment if you had a loss,” Mr. Briscoe said. Used equipment that can be refurbished is also in short supply, leaving mill owners “at the mercy of whatever is available,” he said.  

Completing a business income worksheet is critical to understand where a mill’s revenue is generated, what its exposures are for an upcoming policy term, and whether it has sufficient business interruption coverage, Mr. Briscoe said.