Coming Out of the Woods

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Volatility in demand for wood products and the risk for total loss by fire make the forestry sector a tough niche. But the industry is on an upswing again after a turbulent period.

Brynna Leslie on April 30, 2011

Last August, logging contractor Gordon Peters positioned a crew and equipment in a pine beetle-infested forest near Fraser Lake, British Columbia. The forest was on fire. “When there’s a forest fire, they try to cut all the wood around it and get all the cut timber out of the vicinity as fast as possible so it doesn’t burn,” explains Peters, owner of Gordon Peters Logging Ltd.

Logging machines are expensive, big and sophisticated. That particular day, Peters had a handful of low-bed trucks bring in a processor, a skidder and a feller-buncher among others. The three machines alone carry a million-dollar price tag, which is why it was so devastating when the wind picked up that evening. A late-day warning from one of his crew triggered an order to get the equipment out of there the next morning.

“We were too late,” Peters says. “During the night the fire moved 30 miles (about 48 kilometres) and burned up the processor. Nobody ever dreamed the fire would get there, not in that short time.”

Dangers in the Woods
Insuring the forestry sector has become risky business. In the past 10 years, the sector has replaced manpower with highly mechanized hydraulic equipment, prone to fire and costly to replace. The infestation of the mountain pine beetle has devastated pine forests in British Columbia and Alberta, causing trees to become brittle and dry and contributing to the rapid spread of the estimated 8,000 to 9,000 wildfires in Canada each year.

“Fifty-five per cent of forest in BC is pine forest,” explains MaryAnne Arcand, the executive director of The Central Interior Logging Association (CILA), which represents about 65% of logging contractors in the province. “We see guys buying more coverage and deeper levels of coverage. They have to compensate for the downtime when there’s a fire, and the extra costs for mobilizing and demobilizing this huge equipment.”

In addition, the forestry sector, from an economical point of view, is highly volatile. The housing crash in the US in 2008 devastated the logging industry for two years, causing mills to shut down and devaluing equipment.

Industry-watchers are just now seeing a “glimmer of light on the horizon,” says Glen Williams, president of N.G. Williams & Associates Ltd., a wholesale insurance brokerage in Vancouver.

“There are pockets of activity, most noticeably in Alberta, that we didn’t see two years ago,” Williams says.

Knotty Niche
One of these challenges, alone, could be enough to scare insurers away from the forestry sector. The three together–expensive equipment, rapid spread of fires and a volatile economy–have contributed to the creation of a niche insurance market in Canada with restricted access for retail brokers. “The logging industry is so volatile,” says Williams. “You can have several good years without bad losses, and then you can suddenly get quite an array of large losses which can be devastating.”

Some believe only the big domestic insurers and wholesalers have the capacity to take on the level of risk required.

“When there is a forest fire, you normally have a few hundred hectares that goes up in smoke,” adds adjuster Ian Maxwell, president of Maxwell Claims Services Inc., who has been an inspector for the industry in South America, Europe and North America for 15 years. “The retail broker simply doesn’t have a ready market to underwrite that class of business.”

At the same time the number and cost of claims is on the rise, while industry ratings remain precariously static.

“Ratings have not been in keeping with fluctuations in the industry,” says Al Delwo, who’s been a broker at Summit Insurance in Prince George, BC, for 41 years. “And litigation is on the rise. The logging community is more likely to file a claim and be more enticed to litigate against a broker or insurer if they don’t get results expected.”

Delwo adds that insurers in BC who have dealt in logging equipment insurance have had very poor results for the last 10 to 15 years. This has left the bulk of the business to big domestic players like Chartis and Commonwealth, he says, along with a handful of Lloyd’s syndicates.

New Players
The forestry industry is diverse, however, and there are smaller players emerging to cover niches within this niche. One of the newest underwriters in this sector is The Economical Insurance Group (TEIG). Headquartered in urban Waterloo, Ontario, about 120 kilometres southwest of Toronto, TEIG may seem an unlikely candidate to emerge as a specialist in this market. But it was no accident. In 2007, TEIG purchased a Seattle-based managing general agent (MGA) called the Mattei company, which has been in the forestry business since 1972.

“We can provide an option to our brokers that previously only had an ability to go to the larger players in the international forum,” explains Rocco Passarelli, Manager of Specialty Insurance at TEIG. “We’re not prepared to compete with those markets that write larger schedules, larger international forestry companies. We’re focused on medium-sized contractors and log-haulers.”

Key to TEIG’s success has been partnering with brokers who understand the unique needs of logging contractors in different parts of the country.

In Atlantic Canada, for instance, some land is privately owned. Clients there require commercial liability in case a trespasser or visitor to the property is injured. Likewise, in Alberta, heavy trucks such as logging trucks must follow specified routes to keep them out of city centres. Insurance companies may want to be clear about the types of vehicles being used, the experience of the drivers and whether they are keeping to the designated roads.

“We look at our broker partners as our first-line underwriters,” says Passarelli.

Premiums
As with any type of insurance, premiums vary considerably in the forestry sector, depending on the type of insurance, the claims history of the company, the type of equipment being used and where the company is operating. A logging contractor like Gordon Peters, for example, who is purposefully harvesting trees in a crown forest on fire with a $300,000 processor, has much higher exposure than a small independent operator in Newfoundland who owns his own land and uses a chainsaw.

“We look at the type of terrain they’re operating on, the degree of the slopes, the service and maintenance of vehicles, ministry regulations and rules,” says Delwo.

Looking at equipment alone, Delwo says a contractor with $1.5 million worth of equipment and a clear loss record would probably qualify for a rate between $1.05 and $1.20 per hundred dollars of value.

“A contractor with only harvesting equipment would probably be looking at $1.40 to $1.65,” explains Delwo. “Harvesting equipment is more susceptible to loss by fire, upset and overturn.

“It’s the nature of the equipment,” says Delwo. “If they’re working on a 12% slope and they cut off a tree, lift it and turn the wrong way, the weight of the tree can pull them over and roll down the hill. Those machines all vibrate while they’re working and have high pressure hydraulic systems inside. It’s probably the most frequent type of equipment lost and the most expensive to repair.”

Broker Know-How
“Brokers really need to spend some time on an active logging work site and see for themselves how it works and what the dynamics are,” says Arcand at the CILA. “You can’t do this kind of work by meeting the company executive in town or in his workshop.

“If they start talking to the broker about the buncher being on a certain kind of slope, or if they’re going to log dry pine instead of spruce and you don’t understand the differences and all the implications of that difference, you’re not going to assess them right,” she adds. “If I’m going to be logging pine, it means there’s less of a payload, more risk of fire, more volume. You need to know that.”

On the East Coast, broker Tony Conway agrees. A forestry worker himself 22 years ago, he’s always viewed his role as a risk manager consultant to his clients.

“You have to work with the contractors to grow their businesses and consult with them on what’s best for them,” says Conway. “Ultimately, I’m not only interested in the lowest price on insurance for these guys. I’m concerned with a good product and a reasonable price, but the service is just as important.”

Understanding the equipment is key, he says. Every two years, Conway goes to equipment shows with logging contractors and equipment dealers that he represents. Adjuster Ian Maxwell recommends brokers go one step further, examining the online auction prices of used logging equipment on a monthly basis.

“Until recently, the market for used equipment was rock bottom, the industry was in the doldrums and the value of the machines was low,” Maxwell says. “Most logging contractors are checking the values before their annual renewal. But if your client insured a machine for $100,000 and it’s now worth $200,000 a month later because the economy has picked up, they’re not going to get the replacement value if the machine goes up in smoke.”

And don’t overlook the thousands of dollars of miscellaneous tools and equipment, warns Delwo, including welder’s hand tools, power tools, welders, compressors, lights, hoses, lubricating fluids, fittings, spare and duplicate parts.

“Most contractors have anywhere from $30,000 to $100,000 worth of tools that are left outside, normally in vans on the logging site in the forest,” Delwo says.

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New Markets

The upside of the economic collapse south of the border and the pine beetle devastation in Canadian forests is that the industry has been forced to change. It has developed new products–like wood pellets for fuel–and new methods of harvesting and transporting the products to emerging markets in Asia.

“The industry is on an upswing,” says Arcand. “And we’re also in the midst of an evolution to the next iteration in a greener economy.”

The CILA has developed a program of modifying traditional logging equipment to reduce fuel consumption and have carbon credits to sell back to the province of British Columbia. All good ideas in theory, but Arcand says the insurance industry has been a block toward growth in this area.

“The changes we’re making to the equipment, the increased liability, the errors and omissions coverage that we need? No one knows what to do with that,” says Arcand. “I’ve gone to a number of insurance providers and they have not been able to help us because this is not something with a ticky box. They’re coming back with a series of questions requiring answers in a ticky box, and then the conservative side of the industry is saying ‘we don’t want to insure you.’

“But this is where the industry is going so they’re going to have to figure it out,” says Arcand. “I think they [insurance industry] need to step up, and you can quote me on that.”

Arcand may find a willing partner at TEIG.

“As a company, we’re always looking at ways we can support greening the environment,” says Passarelli. “We have not entertained coverage specifically for this product, but we have for others. We rely on brokers with knowledge in this class to bring these ideas forward.”

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