Is the Biomass Industry Overpaying for Insurance?

Over the past few years, we have seen that the biomass power and processing industry has experienced the same growing pains, related to insurance, that ethanol saw in 2003.
By Kenny Hallacy | July 11, 2018

In 2003, renewable energy industry entrepreneurs were building their businesses. Early on, they noticed there was a big problem with their property and casualty insurance—it was expensive. For a few years, they validated that the pricing was not an accurate reflection of the risks. In 2006, an innovative insurance program was developed to specifically meet the needs of a segment of the renewable energy industry—ethanol production. These companies used their superior knowledge of the industry to create their own insurance company to protect and insure their assets and potential liabilities. Over the past decade, this insurance company has grown to include nearly half of all ethanol production facilities in the U.S.

Highlights include:
• More than $13 billion of insured value.

• Returned more than $20 million to its members through surplus credits/returns and dividends.
• Nearly 50 member companies with over 100 separate facility locations.

• 100 percent retention over the past three years.

• Decreased property rates more than 74 percent since 2003.

• Decreased general liability rates more than 79 percent since 2003.

• Decreased work compensation rates more than 49 percent since 2003.

As the ethanol production sector has diversified over the past 12 years, the insurance company has added other similar agricultural and renewable energy industry companies, where the risks could be controlled and underwritten to make sense.

How was the insurance company created?
This particular insurance company is named ERM SPC Ltd. and it is a Segregated Portfolio Company captive reinsurance company domiciled in the Cayman Islands, and exists for the purpose of reinsuring property, general liability and workers compensation risks. What is a captive, you may ask? Via A captive insurer is generally defined as an insurance company that is wholly-owned and controlled by its insureds; its primary purpose is to insure the risks of its owners, and its insureds benefit from the captive insurer's underwriting profits.

What does that mean?
In simple terms, a captive is a group of insureds (companies) that come together to purchase insurance in an advantageous way. In the case of the ERM SPC Ltd., there was a group of ethanol production facilities that met certain design standards, had effective risk control programs in place to make them better than average in the traditional insurance marketplace.

As part of the captive, these companies also have a responsibility to themselves and the group to control risks and losses. In addition, they share loss-related information in order to learn from one another. Each facility is inspected at minimum of two times annually to ensure they are keeping their facilities as safe as possible.

How does a captive work to save a business money?
Captives have a direct impact on companies’ bottom lines in a variety of ways. One of the most direct impacts is the ability to leverage the insurance markets on behalf of the entire portfolio of companies, instead of individual companies approaching insurance markets on their own. This allows the captive to decrease premium while improving their coverage and terms for the captive members.

Secondly, for every dollar of insurance premiums paid to an insurance carrier, a large percentage is set aside to pay claims, and when claims do not occur, it creates underwriting profit. For a business, that dollar is a sunk cost. In traditional insurance, even if a company practices superior risk control and safety, and works hard to limit claim activity, the carrier will keep the profit that results from the company’s risk-control efforts. In a captive environment, those profits are returned to the participant.

How does a captive help lower claims?
The claims are lower for a number of reasons, which are the following:

• Members are directly incentivized to improve safety and reduce claims.

• All claim costs are monies that would otherwise be paid back to the captive participants (rather than a sunk cost paid to the insurance company), so all captive members are incentivized to reduce or eliminate claims costs.

• Every member is required to go through two risk control inspections per year, where regulatory compliance and best management practices relevant to the industry are reviewed.

• It shapes a team environment for all members, and a percent of premium is at risk, based on the performance of the captive as a whole. It also incentivizes members to help fellow captive facilities reduce claims.

• Organizations that refuse to make improvements, should they need to, will be suspended and removed from the captive program.

Why a captive program is right for the renewable energy industry?
The renewable energy industry has had a lot of growth in the U.S. over the past decade, and there is not enough underwriting information at a specific carrier to support their own classification and rate structure. The loss ratios on good risks are very low, and these accounts aren’t priced appropriately for the insured. A customizable program is the perfect avenue to not only improve risk control practices, but can provide a fair net cost to the insured.

What does this have to do with the biomass power and processing industry?
Over the past few years, we have seen that the biomass power and processing industry has experienced the same growing pains, related to insurance, that ethanol saw in 2003. Companies appear to be paying too much for their property and casualty insurance, and we want to do something about it, so these organizations can reinvest their diverted premiums into what they need to advance their business and the renewable energy industry. IMA Corp., the largest employee-owned insurance brokerage in the country that focuses on several niche markets and is the top provider in various renewable energy industry sectors, is currently performing a benchmarking study of renewable energy facilities to analyze current insurance programs, operations, loss history, etc. The end goal is either building a separate insurance company or segregated portfolio company for the biomass power/processing industry, or if mutually beneficial, introducing these companies into this already established, and very successful, renewable energy segregated portfolio companies containing ethanol production companies.

Am I allowed to participate?
Organizations that participate in the benchmarking study will receive an anonymous (all company and location identifiers removed) copy of the study. If you have questions, or would consider participating in the benchmarking study, contact Kenny Hallacy at IMA.

Author: Kenny Hallacy
MBA, IMA Corp., Lee Enterprises