Why Business Insurance Costs More and Covers Less

Kim Phelan

It was an inconceivable moment for a small, private equity-owned foundry––management’s local insurance provider, a local friend who’d done their insurance for years, could not come up with a single insurance option for the facility. No carrier would cover them. Elsewhere, a large foundry experienced a terrible insurance renewal in which the company’s premiums skyrocketed 300% and its deductible soared a stupefying 500%. Snapshots such as these have been mounting in number over the three-year hard insurance market that hasn’t yet released its chokehold on the manufacturing industry, which includes metalcasters. 

An insurance expert who specializes in foundry businesses, Scott Meyer, executive vice president and managing director of AFS Corporate Member Willis Towers Watson (Chicago), says the tight market has produced not only alarming rate and deductible increases but reductions in coverage, a trend that has accelerated especially over the last two years. Fortunately, in the two real cases above, the foundries both contacted Meyer’s firm, which (1) obtained coverage for the small foundry at a reasonable rate, and (2) over the course of nine months, revamped the large foundry’s insurance program and succeeded in getting one carrier to write its entire portfolio at a more manageable cost.

Another phenomenon is at work in the present insurance environment: While geographic high-hazard zones with histories of weather-related claims still fare worse than calmer sectors of the U.S., insurance is no longer regional, according to John Link, vice president, Risk Management, at AFS Corporate Member Cottingham & Butler (Dubuque, Iowa). Gone are days when a coastal event in Florida would not impact companies in Indiana or Wisconsin, he said. 

“If something happens, like the recent ice storm in South Texas, for example, which was $18 billion in estimated claims, that’s going to impact and send ripples across the entire property marketplace.”

How Did It Get So Bad?

There’s nothing mysterious about how we arrived into the present hard insurance market. It all boils down to a surge of claims, and weather events have, in fact, dominated the claims scene, a fact that’s easy to forget once the storm’s blown over and headlines chase the next shiny object. Meanwhile, everything from East Coast hurricanes and West Coast wildfires, to unprecedented ice in Texas and the derecho in Iowa leave insurers holding the bag––who in turn pass it around to all the insureds, to the tune of tens of billions of dollars.

Obviously, the more claims, the less risk appetite there will be among carriers, and thus a mass exodus of carriers has left only a handful of players today. And where fewer carriers underwrite, absence of competition contributes to price increases, as well.

Meyer emphasized that while his brokerage has achieved successes for struggling foundries in this challenging environment, there’s definitely no silver bullet to fix all the pain––however he has observed two silver linings in the dark cloud: He says over the last six months he’s witnessed a gradual return of capital and of carriers looking for new business in foundry underwriting; he also said that rampant rate escalation is relaxing somewhat and morphing into smaller increases now. It’s also not unusual in this environment for multiple carriers to take pieces of one foundry’s risk versus one carrier underwriting the entire company. 

In general, Meyer sees a calming of the turbulent conditions that began in 2017. But Link is less optimistic and doesn’t believe the market will soften for another 18 months. For the time being, renewing the foundry’s annual insurance contract will not be an easy transaction. 

Winners and Losers

Disconcerting as it may be, it’s not just foundries with claims on their insurance record that have been hit by double-digit percentage increases year after year. And though a foundry operation may be trying to do all the right things, Meyer says those carriers that still underwrite foundries have migrated into a “flight to quality” mindset, cherry-picking only the very best risks that measure up to a rigid playbook of standards. 

Hence an arena of winners and losers has emerged. But that doesn’t mean foundries are helpless victims of carriers’ whims.

One way to get out ahead of the market issues is to consider some creative insurance solutions, said Link, which larger operations may have the financial means to act upon. He said more foundries might begin looking at captive solutions, different ways to structure deductibles, and even profit sharing components under umbrella programs. 

“There are a lot of different things out there available to foundry owners if they want to take advantage of it, but they have to be in the right position to do so and they have to be open to it,” Link said.  
Bottom line, those who choose to win in the challenging insurance marketplace must have a comprehensive risk management strategy, and they’ve got to plan early, sources agree. Thirty days before the renewal deadline won’t cut it. 

They’ve got to be prepared to tell their story better than their competition, and working with a broker who knows the foundry business, works for the foundry, and advocates for the foundry in front of insurance carriers (versus an agent who works for an insurance company) is a fundamental advantage. What separates the winners is how they’re able to position the company––being best in class but also being able to paint the picture and articulate everything that differentiates their foundry. 

Positioning for the prize of property/casualty insurance that won’t lead to bankruptcy is, frankly, an unfair competition. From the get-go, foundries leave the starting line several paces behind other industries and run a steeper course by mere virtue of tainted public perception. Often branded as a dirty business, Link said, foundries might be written off instead of underwritten the moment a carrier Googles metalcasting and sees the word “oven.” 

All the more reason to prepare for telling the foundry’s story better. If a carrier will only choose a few foundries to underwrite, how do you make sure you’re one of them?

Know What You’re Up Against

Beyond the considerations of weather-related risk factors, which naturally lie outside anyone’s control, the insurance loss control inspector who visits the foundry at renewal or first-time application will be scrutinizing the overall safety protection within the facility, said Meyer. Chiefly, that means fire protection and other forms of life protection, as well as precautions against hazards like flooding and other general loss exposures.

Be mindful of your housekeeping habits because carriers are asking more questions in this area than ever, said Link, including: “How often do you clean the plant operations? Are you maintaining the integrity of your structure? Are you rebuilding sections of your operation? Is there an opportunity to put in a fire suppression and/or rapid rise temperature monitoring systems? Underwriters want to see that you’re doing or contemplating all of those things, so make sure your story is being told,” he said. “Also, what’s your preventative maintenance schedule on your equipment? How are you maintaining? And do you have a backup vendor for your key components?  How are you transferring risk to third parties? And much more.”

Meyer and Link agreed a foundry that employs a full-time EHS director tends to be a company already focused on the very things that help tell the right kind of story to insurance carriers. The daily presence of someone whose job is to scrutinize safety hazards is likely to have a trickle-down effect throughout the company––more so than the foundry whose management and employees can easily become accustomed to and overlook issues that should be raising a red flag. 

Additionally, a new line of questioning has cropped up recently among insurers, according to Link, having to do with the actual products the foundry is making. 

“Insurance companies are asking, ‘What do they make’ and ‘Are the parts critical?’” Link said. “I would argue every component that goes into a product is probably somewhat critical, but is it going to kill anybody [in the event of a malfunction]? So [insurers] are scrutinizing what you make and what part it’s going into. 

“As a broker, as somebody who is telling the story for my clients,” he added, “I have to go deep into the detail of what you’re making, and it frustrates my clients and prospective clients, because I’m asking questions they’ve never been asked before. It’s part of what we have to do these days, because the insurance markets are controlling who they want to write.”

His advice: Make sure you know and can identify the end use of at least the top 20% of castings produced at your foundry.

Take Action

Insurance brokers who invest in AFS with corporate membership and therefore understand foundries well, Meyer and Link said their respective companies possess resources that can help successful insurance outcomes, including, said Meyer, engineers who can identify risks for mitigation long before the insurance renewal deadline. 

“We have foundry experts who go in and evaluate the actual property risk and are able to consult with the foundries and say, ‘Here’s how you should do some things that are cost effective,’” Meyer said. “Because it’s all about trying to make yourself more attractive. And, hey, if you can spend 15 grand to save 400 grand, most people will do that every day of the week, right? So, it’s just having expertise; people with specific foundry experience to go in and work with the clients to improve their overall risk profiles.”

Navigating the hard insurance market won’t be your grandfather’s one-and-done, just-sign-here annual event anymore. Now and going forward, it’s likely to remain a process of updating, modernizing, reinvesting, and continuous monitoring of EHS issues, according to Link. Foundries must take ownership of their own risks and utilize their internal engineering prowess as well as the services available from their broker.

“It’s a hard market, so it’s really easy for people to want to make a change for the sake of change,” Link said. “But doing something different is not the same as doing something right. So make sure you’re doing something with a purpose and a long-term plan as opposed to a just a knee-jerk reaction.”     

Click here to view the article in the digital edition of the May 2021 Modern Casting.