By Mark Rushton, Editor, Pulp & Paper International Magazine, RISI
BRUSSELS,
Dec. 5, 2011
(RISI) -
Kevin Bradshaw, VP and operations manager, and Dave Johnson, European branch manager, of commercial and industrial property insurer FM Global's Forest Products Operations, both exude a deep affection for the pulp and paper industry. They talk about the industry with palpable concern and zeal, and for good reason - both have had decades of experience as engineers going into the very heart of the industry and looking out for the danger zones.
And important work it is. They both work for an insurance company that looks after the sharp end of the business, the one that often gets hit by natural disasters, or just as prolifically, human error, massive fires and major mechanical breakdowns. In a sentence; it's these guys you call before all hell breaks loose at the mill.
FM Global has a long history of association with the pulp and paper industry. The industry insurer - which has more than 130 clients in its Forest Products portfolio - is a "mutual" insurance company. The word ‘mutual' actually holds a multitude of associations and definitions as you dig deeper into the company's history. But "mutual" in an insurance sense actually means that the company is owned by its clients, in the case of the Forest Products Operations, numerous pulp and paper companies who are insured by FM Global, are actually its owners as well.
Mutual well being
The idea of mutuals has been around for a while, in fact in the case of FM Global it was first rolled out 176 years ago. The beginnings of the company were all down to one man, Zachariah Allen, a canny textile mill owner in New England North America. Bradshaw explains: "Allen was quite obviously a conscientious mill owner who had gone out of his way to make sure that every precaution possible was taken against any disaster that might take place. This meant that he had easily accessible fire buckets around the mill as well as other procedures in place to deal with an emergency as soon as it happened.
"Allen went to his insurance company at the time and requested a reduced premium as he had all these measures in place which meant that he was much less of a risk that most other mills," continues Bradshaw. "His insurance company refused, and Allen decided to part company and set up his own insurance firm, involving a membership of like minded mill owners".
Allen had watched other mills catch on fire over the years, and he had learned from experience just how expensive, and more importantly, disruptive to production such disasters could be. So he insisted that the mill owners who joined his mutual did their utmost to follow good practice, share knowledge, and put in loss prevention measures against fire and flood to protect their business operations.
The mutual insurance business grew rapidly in all industries in the US over the years, to the point where at one time there were dozens of them across the country. And it was becoming clear, the Factory Mutuals as they were called were proving to be a real success when comparing results with more traditional insurers who did not focus on loss prevention engineering methods, and shared knowledge.
"More than 175 years later," says Bradshaw, "and with a lot of experience under our belt, FM Global's Forest Products Operation's ethos is still the same; to implement the very best in good practice, to share engineering knowledge and to help clients protect their property against damage wherever we can, is central to our being."
The company has seen success in North America with more than 70%of the pulp and paper companies being insured with FM Global. In 2004 it was decided that this success could be replicated elsewhere, and a European office was initially headquartered in Stockholm, Sweden, and has now been relocated to Windsor near London in the UK. Bradshaw says: "Now, about 35% of our overall income comes from European, Australasian and South American companies."
Burning, exploding, flooding and crashing
So, FM Global is big in pulp and paper, but what does it actually do that sets it apart from insurers who take an actuarial approach to insurance rather than an engineering focus.
Dave Johnson, who heads up the European Forest Products Operation says: "Our engineers are situated all over the globe, and provide consulting services to the pulp and paper industry. These employees spend 50% of their time inside clients' facilities alongside pulp and paper maintenance people looking for things that might burn, explode, flood, or breakdown, as well as looking at maintenance procedures.
"Our engineers - who are steeped in experience from other mills or facilities - will then identify potential property hazards and point them out to managers at mills, and then work out how to minimize, or totally negate the risk," adds Johnson.
Having an experienced team of engineers goes a long way to give the staff at clients' sites confidence in working on projects together. Johnson explains: " When we send an engineer to a mill - to look at a recovery boiler for example - after just a couple of hours the mill personnel begin to realize that our people really know what they are talking about, and before long, knowledge is being shared, and a mutual regard is being developed."
After the assessment is made at the mill, which can take week or more, a written risk report with recommendations is made identifying potential exposures, and what to do about them. This report will include benchmarking to compare similar mills. This is presented to the senior management, and is laid out in terms of priority, of what is the most potentially hazardous area of the mill.
"My team in Europe then sits down with the corporate clients, with the risk reports for all the mills in front of us, and we discuss with them what are the most important business areas for them, which then helps us prioritize any work we need to recommend - so a client can direct resources to the most critical exposures first. If you are going to spend a Euro to protect your business operations, spend it in the most important place first."
Ultimately, the goal is to have a mill where most, if not all, the recommendations are implemented and the mill becomes highly protected". "The upshot of this is that losses are prevented or minimized which can result in a better bottom line for a client over time. In fact, we find that our insurance policy sells itself when a client really understands the full concept of what we are looking to jointly achieve together through risk management," adds Bradshaw.
The most costly events
So what are those property risks that affect the pulp and paper industry the most? Bradshaw says: "The most frequent losses are mechanical breakdowns but the most costly risk that most affects this industry is flooding. Pulp and paper mills are almost always by rivers, and rivers flood. With our help, our clients have made much effort related to protecting their mills from flood risk."
FM Global has closely examined the statistics on flooding at mills and has found that if there were no precautions in place around an area that flooded, then the loss could cost an average of four times more than a mill that had put protective measures in place.
"We are also noticing that fires in woodyards and recovered paper storage at mills are on the increase in frequency and severity," continues Bradshaw. "We are particularly working closely with the industry on this one and trying to be creative in finding better ways to stop those fires from breaking out."
New areas of mills FM Global is looking at include the long term safety and efficiency of "lights out warehousing" which is becoming more and more popular with the larger paper companies. Johnson says: "Robotic warehousing and how to protect them is becoming an interesting area of research for us. For instance, once you stack paper at those heights what are the risk implications for fire, and how do we go about protecting them? We have a research campus in the US that specializes in just such experiments and research - and we are searching for the scientific answers."
Interestingly FM Global reports that the human element, involving errors and improper response is a contributor to up to 70% of the losses that occur, so the company is spending a lot of time on client training in the areas of heavy machinery maintenance, emergency procedures and fire protection training. "We spend days at mills looking to improve how things are done by operators. Our expertise is protecting the property and equipment, but a byproduct of that focus is the benefits it brings to people and people safety. There is a real synergy there," adds Johnson.
Another point of interest for FM Global is the really big cataclysmic events, like natural catastrophes.
"The year 2010 was considered a very heavy "NATCAT" year with 14 very large events, including earthquakes, tornadoes and volcanoes," says Bradshaw. "Already in 2011, NATCATS are up to 18 in number, mainly because of the earthquakes in Japan and New Zealand, tornadoes that hit the US in the middle of the year, and floods inundating mills in the U.S., Spain, Brazil and Thailand."
But Bradshaw is keen not to be seen as scaremongering, "The main reason for the increase in these NATCATs often has to do with the movement to and concentration of population in natural catastrophe-exposed areas, and the simple fact that buildings and equipment are that much more sophisticated now, and cost a lot more to replace.
"If you do happen to have business property located in a vulnerable area, there are things you can do to prevent loss in terms of physical protection and a good emergency response plan to drastically lower your risk. These are the things that our engineers are constantly looking at and our clients are constantly implementing," continues Bradshaw.
Every eventuality
Despite best efforts though, fires, floods, earthquakes and major breakdowns do happen making insurance necessary. FM Global prides itself on the third-party validation it receives as being one of the best companies for claims-paying ability and responsiveness in the business. Johnson says: "We probably have the broadest insurance coverage for pulp and paper companies in the industry because our policyholder-owners have helped us develop it."
Johnson continues: "FM Global and its clients have a vested interest in the mill, from our engineers working with plant maintenance and management, to our insurance teams working with corporate risk managers. We want our client-owners to push pulp and paper out the door uninterrupted. With that focus, it's smart business to dedicate time and resources to preventing losses".
"We do not look backwards when we are doing our insurance assessments. We are always looking into the present and the future and what the client company needs going forward," concludes Bradshaw. "Most of our forest products clients have been with us for more than 20 years and we feel that we have a mutually beneficial relationship with them. We see ourselves as trusted advisors to pulp and paper companies, following behind as they carry out their grand visions, and us supporting them to help ensure they are covered for the unexpected".
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