Posted in News on 23 Aug 2022
Can new tech help the London market see spontaneous combustion risk in a new light?
Fire risk in the commercial insurance world typically comes from sources we all recognise. Faulty equipment, human error, natural catastrophes, the list goes on. Nuts spontaneously combusting, however, isn’t exactly a usual suspect. But for nut processors in the US, it’s a very common and costly fire risk.
Nuts like peanuts, walnuts and pistachios are low in water content and high in fats and oils. When large amounts of these oily foods go into storage, they start to heat up as they decompose. This heat can get trapped within the storage, and if it reacts with enough oxygen, it causes the nuts to reach “auto-ignition point”.(1)
London Market underwriters have seen various spontaneous combustion claims from writing agricultural business. The accumulation of fire losses impacting the London market has meant capacity in recent years has been hard to come by for this particular interest. Insurers have been very selective about the risks they write with some declining this class of business as a whole. But there’s proof to say these risks can be profitable if underwriters utilise sub-limits and insureds have the correct protections in place.
Clients are shifting their risk mitigation strategy and embracing the benefits of new tech. Which means insurers are starting to entertain this interest once again, but are preferring to protect themselves with smaller lines on much larger overall limits.
Capacity is available to tech-savvy clients who collaborate
At Alesco, we’ve been helping clients collaborate with insurers, putting them in a place that shows they’re ready and willing to implement underwriter suggestions. To facilitate that process, we make sure we’ve got a thorough picture of every stage of a client’s operations – from the moment the nuts arrive, right up to when they’re ready to be shipped out to retailers.
By getting on the ground with the client, we can run a comprehensive risk assessment and help them get ahead of the hazards insurers are most concerned with. For instance, the first and most essential control measure for these businesses is to monitor the temperature of their silos and reduce it when necessary. This has traditionally been a manual task, but insurers look at businesses more favourably if they’ve switched over to automated technology.
It is the nut shells that can present the greatest risk at these facilities. Insureds will often store them as a bi-product to maybe sell on as animal feed, so insurers will want to know how long high-risk products like these are kept on site. The quicker they can be distributed and moved on, the better the risk.
Insurers want a detailed view of the business
We recently arranged a US shelling site visit for insurers to get a close-up tour of these facilities, so they can get an accurate understanding of the risk involved and how the clients operate.
Before insurers consider an insured’s risk they want to make sure the fundamentals are in place. This means being fully informed on the Construction, Occupation, Protection and Exposure (COPE) measures at the location.
Is the facility a modern state-of-the-art unit or has it been operating for many years? What parts of the risks need a controlled environment? Does the insured have the correct temperature-controlled procedures in place? Have they invested in technology that alerts them when silos are overheating? Are there smoke alarms and sprinklers installed at the location?
But when site visits are not possible, Google Maps does a good job of assessing key hazards remotely. The majority of the time our brokers can identify the storage risk from its aerial map view, such as warehouse distribution or silo exposure. They can also get an accurate view of how spaced out buildings are from one another – when there’s a good distance between the properties in the facility, the business has a better chance of containing a fire and stopping it from spreading. Good separation information will demonstrate a lower probable maximum loss for insurers.
Policies are tighter than they once were
Even though insurers are showing more flexibility around coverage, London market underwriters are asking for certain policy demands that make this risk more sustainable and appealing.
Past losses show that even minor spontaneous combustion events usually result in a claim due to the time it takes to separate the hot spot from the rest of the stock. So underwriters are asking for clients to accept higher deductibles and to have some skin in the game.
Previously the spontaneous combustion deductible was not separated out from the general stock deductible and was therefore set around the USD 25,000 mark. However, this high-risk peril now needs its own deductible, which can get up to USD 250,000 when looking at large overall limits.
Underwriters are also excluding losses resulting from aflatoxin contamination. Aflotoxin is another inherent risk in the nut which can cause mould to spread through the storage silos. Brazil nuts, walnuts, peanuts and cashews are among the most susceptible. (2)
Technology holds the key to future market growth
The current market is testimony to the nut industry’s success over the past couple of years. Despite the pandemic, producers kept operations moving and the need for their product has never been greater.
With business booming, clients have had to take on more storage facilities and increase their risk exposure in what was seen as a limited insurance market.
We’re convinced tech innovation is the key to unlocking a more competitive market. We look forward to working with clients and insurers on exploring which new tech solutions can keep spontaneous combustion events down and attract more underwriters back to the table.
Associate Director, Marine & Cargo