The costly & complex nature of food processing and agri losses
Ageing equipment and lack of proper maintenance are just a few factors driving large losses in this space.
Accidents or fires at food processing plants in the United States can lead to major insured losses and claims of this nature are on the rise.
The sheer scale of the U.S. food industry (according to USDA there are over 36,000 food processing plants in the United States) and the complex supply chains involved, mean that the repercussions can be huge. Losses of this nature can cost multiples of millions and affect many different stakeholders, including the American public (particularly so given that US food prices have risen 10.4% annually, according to recent reports).
What’s behind the apparent increase in these kinds of losses/?
Ageing equipment, design issues and lack of proper maintenance are often key factors in these losses.
The huge food processing industrial revolution started in the late 1950s, meaning that many of America’s food processing plants now operate with aged infrastructure. As the industry has modernized and technologies advanced, systems have not been updated adequately, with operators adding new parts or components to existing infrastructure instead of building new plant layouts that are fit for the demands of the modern industry.
Vegetables and animal/poultry products have very tight windows of harvesting to ensure the fresh, high-quality product consumers have come accustomed to. These products have limited shelf lives and therefore it can be difficult (and costly) to implement the necessary shutdowns to bring processing plants up to date. Such pressures are only intensified by the ever-increasing food demand. Living things, unlike widgets, can’t be stored and need to be processed.
These factors can greatly increase fire risk, hampering both the effectiveness of fire suppression systems as well as the efforts of firefighting departments. For example, many plants are hundreds of feet deep and wide, making access very dangerous and often not possible. Moreover, the connecting hallways and doorways can create vacuums and air pressure issues which can, in turn, become flame tunnels.
Such issues are often exacerbated by human factors, with lack of personnel to keep up with the maintenance, and hazardous working conditions causing human error and poor judgement.
Why are these losses so complex and costly?
Supply chain complexities: There are multiple factors at play here, though one of the key challenges relates to supply chains, which are complex and multifaceted. The industry is largely made up of a conglomeration of companies eliminating the smaller farm and suppliers that can make changes much faster. These processing plants are very interconnected.
Many of the processing points are contingent on other processing plants for their raw materials, and some control such a huge part of the supply chain making the contingency on other suppliers very fragile. If one goes down, it can clog the entire system.
These complexities were exacerbated in recent years by the pandemic when the very long lead times on a lot of equipment coming from other parts of the world were at the mercy of the port authorities or waiting on a limited trucking system to get the material/equipment to site. This increased the extra expense and business income cost of these claims exponentially.
Technology: Technology, mechanics and in particular the interaction of electronics with mechanical equipment, are also key factors. The equipment in use is both costly and complex, with increased use of robotics, scanners, programmable controllers, thermal technology and so on.
Consumers want to be able to buy a dozen eggs and a cheeseburger for 99 cents, yet the efficiencies to be able to produce a product at such a low price are only possible through the gradual innovation and system automation that has developed over the last 70 years.
Yet, the bolt-on nature in which technology has evolved — updating, reprogramming and re-implementing existing processes, rather than starting over with a new system — raises challenges when a loss occurs. How does a company that is in need of repair and updated equipment shut down without losing market share during that transition?
Regulation: Food producers and manufacturers operate within a strict and costly regulatory framework that is ever evolving. This is, of course, important from a consumer perspective yet can cause issues when losses occur. Plants that were built 50 years ago, in a different regulatory regime, need to be brought in line with modern day Environmental Protection Agency codes and other relevant regulations when it comes to repair and remediation.
The impact on costs is notable and the fast-moving nature of regulation means that the picture is ever changing, at a federal, state and local level. This can be a challenge from a loss adjusting perspective. For example, at McLarens we are handling a claim where an air quality filtering system, which could cost upwards of $20 million, may be required. To ascertain this our team needs to monitor a month’s worth of air quality samples, all of which makes reserving very difficult (and difficult to see if it will even be required).
How can the insurance industry better manage these risk/claims?
Central to effective risk assessment is knowledge sharing between adjusters, brokers and underwriters to ensure that all parties fully understand the risks, and that carriers are armed with accurate information. As with any insurance product, competent risk assessment is essential in the calculation of premium.
Key to this is the role of a specialist loss adjusting team. Agriculture is now such a technical area and it’s crucial that claims professionals have the relevant technical skill, experience and market insight to bring to these complex issues. There are different ways of approaching this, of course.
Also, hiring the right experts is key when it comes to controlling expenses and claim indemnity cost, but it’s also important to understand how these systems work and to be able to explain to all stakeholders the issues and exposures of a claim.
Trent Gillette is U.S. agriculture director at McLarens, and hold numerous insurance certifications and a degree in industrial electronics. Trent grew up in the Midwest in a farming family and community and still owns and operates a family farm. He has over three decades of experience working in the agriculture industry.
Related: