Crystallisation of market leaders The Brumadinho disaster in January 2019 unquestionably served as a trigger for insurers to determine their underwriting position in respect to mining and, while the focus on Tailings Storage Facilities (TSFs) continues to grow, the recalibration of market appetite has led to the emergence of a ‘lead – follow’ dynamic within the market. This of course has been exacerbated by the onset of the COVID-19 pandemic.
This is coincidentally reminiscent of the ‘lead – follow’ initiative that Lloyd’s announced last year insofar as certain carriers are investing in specialist engineering resources that enables them to adopt lead positions on programmes whereas other carriers are approaching mining risks on the understanding that they are following a recognised lead that has undertaken the necessary risk due diligence prior to quoting. The impact of coal exposure Whereas TSFs have dominated the spotlight in terms of insurer requirements recently, the market position on coal has continued to evolve and the extent of an Insured’s coal-related operations is becoming an increasingly dominating factor in determining whether insurers will consider providing cover. This is particularly pertinent for non-Lloyd’s markets, who are the most likely to apply coal-related criteria to their underwriting guidelines or refuse to write coal-related risks altogether.
Insurers who can continue to write coal exposures are often unwilling to increase their exposure to coal further by writing new risks and will only consider renewing existing policies. In addition, there is a much greater emphasis on understanding buyers’ ESG strategies and as such a forward thinking and well-considered approach to ESG often now forms part of the prerequisites for insurers.
Trend for reduced line sizes As the pressure of market contraction and reduced capacity deployment takes effect, we expect that most - if not all - mining programmes with significant limits will likely face a substantial challenge when it comes to maintaining existing capacity.
The impact of this for buyers is varied as the expense to replace any existing capacity can sometimes come at a much higher cost than the existing pricing. Consequently, some buyers have found themselves at an unfortunate predisposition to price volatility where their primary or lead insurers are seeking to cut back line sizes before the renewal process has even begun. It is therefore increasingly important for buyers to ensure that relationships with key insurers are carefully nurtured, thereby maximising the chances of any necessary rate correction and/or wording restrictions being introduced over a longer period. That being said, the benefit of cultivating key relationships with specific lead markets needs to be balanced with the disadvantages of not sufficiently diversifying the insurance panel, as a failure to do so can leave buyers exposed to a significant change in underwriting approach from a single insurer.
Market capacity While in theory the total capacity available for mining may be close to US$1 billion, in reality the largest limits purchased (or even purchasable) are often significantly lower. This delta is caused by a variety of underwriting considerations, including insurers’ unwillingness to deploy their maximum theoretical capacity, minimum and/or preferred attachment points and a lack of appetite for specific aspects of the coverage requirements.
In addition to this, capacity deployment can vary significantly on a risk by risk basis according to multiple underwriting factors such as the location of the risk, extent of coal exposure, construction method of any TSFs and, of course, the loss record. Another important variable is whether the risk is existing or new business. Underwriters are treading even more cautiously when it comes to putting new mining risks on the books and consequently the deployment of maximum line sizes is reserved almost exclusively for well-perceived longstanding renewals.
Continued focus on TSFs In conjunction with the hardening conditions in the context of the broader International Liability market, the approach from underwriters to mining risks continues to be increasingly technical with a major focus remaining on TSFs. In addition to the usual elements of a mining underwriting submission, underwriters now expect to receive recently undertaken third party Dam Safety Inspection and Dam Safety Review reports per TSF, as well as specific details about their construction and a host of other characteristics. These include conformity to design standards, frequency of inspections and – importantly – details of any outstanding maintenance and/or recommendations. Whilst the requirement for detailed TSF information is not a new development within the past year per se, the requirement for insurers to be in receipt of such information in order to provide cover has without doubt become stricter as underwriters operate under pressure from management to walk away from risks where such information is unavailable.
A vertical perception of risk A key component of the challenging market environment is the perception of mining risks as presenting a much greater ‘vertical’ exposure than in prior years (due to the increased chance of incurring a loss that breaches the entire programme “tower” comparative to other sectors). As a result, excess layers are often being subjected to a greater rate increase than primary layers and this makes for a much larger - and harder to predict - potential range for rate change. Like the market’s position regarding underwriting information, insurers are increasingly only participating on risks where they consider the price to be right. The effect of this is two-fold, as it not only leaves renewal pricing vulnerable to opportunistic pricing, but it also reinforces the impact of capacity scarcity for capacity-impacted programmes. In addition to pricing, much greater attention is also being paid to policy coverage and, depending on the premium adequacy of the risk, insurers may look to strike out soft market coverage extensions in a bid to achieve rate adequacy.
In order to mitigate the impact of all the above considerations, there are number of actions buyers can take:
Matt Clissitt is Deputy Head of Liability, Natural Resources, Willis Towers Watson London. Matthew.Clissitt@WillisTowersWatson.com
Brumadinho - the straw that broke the camel’s back The North American Casualty market for miners started to undergo lasting change shortly after January 25, 2019, largely as a result of the tailings dam failure in Brumadinho, Brazil, which killed over 250 people and caused substantial environmental damage.
Up to that point, Casualty insurers traditionally provided coverage for Sudden and Accidental pollution events under their respective Casualty policies, which included coverage for unforeseen tailings dam failures. Historically, requests for underwriting information, as they pertain to this substantial exposure, were rather limited. Brumadinho was a defining moment, not just for the mining industry as a whole but also for Casualty insurers supporting this sector; it finally opened insurers’ eyes to the true risk they have assumed all along without asking too many questions. This particular dam failure, which impacted several insurers in the market, caused a change in underwriting guidelines, adjusted risk appetite and impacted pricing. Some insurers chose to exit the mining space completely, while others chose to provide curtailed coverage going forward.
2019 - a time for correction For years, insurers had complained about a lack of profitability in this space; rates were so far below where they should have been technically that gross written premiums were never enough to cover losses. Despite this, competition was still sufficiently vibrant to prevent rating increases to the buyers’ obvious benefit. However, Brumadinho has provided the wake-up call needed to made Casualty insurers realise that they had to adjust their overall underwriting approach towards mining in order to stay in business. This process took place throughout 2019, when insurers took a very close look at their respective book of business, scrutinizing every program and its associated risk. We witnessed premium increases throughout last year, with no miner remaining unaffected by this changing market place. Underwriting requirements and requests for information increased; in particular, miners are now expected to be fully transparent as far as their tailings exposures are concerned.
Greater focus on underwriting information At present, the vast majority of insurers are demanding to see copies of independent third-party dam safety inspection reports, including an explanation as to what the insured plans to do regarding any identified recommendations; some insurers will request copies of flood inundation studies if available. Those insureds who prefer not to share these reports with the insurers will have very limited options to obtain Sudden and Accidental Pollution coverage for their tailings dams.
To make matters worse…2020 ushers in COVID-19 Now, we have to report that overall market conditions have gone from bad to worse, with the arrival of COVID-19 and the resultant global pandemic which is deemed to be the largest single catastrophe to ever impact the Property & Casualty sector. While the market was already in a hardening state prior to COVID-19, the pandemic has caused a shift to an actual hard market - something we have not seen since the 1980s. Most lines of insurance have been impacted by the hard market, with premiums rising across the board; sadly, Casualty is one of the lines most impacted. Combining a challenged line of insurance with an equally challenging class of business, such as mining, leads to some very challenging renewal negotiations and outcomes, leaving many buyers in a state of disbelief. North American insurer responses Casualty insurers across North America are taking a very similar approach towards their mining book of business. Underwriting guidelines are now very much centralized and aligned across the region, with minor exceptions. The North American pool of insurers willing to lead or participate in a complex and international mining risk is limited, especially when there is a need to issue locally admitted policies overseas. The pool shrinks even further for buyers with thermal coal exposures. Due to their international networks, insurers such as AIG, Allianz, AXA XL, Chubb and Zurich are potential lead options. While these insurers have the network capabilities and generally support mining placements, they vary in coverage scope and risk appetite and may not always offer a primary or lead option.
Large programs require international placements In reality, large mining Casualty programs will require access to the international market place beyond North American insurers. At this point, we do not foresee any new market entrants until conditions have stabilized, at which point the market will become an interesting investment opportunity for available capital yet again. Changes to appetite While we still saw $25m excess layer blocks in 2019, insurers are now cutting down capacity to $10m or even $5m per layer and program. Some insures may still deploy a $25m limit but will do so through ventilation across a program with enough buffer capacity inbetween. Working with these smaller blocks requires brokers to secure more insurer participants and therefore increases the timespan to complete a program. Review of attachment points In addition to cutting capacity, insurers will also carefully review attachment points on any given risk, often preferring excess positions above $50m or more in underlying capacity, which reduces the insurer pool for miners buying lower limits. Some Umbrella insurers are insisting on a minimum $5m attachment on Automobile coverage; this may lead to a potential gap in limit, as many primary Automobile insurers only offer a $2m limit. We are also seeing a push for higher deductibles, although there is no consistency on this across the North American Casualty market.
No one is exempt… These changes are currently taking place regardless of long-standing relationships between buyers and insurers. Even buyers who have not experienced recent claims are impacted by these changes in appetite. Changes to coverage scope Despite the current hard market conditions, the actual coverage provided has not been impacted as much as one might imagine; of course, this is always subject to future change. That being said, COVID-19 has led to the widespread deployment of Communicable Disease and Health Hazard exclusions across the board. While some insurers may be open to negotiations in this regard, others will enforce these exclusions outright. As the pandemic continues and COVID-19 related claims probably rise, we may see this room for negotiation shrink to zero. Some miners, whose tailings dams are identified as problematic or those who do not want to disclose requested tailings data, may find themselves without coverage for Sudden and Accidental Pollution events related to tailings dam failures. Other buyers will have gaps in coverage throughout their casualty program as insurers are taking different approaches rather than following an underlying coverage lead.
Rating increases In observing rate changes, we must differentiate between the primary Casualty space and the Umbrella/Excess space. In general, we have not seen any insurer enforce a blanket rate change across the mining portfolio; every increase appears to be applied on a case by case basis, driven by the perceived client risk profile. Rates are driven by individual exposure, as well as past and recent losses sustained by the buyer:
What to expect going forward: making a battleplan We expect current market conditions to remain challenging for the next 24-36 months. Every renewal negotiation will take extra time and effort and will be challenging for all parties involved. Maintaining existing coverage limits, deductibles and coverage scope will be the main task on hand.
Buyers are advised to fully engage in the renewal process, following these guidelines for best renewal outcomes under very challenging market conditions:
Katrin Hayduk is SVP, Head of Mining & Metals – Canada, Willis Towers Watson Toronto. Kat.Hayduk@willistowerswatson.com
Stephanie Wong is Senior Vice President, Canadian Property & Casualty Broking Leader, Willis Towers Watson Toronto. stephanie.wong@willistowerswatson.com
Fred Smith IV, is SVP, Head of Mining & Metals – USA, Willis Towers Watson Nashville. Fred.SmithIV@WillisTowersWatson.com
Environmental Impairment Liability (EIL) coverage and capacity continues to evolve as a result of buyers’ heightened awareness of increased exposures, legal liability and regulatory risk around the world.
In Europe there is also a clear trend towards the introduction of mandatory financial security (where an environmental insurance policy is the main solution) for activities involving waste, environmental permits and Seveso III facilities beyond that required by EU legislation. This trend shows no signs of abating or reversing; rather, its continued increase now appears to be inevitable. Particularly for mining risks, London is the main centre for underwriting EIL risks outside of the USA, with developing markets emerging in Australia and the EU supporting our ‘rest of world’ placements.
Insurers have risk appetite for:
✔ Metalliferous and non-metalliferous mines ✔ Underground and open cast mines ✔ Dissolution mines e.g. potash, uranium ✔ Mines operated by established mining companies with strong CSR principles ✔ Tailings Management Facilities (TMFs) constructed in accordance with internationally recognised standards, e.g. ICOLD, CDA, ANCOLD
but not for:
✖ Coal mining and associated infrastructure. (unless it’s a fairly minor part of the overall risk) ✖ TMFs in areas of high seismic activity ✖ Upstream construction TMFs
Useful additional coverage As the General/Public Liability market for Mining risks hardens and contracts, the EIL market is being used increasingly to provide additional Sudden & Accidental (S&A), unexpected and unintended cover at the top end of Mining Liability programmes or to infill gaps mid-programme.
EIL markets can offer additional S&A capacity on a Claims Made basis which is often the main reason why high limits are purchased. Dependent on territory and exposure, there may be $20–150 million+ capacity available for Mining (considerably lower than other less risky industries, but no less valuable nonetheless). Locking in long term Environmental programmes Hard market conditions in standard lines of insurance have also had both positive and negative effects on the EIL market. As demand and application for Environmental products continues to grow, many clients facing hardening conditions in the Property and Excess Casualty markets are strategically locking in multi-year operational environmental programs where available (2–3 years) to mitigate future market uncertainty. Stretching the aggregate policy limit across a longer policy period is proving a popular and cost-effective way to build an EIL programme. While longer policy term programmes (5+ years) are available for transactional business such as mergers and acquisitions, insurers are less likely to offer them based on regulatory uncertainty surrounding emerging risks. Furthermore, pricing increases on long term programmes also means that some buyers are less likely to purchase them when they are offered. Effective deal facilitators Having said that, these transactional programmes are extremely effective deal facilitators, unblocking impasses in sales negotiations where the seller wants a clean exit from an environmentally-distressed business but where the buyer is reluctant to take on responsibility for unknown historic risks that are difficult to quantify financially. Venture capitalists, banks and lawyers increasingly see the deals available in the EIL market as a valuable tool to ensure that a deal moves ahead.
Jo Newson is Director, Environmental Practice, Willis Towers Watson London. jo.Newson@WillisTowersWatson.com
