Mining insurance

A Russian perspective

Mining insurance :
a Russian perspective

Introduction: a background to the Russian mining insurance market
For the last two decades the Russian (re)insurance market has been developing constantly. Today most of Russia’s heavy industrial risks are (re)insured in the international insurance market; during this time they have already faced different market trends, from highly competitive terms through to serious rate increases following global insurance losses and specific Russian loss activity. The oil and gas, metals and power generation industries in Russia have a long history in the insurance market and now form a significant portion of many European insurers’ portfolios.Insurance a relatively late proposition for Russia’s minersFor Russian miners, insurance has been a relative latecomer as a business proposition. Despite Russia’s significant contribution to global metal and diamond supplies, during the 10 years up to 2016 there was only one dedicated Russian mining insurance programme placedin the international insurance market. For most Russian miners, even at the highest level of management, insurance has not been considered as a realistic proposition to respond to the key exposures of their mining operations. Together with this pessimism, factors such as the limited cover available in the international mining market and the high pricing for the cover on offer has compounded the issue.However, a combination of factors has led to an increased interest from Russian miners for insurance solutions during the last few years. Why?

Reasons for renewed interest

Commodity export producers have flourished since the Rouble currency drop in 2014-2015. During the first years of the devaluation, the margin effect was astonishing; even in 2018 total cash costs in almost every type of ore production and processing remain at minimum levels compared to the rest of the world. Interest in securing these high margins has resulted in the consideration of Business Interruption insurance.

Increased severity of events (or maybe as reported by the media). Several large catastrophic events across the globe have triggered a renewed interest in insurance, specifically for underground mines, open-pits and tailings dams. Some large events have also occurred in Russia and forced the management of several companies to start implementing risk-based scenario analyses for their operations, calculating the potential effect on their business. This has paved the way for the consideration of risk transfer solutions such as insurance.

Softening of market conditions. Historically what Russian miners consider as their key exposures may not have been insurable in the mining insurance market. However new coverage options are now becoming available, with higher limits, new types of extensions, and other tailor-made solutions. Overall market capacity for special risks is rising and underwriters are offering attractive terms for new and high-profile clients with good risk-management.

Industry education and communication. Financial executives and risk managers share their experience and knowledge with other mining companies and tend to implement best market practices for their operations. New insurance programmes and covers have raised interest levels within the Russian mining peer group. Comparisons of technical practices with global industry peers are also well received by Russian miners and the international insurance market is a good facilitator for such knowledge sharing.

The Willis CIS team has spent years trying to persuade some key industry players to look at comprehensive Property Damage and Business Interruption insurance programs as a viable corporate solution for risk transfer.Higher margin players showing the most interestThose showing most interest are definitely companies with the highest margins. Nickel, gold and diamond producers so far are the only owners of such insurance programmes with specific mining covers insured in the international insurance market. Recent placements support the fact that it is becoming possible to raise very specific and dedicated types of cover for Russian clients and we definitely expect more and more producers of gold, copper, coal, potash and other minerals to consider high quality insurance.

Developing the right underwriting information for the international markets

During the last 3-4 years the Willis CIS team has been constantly negotiating terms and conditions with major market underwriters for new and complex insurance programmes. These negotiations were generally dedicated to very specific aspects of cover which are considered key risks for buyers as well as for sellers - permanent
underground workings, pit-walls, tailing-dams and flooding.With full appreciation and respect for the insurance market’s initial concerns, a fair and balanced solution has been found and implemented. To ensure underwriters are comfortable with the risk, it is generally understood that significant engineering involvement, explanation and dialogue are required.Engineering keyEvery mining programme has unique clauses and terms which represent specifics of the company and its operations; the level of dependents on engineering information are such that they can only be compared to offshore upstream insurances. We have also seen that insurance markets respond positively to the use of special mining consultants and experts for particular areas of interest (for example, geotechnical engineers for mine and tailings designs).

For Russian mining insurance, representatives from several engineering backgrounds support our programs and the combination of all of these allow for the achievement of the best results:

Insurance company engineers

Broker engineers

Independent market engineers (Hawcroft, Mensor)

Mining experts (SRK, design and geological institutes)

We have found it very effective for Willis CIS engineers to accompany global technical experts in Russia – our engineers have unique cultural knowledge, and a full understanding of Russian practices for the handling of industrial risks.Good submissions build trustHigh quality technical information and data availability is definitely the first and most important step for effective and trustful cooperation with insurers. Submissions not only include descriptions, plans and projects but also sometimes sensitive internal reports and performance analysis. Bearing in mind the complexity of assets, underwriters are unable to draw a full picture based on partial information. The more transparent and extensive the information provided before inception, the more reliable the response from insurers tend to be during any future claim settlement.

Coverage case study – open pit mine earthworks coverage

Underground mines and open pits are constantly developing areas, subject to redesign and adjustments as the life of a mine progresses. For insurers, the adequacy of operational procedures and the company’s reaction to emergency situations is the best measure of the quality of a risk.Insurer reluctance on open pits surprises Russian minersMuch to the surprise of Russian miners enquiring about insurance, specialist mining underwriters are hesitant to provide cover for the earthworks of open pits themselves (pit walls and haul roads). Historically Business Interruption from a mine collapse would only be covered if mining machinery and equipment is damaged in the process. With this type of cover, any collapse which impairs mine access could be covered, regardless of whether or not there was damage to equipment. In some cases, insurers feel more exposed to this type of event than they do for underground mines (permanent mine workings); this is due to the nature of open pits and the complexities associated with risk quantification and claims settlement.

Open pit challengesIssues that should be considered and given special attention when looking at pit wall cover include:

Open pits are constantly evolving - an inherent hazard is rock/earth movement in the open pit mines

Although separate events may be unpredictable, in general it is expected that cracks will develop in mine workings due to geological conditions, weather etc.

With the use of modern radar systems, geo-monitoring specialists are usually aware of a collapse before it actually occurs

Disclosure of crack monitoring and recording is crucially important in areas where a collapse is expected - predictive analytic methods should be used for identifying potentially dangerous cracks

Quality and quantity of access ramps - multiple access ramps allow for mitigation of Business Interruption losses should a collapse occur

Getting the wording rightIt is very important to define this type of coverage properly in the insurance contract wording, and to take care, for example, where some traditional extensions – which often have small monetary limits – could arguably apply to a pit collapse. It is important that coverage for Debris Removal and Landslide are clearly segregated from the cover for a pit collapse event. Our professional wordings experts are careful to consider such situations when drafting a tailor- made wording for a particular client’s demands.Responding to the timeframe challenge - a new approachNevertheless, according to our own experience and market intelligence, even though an individual pit collapse event may have been finally settled by insurers, miners have often been unhappy with the time taken to adjust such losses. Our team, together with a global mining insurance leader, is currently considering a new approach by implementing a structured risk solution to remove (or significantly reduce) claims complications. This may be a non-damage parametric cover, whereby loss of revenue is covered automatically by the insurance policy once certain parameters are triggered – for example, the moment a collapse is detected on radar systems could be the trigger for an insurance payout. Time will tell if this new solution becomes a realistic proposition for the Russian mining industry.

Alexey Veremenko is the Head of Power Generation and Engineering Risks Department at Willis CIS Insurance Brokers LLC, Moscow