Aluminium losses a 'cold' topic for insurers

Aluminium losses:
a 'cold' topic for insurers

Softening market coincides with record year for aluminium losses
For the last ten years favourable insurance market conditions, combined with consecutively profitable years for (re)insurers, have seen premium rates for the aluminium sector reduce consistently. The trend has also affected coverages, with a gradual movement towards higher limits for key risks such as service interruption and pot freeze. In 2017 (re)insurers' long term strategies were subjected to a stress-test; the table in Figure 1 below gives an indication of a severe spike in global loss activity for this sector. Inevitably, specific sectors experience bad years and while it is too early to predict whether the 2017 activity was an anomaly, loss activity emanating from aluminium in 2018 has been more benign.

Fig 1 – aluminium processing loss history 2007 to 2017 inclusive

Source: Willis Towers Watson

Unusual spike in Pot Freeze and Power Interruption losses
Figure 1 highlights that the most common cause of loss during 2017 was pot freeze and power interruption (some data indicated that the cause of loss was 'power interruption' or 'pot freeze'. However, the cause for pot freeze is invariably linked to an interruption to the power source or failure with power interconnection equipment linking power generation assets with smelting assets).A power interruption for an aluminium smelter can have the effect of solidifying the molten cryolite in the reduction cells within a matter of hours from the time of interruption. Business outage periods can be quite lengthy, as the solidified metal must be laboriously prised away, damaged cells repaired and preparations made for restarting.Whilst pot freeze has always been an issue for aluminium production, the events of 2017 raise the question of what may have changed to cause such large business interruption losses in the sector. We will summarise some key potential issues.Key issue 1 - need for improved process efficiency
What can we see has been done to improve business efficiencies and how does this affect risk?

Advances in technology, such as pot material and design aimed at increased amperage. This can improve process efficiency; however, in the event of a power interruption it may take a shorter period of time for molten metal to solidify due to a smaller amount of anodes and other materials which have less accumulated heat. This will become more common as the Soderberg cells are gradually replaced with pre-bake technology.

Automation of processes, including power regulation is improving efficiencies. However, this can cause complications when an unexpected situation occurs. In some cases, power network automation can have the effect of overloading and tripping surrounding systems following a breakdown. As for the smelting process, further complications arise when operators have to override systems to control an emergency.

Key issue 2 - redundancy integrated into plant designs/plants working at capacity

Modern plants are using fewer and longer pot lines, which can mean there is less mitigation capability should a pot freeze occur.

Power transmission systems are under significant pressure. As power gets closer to the plant, bottle-necks can appear with, for example, one pot line relying on one substation

Favourable market conditions and power costs have seen plants operating at capacity, which means there is little redundancy should an interruption occur

Risk mitigation measures
What action is being taken to mitigate these risks? Of course, aluminium producers are aware of these risks and companies are taking steps to address them. The following are among the measures we have seen:

Steps to ensure adequate power supplies, including installed redundancies within in-house power facilities and additional access to grid systems. Improvements to third party supply chains have also been made for fuel supply to power production assets.

Good compartmentalisation between key assets such as electrical sub-stations and pot line buildings.

Established procedures for handling emergency situations, business continuity planning, and the ability to restart frozen pots provided correct shutdown procedures are followed. In this respect a great deal has been learned from previous emergencies, since recent losses have indicated personnel actions have a significant impact on cell downtime.

Engaging with third party experts to reconfigure power supplies where necessary.

Installing redundancies in power distribution systems with good spares policies for key equipment such as rectifiers.

Whilst pot freeze has always been an issue for aluminium production, the events of 2017 beg the question of what may have changed to cause such large business interruption
losses in the sector.

Market reaction and the outlook for 2018
How are (re)insurers reacting to the 2017 loss experiences and what solutions are available to the aluminium industry?Over the last year we have seen a tightening of appetites for aluminium processing insurance, consisting of (re) insurers "shying" away; there have been some complete withdrawals, as well as some insurer movement from a "ground up" appetite to a high excess of loss position. These developments have been manifested in pressures on pricing and key coverages. Limits and deductibles for specific exposures such as pot freeze are also under significant scrutiny.Overcoming these pressures will require good engineering information and an application of lessons learned. Aluminium producers may have to increase self-retentions and, if this trend continues, it will lend itself to more structured forms of retention strategies such as the formation of captives. Willis Towers Watson has already been discussing captive solutions with some large producers; we have also been successful in developing structured facultative solutions for (re)insurers, particularly in the Lloyd's and London (re)insurance market, which have demonstrated particular support and continuity of coverage for aluminium producers.Finally, the years ahead may well see new (re)insurers emerge to take advantage of improved insurance rates following a year like 2017, so it is important that brokers conduct a proper market appraisal to identify any new players to introduce competition and mitigate any loss of capacity.

Matt Tyler is a Divisional Director at Willis Towers Watson in London. He has been working as a broker and client manager for industrial clients in Russia, the CIS region and Europe for over nine years.