Beyond insurance
parametric solutions for the mining industry
Beyond insurance: parametric solutions for the mining industry
Introduction - time to change the risk management conversation
Mining is one of the world's oldest, most established industries. It's also in a period of transformation, propelled by changes in climate, technology and innovation. Fresh opportunities - and risks - abound.
Every year we have more data readily available at our fingertips. Thanks to the volume and complexity of this data, we are able to analyse and better understand risk in new ways.
However, data is only part of the equation; a different approach to risk management is just as vital to anticipating and meeting the mining industry's evolving needs. Historically, major losses have triggered new views on risk, yet that's just reactive - it's now time we changed the conversation.
New levels of engagement
Swiss Re Corporate Solutions is seeking to do just that, with new data and new participants. We are committed to listening closely and learning more from the people working on (and under) the ground. In turn, we're keen to share our knowledge and ideas for alternative
Most of us - risk managers, brokers, underwriters - come from a traditional background. We're used to traditional meetings where we talk about the past with a limited number of stakeholders. But now we're thinking of new ways and levels of engagement with each other. This is about working together to enable a new approach - there are no stupid questions or ideas!
Key concern: uninsurable nat cat cost escalation
While mining companies' individual needs may vary, they've voiced a shared set of concerns. One is the escalation of natural catastrophes and the costs they carry1 .
Consider supply chain breaks, for example. When earthquakes, floods or cyclones knock out rail and roadways, they destroy equipment and halt the transportation of goods. But physical damage losses are usually a fraction of those incurred each day that a supply chain stays broken.
There's a big difference between the numbers from physical damage loss and the interruption of business. Often the split between physical damage and business interruption losses can be as high as 10-90 in favour of business interruption. That's why supplemental non- damage business interruption coverage could be of real benefit to a mining company.
Source: Max Roser and Hannah Ritchie (2018) - "Natural Catastrophes". Published online at OurWorldInData.org. Retrieved from: https://ourworldindata.org/natural-catastrophes [Online Resource].
Accessing wider expertise
As protecting assets extends beyond equipment to cash flows, sales and profits, it makes sense to invite experts from other disciplines to join the conversation. Risk engineers, operations/sales teams and CFOs may have a different view on risk than their risk manager, broker or
Swiss Re Corporate Solutions believes that when these stakeholders - all desiring to protect a company's operations and profitability - come together to exchange insights and information, results can be powerful, to the benefit of everyone involved.
Exposing - and bridging - the coverage gap
Another concern voiced by mining companies is the coverage gap. While there is still plentiful insurance capacity in the global market place, in some cases mining companies only receive limited protection for their key exposures because they can't access capacity or the breadth of cover they require from traditional insurance structures.
In other cases, they may be left with no alternative because their insurance budgets - or timeframes to seal a deal - haven't yet caught up to reflect the industry's new complexities and risks. Regardless of the reason, such gaps are leaving companies vulnerable. Add in a natural catastrophe, and the business impact could be crippling.
Quick pay-outs avoid a long adjustment process
Nevertheless, calculating losses in the mining industry is inherently tricky. Even when mines collapse during earthquakes or flood due to cyclones, the ore isn't normally lost; rather, it just becomes more difficult and therefore takes longer to extract. It's not like a warehouse full of stock; by applying a parametric solution, we could remedy the coverage gaps left by traditional insurance and spare clients the frustrations of a drawn-out adjustment process. Instead, once triggered a parametric product would offer a quick pay-out - in a timeframe that meets, and exceeds, client expectations.
Pre-defined, customisable exposures and triggers
In an age when efficient business transactions are paramount, parametric solutions may offer an answer. And while they're based on hard data and sophisticated modelling, they're elegant in their simplicity.
Instead of open-ended coverage, parametric solutions feature pre-defined exposures and triggers. Pay-outs are also pre-defined and promptly paid, generally within 30 days. Such transparency and liquidity can be lifelines, especially for highly leveraged or public entities that must maintain a reputation of stability among lenders and investors.
Parametric insurance is not intended as a replacement for traditional insurance. Rather, it provides supplemental coverage for business operations stalled by natural catastrophes or for gaps left by conventional plans.
Parametric insurance is not intended as a replacement for traditional insurance. Rather, it provides supplemental coverage for business operations stalled by natural catastrophes or for gaps left by conventional plans.
A scenario suited for parametric solutions - Chilean earthquake
Let's say an earthquake in Chile destroys critical infrastructure, such as ports, access roads or concentrate pipelines to a mine high in the Andes. The mine itself may not be affected at all, so how can it get back into operation quickly? Even if roads are just partially destroyed, it would be difficult to find alternative means to transport the concentrate and other goods. Ports may be altogether unusable, making it impossible to import replacement equipment or export concentrate. Regulators may prohibit personnel from the mine due to safety concerns. Alternatively mines may be deemed safe, but employees can't reach them. With traditional insurance, a mining company might have (limited) coverage for some of these scenarios, yet in a chaotic disaster situation, there are other factors to consider.
Concerns that insurance can't allay
Business Interruption losses can be catastrophic to cash flows. Add in a protracted adjustment process, not uncommon with traditional insurance structures, and the company may face a liquidity crisis. Spikes in commodity prices, due to sudden scarcities, can magnify it. Even companies with cash reserves must worry if destruction is severe or widespread and it takes months for local governments to rebuild surrounding infrastructure. What if contracts can't be fulfilled? They risk losing client trust and market share if competitors fill the void. All told, impacts on profits can be detrimental and long-lasting.
The parametric way
In this instance, a parametric solution could nicely complement traditional coverage:
Using data from reputable, independent sources, it could be structured to protect both physical and non-physical assets due to exposure gaps or interruptions
Earthquake coverage could be based on a ground-shaking intensity index, such as the United States Geological Survey's ShakeMap. Payouts would be pre- defined and pegged to pre-agreed triggers measured by a reliable third party, such as the Modified Mercalli Intensity scale
For other natural catastrophes, coverage might be structured around data on precipitation, wind speed, sea level or storm category, as long as the data is consistent and has been captured over a long period
Companies receive liquidity in approximately 30 days, rather than being hamstrung by interrupted cash flows
Addressing geographic spread
Mining operations can span vast geographies, so how can a miner determine which are covered? Swiss Re Corporate Solutions work with the company's stakeholders ahead of time to establish exact areas, say by latitude/ longitude. Then a property value could be set according to the defined area and an exposure percentage; companies choose how much coverage they want. Alternatively, we could draw a 'box' around an area vulnerable to risk. This is sometimes called a 'Cat in a Box' - here we need to remember that the bigger the area, the more expensive it would be. The big difference to traditional insurance is the pre-agreed trigger and the payout pattern.
Another scenario for parametric solutions - Australian Cyclone
To take another example, suppose a cyclone slams into the Bowen Basin in Queensland, home to Australia's largest coal reserves (in a similar way to Cyclone Debbie last year). Massive rains wash out railways, mines get flooded and can't be pumped out for environmental or other reasons. The physical damage might be small, but the business interruption impact is enormous, and can last for weeks or months.
A related but alternative scenario is when a major cyclone is forecast, but doesn't hit an area directly. If companies have taken precautions and sent employees home to ensure their or their families' safety, operations still cease, and downtimes aren't covered by traditional insurance.
Insufficient insurance cover
Of course, a cyclone could hit, with worse-than-expected consequences. Companies operating in cyclone-prone areas may find (after the storm), that damage exceeds their traditional insurance coverage limits. So, similar to earthquakes, we work with clients ahead of time to design a complementary solution triggered by pre-defined metrics. In this case, it could be structured around a staggered pay- out index based on estimated losses assigned to category 3, 4 and 5 storms.
And last but not least: Pandemics
We also shouldn't forget about other tragic events such as pandemic outbreaks, which may diminish the number of people actually able to come to work. As sad as this sounds, it has happened before.
Conclusion: the key advantages of parametric solutions
Economic advantages
The losses described in these examples can be complicated, sometimes requiring months if not years to sort out. Often, many companies are affected, further muddying the process. If companies project estimated losses and cash flow strains, and consider the cost of emergency financial measures such as additional leverage or reduced dividends to shareholders - on top of escalating natural catastrophes - they could find parametric solutions are valuable investments against capital and
With fast returns to liquidity, companies are better equipped to recover, and even outperform local peers. Finally, pay-outs aren't limited to rebuilding damaged assets - they can be allocated at will (and even be used to help workers and their families in the case of pandemics).
Inclusion of other business units
What's also important to remember about parametric solutions is that they call for a new way of looking at insurance: forward rather than backward, and with a wider group of stakeholders. By including different business units and the CFO, we can gain a well-rounded understanding of profit streams, cash flows and their interdependencies. Identifying external events that could disrupt them, and the ways to protect against them, becomes easier.
Swiss Re Corporate Solutions is committed to being part of that knowledge exchange and education process. This is our way of insuring the future and evolving long-term partnerships of trust with our clients. To the end, we want to be there for our clients - and risk managers are the enablers.
Cornelia Iacobacci is Head of Energy Products at Swiss Re Corporate Solutions in Zurich.
