Introduction:

Addressing uncertainty

Introduction: addressing uncertainty

Welcome to the 2019 edition of our Mining Risk Review. The last 12 months have proved to be a difficult and challenging time, both for the mining industry and for those of us involved in the insurance and risk management industries. Our Review is being published in the aftermath of yet another tailings dam tragedy, at a time when the mining industry is already having to cope with an unfavourable press and, at times, a strident attitude to environmental concerns that often paints the industry in an unfavourable light. In the meantime, negative underwriting results across the global Property & Casualty (P&C) spectrum have brought about a distinct change in underwriting climate across several “heavy” industries, including mining.

As a result, all of us involved in mining industry risk management are facing a period of considerable uncertainty. This year we’ve split the Review into two halves; the first addresses uncertainties relating to the mining industry itself, the second addresses uncertainties involved in transferring risk as efficiently as possible, given the backdrop of a hardening insurance market.

So let’s turn first to the industry itself - what are the four key areas of uncertainty for miners that we have identified for 2019?

1. Digitisation: Upgrades in digital technology and artificial intelligence are transforming the way in which the mining industry operates. Even now, this process is still in its infancy; human agency is still required to ensure that the process of mineral extraction is carried out to optimal standards. But already this process is presenting its own challenges. As our mining engineering specialist Don Hunter points out, a combination of negative attitudes, increased cyber risk, a failure to train properly and upskill and the potential for the process to discard valuable human experience during the digitisation process suggests that miners are exposed to a number of new risks that can threaten project viability.2. Bottlenecks: The linear nature of mining risk means that the impact of a natural catastrophe such as a windstorm or earthquake on a mining operation can be hugely significant. Far too often, getting a mine back up and running after a major incident is dependent on factors outside the mine operator’s control; far too often in the event of a major loss, the precise cause can often remain uncertain. It’s for situations like this that the quality of underwriting information supplied can be critical in buyers obtaining optimum insurance cover. Stephen Thorpe, an experienced Australian loss adjuster, explains that there is much more that clients can do to achieve optimal outcomes when faced with these challenges.3. Geopolitical risk: Whatever side of the geopolitical fence you happen to sit, no one can doubt that we now live in a world where the geopolitical stakes have risen considerably during the last 12 months. Increased tariffs, regulations, legislation and tax liabilities imposed between different countries have had a direct impact on the viability of mining projects in a variety of locations around the world - especially given the global nature of the industry’s supply chains. The Willis Research Network’s Andreas Haggman suggests that mining companies adopt a more holistic approach to managing these risks and points to some useful analytical tools that can turn seemingly intangible problems into tangible opportunities.4. Social Economic Development (SED): the relationship that miners form with local communities is always a fundamental factor to consider in developing an effective risk management strategy. Having a programme that assists in improving the economic potential of nearby communities and local stakeholders usually results in a symbiotic partnership that benefits both the company and the community. Our Latin American mining leader Tom Holliday spoke to Technoserve, a not-for-profit organization that has been at the forefront of implementing economic development strategies for over 50 years; it’s clear from our conversation with them that mining industry risk managers and their teams need to be looking to the deep relationships and activities that need to be built and developed for real and sustainable long-term progress.If only conditions in the global mining insurance markets were more certain. As we move further in to 2019 we are finding that the atmosphere in the market is becoming increasingly uncertain, not only because of the recent loss record in the industry but because of the increasing and worrying tend for insurers to withdraw from what they consider to be environmentally unfriendly industries such as coal. Our Review highlights the following key reasons for the rapid turnaround in market conditions, despite the continued deployment of excess underwriting capacity in the market:

A depleted premium income pool: Given that no official global premium statistics exist for this class of business, we can only provide an estimate from our own experience and from our conversations in the market. We think that total mining insurance premiums remain under US$1 billion - not nearly enough to secure regular underwriting profits and well under the average annual burn. Indeed, premium income levels have been falling for the last five years, given the previous market conditions and weakening insured values.

An atrocious loss record: Notwithstanding the latest tailings dam tragedy in Brazil earlier this year, and again from conversations in the market, we understand that overall mining losses for 2018 may exceed US$1.3 billion - following hot on the heels of 2017, where total losses apparently also exceeded US$1 billion.

Negative results for other parts of the heavy industry portfolio: It’s not only the Mining portfolio that’s produced unfavourable figures for major P&C (re)insurers. In the Review we show that almost every sector has been affected, with the result being a new determination from insurers to “hold the line” and impose rating increases and/or “re-underwritten” programmes.

Centralisation of underwriting authority: Increasingly, we are finding that those insurers that had previously allowed a degree of regional autonomy to their various regional “hubs” in the past are now restricting underwriting authority to a restricted panel of specialist underwriters.

Major insurer retrenchment: Last but by no means least, we are witnessing a major change of underwriting strategy from some of the largest (re)insurers currently operating in the market. Where this has not been anticipated by buyers and their brokers, it has led to some serious placement challenges, with brokers often having to supplement lost capacity with underwriting support from insurers at very different terms than had been negotiated the previous year.

However, the final chapter of our Review strikes an optimistic note, pointing to new ways in which miners can offset the current market uncertainties; firstly by using modern analytical tools to determine the optimum retention levels and secondly by considering parametric risk transfer solutions that would provide cover for disasters such as tailings dam collapses well in excess of what is currently provided by the conventional insurance market and/or captives/captive cells.What’s more, we would like to end by striking an upbeat tone of our own. Yes, rating levels are generally on the rise. Yes, insurers are certainly scrutinising programmes more closely, while gaps in coverage are becoming increasingly common, particularly for tailings dam exposures. But the reality is that this is not yet a truly hard market; capacity remains plentiful by historical standards and when rates are on an upward trend, we are by no means in the distressed situation that the market founditself in in the immediate aftermath of 9/11 some 18 years ago. Sooner or later, the laws of supply and demand would suggest an easing of these conditions at some stage in the future; it will be interesting to see which buyers – and their brokers – will be best positioned to take eventual advantage to navigate their way towards a more certain future.We hope you enjoy reading the Review and as ever we would welcome any feedback that you may have.

Graham Knight is Head of Natural Resources, Willis Towers Watson.

Andrew Wheeler is a mining specialist and Client Relationship Director at Willis Towers Watson in London.