Bottlenecks:

Beyond your control?

Bottlenecks: beyond your control?

Introduction: the linear nature of mining risk
On the back of significant losses throughout the insurance world, insurers are revisiting their philosophies (as we outline in detail in Part Two of this Review). This is resulting in rate rises, coverage restrictions, downward pressure on sub-limits and a shrinking of capacity. The mining industry in particular is being closely scrutinised, with a focus on tailings dams, transportation infrastructure and potential operational bottlenecks.Most mining operations are linear in that ore is extracted and processed, then transported to either the end customer (if within the same country) or a port for onward shipping. Any interruption can have significant impacts.In the event of a break in the logistics chain, there are very few effective alternatives for miners; the only efficient way to move bulk commodities such as coal, iron ore, or even copper is via rail and/or ship. Trucks and airfreight are not viable for most situations and ports typically have little latent capacity to take up large demand if a neighbouring port suffers a significant outage, even if the mined product could be re-routed.Roads leading to and from mining operations are often exposed to natural catastrophes (particularly flood) and if damaged will frustrate the ability of mining operations to bring in supplies, export finished product and for personnel to access the site. Cyclone Debbie, which smashed Queensland’s Bowen Basin in March 2017, shut down coal mines and washed away vital infrastructure. Insurers have long memories and are at pains to avoid repeat exposure to such significant losses.Mines are complex operations and constraints to production can and will change over their lifespan. This impacts all aspects of the operation, from the mine itself, to crushing, milling and processing and into transport and port operations.But the challenge for mining companies extends way beyond their own operations; the potential impacts are increased when downstream logistics are not within their control – for example, the rail or port is owned and operated by third party entities.

Natural catastrophe impacts on infrastructure
Both mining companies and their insurers face significant challenges when a mine loses access for its processed product to key infrastructure operated by third parties; in countries such as Australia, this usually means rail transport.Typically, that rail infrastructure (both above and below rail) is owned and operated by dedicated operators, and so is completely separate from the mining operations. Recent natural catastrophe events in Australia which damaged rail infrastructure highlighted some of the issues faced by mining operators which rely on that network:

Without direct access to the areas of damage, it is difficult to ascertain the precise cause of the loss – whether it be flood or landslip, for example. This is important to ensure the insured’s policy is engaged (that is, no exclusions apply). Cooperation from the rail operators is key, but often they are reticent to release market-sensitive information.

The timeline for rectification is not in the ambit of the mine operator. They rely on the rail operator for this information, which may or may not be accurate. This makes it challenging for the mine operator to reschedule mining operations and to manage communications with their stakeholders – including shareholders, site personnel, insurers and customers.

The ability to influence loss mitigation activities is limited. Most mine operators and their insurers will seek to mitigate losses through various strategies (for example overtime, airfreight and incentives to suppliers); the ability to influence these activities is limited when they are in the control of other parties (the rail operator in this instance).

Even if temporary repairs are undertaken, competition from other users usually means that full access is not immediately available.

The ability to use other supply chains might be restricted due to limited availability of alternatives and exclusivity provisions in the supply contracts.

These same issues arise for other independently-owned and operated infrastructure such as ports, power, gas and water suppliers, and even roads; the principle being that a loss at a key supplier, whether through natural catastrophe or other peril, can have a significant impact on an insured operation. Furthermore, the ability of that Insured to determine the cause of the loss, and influence loss mitigation strategies, is not direct; it relies on the supplier and their insurers to be transparent and cooperative, which is not always the case.However, there are some positive developments; we have seen recent contracts from Insureds and their suppliers which seek to address these concerns.Structuring CBI policies
The other key issue is to ensure that the mine operator’s Contingent Business Interruption (CBI) policies are correctly structured, including:

The suppliers are correctly identified – sometimes the structures of supply chains are complex commercial arrangements and it is vital that the correct “supplier” is named.

The property and perils exclusions are amended to reflect the supply chain (railways and roads are typically excluded property) - flood exclusions also need to be properly considered for natural catastrophe exposures.

Ensuring that the aggregate exposure to other operations is properly accounted for - a loss at one mine may have significant impacts at the Insured’s other mining/processing operations.

Most mining operations have a detailed appreciation of their business and can understand and manage losses effectively within their own domain. We have seen and assisted in delivering some innovative solutions to outages which support the mitigation of losses which of course benefit the mine operators, stakeholders and their insurers.However, it is far more challenging when the damaged infrastructure is not owned and controlled by the Insured. The Insured’s ability to influence positive mitigation strategies relies on the cooperation of that supplier which, on many occasions, is not as transparent and forthcoming as it could be. This is compounded if the CBI exposures in the policy are not properly understood and/or structured.Recovering from outages
The impact of any event, when overlaid against the cycle of constraints, will ultimately determine its significance to the overall mining operation. Insurers are paying close attention to the mine’s ability to recover from, or “make up” losses from any outage. Two simple examples can demonstrate this further.Rail outage
In the event of a rail outage lasting two months, the ability to send the end product to the customer is curtailed and therefore results in a direct loss of sales. However, mining and processing operations are not impacted and the mine can continue operations, subject to space, by increasing stockpiles at the site.Providing there is latent capacity in the rail and downstream logistics there is potential to transport those increased stock piles within a reasonable time frame (and/or within the indemnity period) substantially mitigating the loss. However, this relies on the mine’s ability to access any additional rail capacity.Mill or wash plant outage
Alternatively, an outage involving a SAG Mill (gold and copper mine) or a wash plant in a coal mine, for a similar period (two months) would have the same impact on sales, but if the mill or wash-plant is the constraint (as is often the case), the ability to make up the lost production is limited, resulting in a far greater financial impact on the operation and or its insurers.

Stephen Thorpe is Director (APAC), Natural Resources & Engineering at Charles Taylor Adjusting.

Conclusion: positioning clients for optimal outcomes
As the insurance market continues to work through the current hardening cycle, it is essential for clients to provide detailed underwriting information, including the ability to demonstrate a thorough understanding of their business relationships and identifying those suppliers and customers who are critical to their successful ongoing operations. Doing so will give insurers greater confidence and comfort in the risks presented, helping Insureds to retain existing coverage and adequate sub-limits. With capacity constricting, insurers will be able to pick and choose where they deploy their capital; that choice will be based on their ability to appreciate and underwrite the risks associated with any operation. An inability to satisfy the insurer’s demands will lead to reduced capacity, lower sub-limits and narrower cover. Ultimately, insurers will step away from certain Insureds altogether.

“As the insurance market continues to work through the current hardening cycle, it is essential for clients to provide detailed underwriting information, including the ability to demonstrate a thorough understanding of their business relationships and identifying those suppliers and customers who are critical to their successful ongoing operations.”

Gavin Wilby, ACII is Victoria Corporate Practice Leader at Willis Towers Watson.