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Mining and insurance—Dialogue or bust...

Finance Blogger: Anthony Harrington Anthony Harrington

Insurance is a vital element of any business’s defense against the unforeseen. For “ordinary” high street businesses protection insurance might have its challenges but it is a game that insurers and many businesses—one hesitates to say “most businesses”—understand. Writing insurance business for mining companies is a different game entirely, and it is one that is fraught with difficulties for insurers.

Take 2008 for example. That year, according to Swiss Re, the global insurance industry racked up $3.5 billion in losses on premium business worth just $600 million (figures for 2009 are still being compiled). If that trend was allowed to continue it would be a recipe for ruin for any insurance company who persisted in offering insurance to the mining industry. Moreover, the upshot of the insurance industry withdrawing cover from the sector would be a huge increase in commodity costs as mining companies sought to set aside reserves to “self-insure” (i.e. to cover any risk losses from their own reserves).

Comparing the risks associated with insuring a factory, for example, with the challenges involved in writing an “all risks” policy for a mining operation, highlights the problem. As Swiss Re notes in its report on volatility in the mining sector, whereas a factory has a well-defined building footprint, any extractive mine on any scale has a complex expanding footprint which can be tricky for insurance companies to get to grips with.

One can work out in fairly fine detail the property of a factory (plant, machinery, furniture, etc.), whereas a mine has all kinds of dimensions to its property portfolio. The term can include permanent roadways in open pit mines, or the permanent workings in an underground mine, the pit walls in both instances, any dams and so on. Then there is the hard-to-predict behavior of Mother Earth herself, with rock fractures, potential collapses, the combustible nature of coal, and the susceptibility of workings to flooding.

Moving from covering property to covering “perils”, mines are intrinsically difficult places. The machinery involved in mining is constantly evolving and insuring against breakdown and consequential loss is problematic. Then there are the various dangers of collapse, landslip, and subsidence. To make matters worse, while factories have sensible, accessible addresses, even if they are in out-of-town locations, mines, on the other hand, are often in remote, inaccessible places. The comfortable, protected environment of the factory contrasts starkly with the extremes of temperature and the exposed nature or harsh environment of many mining operations.

Many things can increase an insurer’s risk where they are providing protection against business interruption. Some of these risks are new and have to do with technological advances in mining machinery. Swiss Re points, for example, to the trend towards “gearless mills” in ore extraction. Gearless technology leads to bigger mills, but putting a huge machine in play creates a single point of failure. Where a multi-line extraction process can keep going if one mill fails, a giant single mill process creates a bottleneck if it fails, leading to potential multi-million pound losses.

Still another risk factor that has to be taken into account is the aging workforce that characterizes mining in many countries. This leads to increased risks from creeping dangerous practices as the sector loses experienced workers.

All of this adds up to the fact that the mining industry is becoming an ever more volatile place for the insurance sector to do business in, and that benefits neither insurers nor mining companies, Swiss Re argues. The solution lies in much more dialogue between insurers and the mining sector to identify ways of de-risking mining operations from an insurance perspective. In particular, Swiss Re recommends that the insurance sector should move away from writing “all risks” policies to writing “named perils” policies. The advantage of the latter is that both parties have to pay attention to detail if the policy is going to work. In essence, the moral is that you can’t have a one size fits all approach to a complex set of problems—if you try, you lose money, big time…

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Tags: Asia , exports , insurance , mining
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