Willis: $3.5B Losses in Mining Market Prompt 30 Percent Insurance Capacity Reduction

In 2011, the mining insurance market was not only hit by $2.7 billion in natural catastrophe losses, but over 60 operational losses totaling $835 million. The $3.5 billion total estimate of losses facing mining insurers has prompted a 30 percent withdrawal in insurance capacity since the start of 2011. This is according to the latest Mining Market Review released by Willis Group Holdings plc, the global insurance broker.

The report, published to coincide with this week’s annual African Mining Indaba in Cape Town, a conference held for natural resource professionals, estimates that the current global capacity available to mining Property Damage & Business Interruption (PDBI) insurance programs is $1.25 billion, down from $1.75 billion at the start of 2011.

Willis’ report identified resource nationalism, natural catastrophe exposure, and supply chain disruption and globalization, as the three biggest risks facing mining companies:

Resource nationalism and punitive taxation regimes are no longer only an issue in emerging markets, noted Willis, with “developed countries (notably the United States, Australia and Canada) increasingly adopting resource nationalist policies that include the blocking of Chinese investments and the tightening of fiscal regimes in the extractive sectors”. The report includes a chapter on the myths and realities of resource nationalism by global analysis and advisory firm, Oxford Analytica.

The huge impact of the Japanese earthquake and tsunami, the Christchurch earthquakes, the Queensland floods, earthquakes in Papua New Guinea, the weather events and floods in Brazil and South Africa all served to reinforce the threat to the mining sector posed by natural catastrophe events.

The Japanese earthquake and tsunami placed supply chain management at the top of the agenda for most mining boards. Following the disaster, many Japanese companies transferred their production trains off-shore to locations like Thailand, where another natural disaster struck a few months later, further compounding the contingent losses suffered by many companies.

Commenting on potential pockets of hardening in the mining market, Steve Higginson, Willis Mining Practice Leader said, “The key elements which are influencing the tightening of insurance terms and capacity availability are firstly the series of losses which have effected the industry over the past 12 months, secondly natural catastrophe exposure, especially flood and earthquake, thirdly the aggregation of exposures carried by insurers in regions such as the Pilbara in Western Australia (cyclone), the Bowen Basin in Queensland (flood and weather events) and Chile (earthquake), and finally the increased complexity of coverage for Contingent Business Interruption (CBI) caused by the globalization of the supply chain.”

The report details 2011 and potential 2012 conditions in other mining-related insurance markets, including:

• The construction insurance market remained competitive and stable, with natural catastrophes having little impact.

• The global directors’ and officers’ liability insurance market remained competitive and awash with capacity, a trend that looks set to continue in 2012, although a significant increase in mergers & acquisition litigation might test insurers.

• During the past 12 months it has been difficult to chart any sustained direction in pricing for the international Liability market and this uncertainty is expected to continue in 2012.

• With seven of the top 20 kidnap hot spots being countries with significant mining operations, it is not surprising that several employees from the extractive industries have been kidnapped for ransom over the past year, a trend that will only increase as the global demand for commodities intensifies.

• In 2011 the Marine market continued to be soft, but this year the pace of the downward trend in pricing seems to have slowed, with the market at the beginning of 2012 offering single, not double-digit reductions. However, the implications of the Costa Concordia incident are yet to fully materialise.

• In 2012 the Specie (precious minerals, including cash and securities) insurance market is likely to see a possible hardening of rates as 2011 natural catastrophe claims in the property insurance sector work their way through the market.

• The last two years have witnessed more insurers offering Personal Accident/Accident and Health cover, especially in Lloyd’s, resulting in a competitive pricing environment.

• Terrorism capacity remained static through 2011. Commercial Terrorism capacity in the standalone market is currently estimated at $1.75 billion. However, Political Violence capacity is more restricted compared to previous years, particularly in areas that have experienced political unrest.

Andrew Wheeler, Willis Mining Practice Leader, commented: “Even though the insurance market is still reeling from the unprecedented spate of losses in 2011, well risk-managed mining programmes will still be able to get favourable terms and conditions this year if they can demonstrate: a clear understanding and ability to mitigate the effects of CBI exposures, a pro-active approach to minimising the effect of weather-related events to their operations, and that sound risk engineering and innovative risk avoidance measures form an integral and core part of their business.”

The extensive report also contains sections on mine rehabilitation, Chinese mining investment, strategic loss management, contract certainty and risks to the UK metals market.

Source: Willis Group Holdings