An “atrocious” loss record, with claims far exceeding premium income in 2017 and 2018, is driving significant price increases in the mining insurance market, according to a report from Willis Towers Watson.
There is no precise data for global mining premium income, but the broker estimated from conversations in the market that the figure was in the region of $800mn in 2018, with $1.3bn of losses in the same year.
The disparity was similar in 2017, with $1.2bn of losses comfortably outstripping $900mn in premium income, according to data from the latest Mining Risk Review.
The two heavy loss years came in the wake of 14 years of “incessant” softening of terms and conditions in the sector.
As a result, all sections of the mining market have united to “bring about a significant and permanent market turnaround”.
This includes direct and facultative lines, major global specialists and regional insurers.
Years of softening
An abundance in capacity in the mining market for over 10 years has led to a deterioration in rate adequacy for carriers.
“With a wide choice of insurers to choose from, each offering increasingly competitive terms to maintain and secure valuable premium income, buyers have been able to press home their advantage, forcing insurers to offer rating levels at way below what they regarded as the ‘technical’ rates at which they could ensure underwriting profitability,” the report stated.
The challenges of a soft market for insurers were exacerbated by a consistently poor loss environment, particularly due to losses from tailings dams.
Tailings dams are used to store the waste products of mining, and their collapse can cause huge environmental destruction.
The most notable recent collapse was the Brumadinho disaster in Brazil earlier this year when a failure at an iron ore mine led to a torrent of toxic sludge leaking into a town, killing at least 58 people.
The report indicates that the loss will be in excess of $150mn, and market sources have suggested to this publication that the general liability loss figure could be as high as $200mn.
Complex international supply chains, often relying on third parties, also make the prospect of business interruption losses more likely.
Meanwhile, the Decile 10 initiative from Lloyd’s has forced syndicates to take tough remedial action on underperforming lines of business.
The Willis report said this left insurers with a simple choice: “Either offer more improved terms from an insurer’s perspective or have your portfolio closed down by senior management.”
Major players in the mining market – including International Mining Industry Underwriters, Munich Re, Scor, Swiss Re and Zurich – conducted analyses of their mining portfolios and adjusted them accordingly.
The most significant change in underwriting approach came from AIG, which had previously been an established leader in the market.
AIG cut back the vast majority of its mining liability in May.
Climate change concerns are also spurring some insurers to reduce their coverage, particularly for risks involving thermal coal.
Pricing in American, Bermudian and Canadian markets is facing similar upward pressure.
The future
Willis predicted that the withdrawal in capacity could result in operators failing to find 100 percent support for their programmes, forcing them to increase self-insured retentions or reduce their programme limit.
There will also be an onus on insureds to demonstrate diligent management.
The report said: “The net effect of the above is that insurers are being very selective in the mining risks that they will consider and will only commit capacity where they can evidence internally that an insured operates excellent risk management.”
The digitisation of mining operations may play a part as operators strive to improve their safety records.
Willis noted that the increased implementation of digitised procedures could markedly improve the operations of mines.
A report from McKinsey & Company has stated that less than 1 percent of available data generated by the mining industry is being used.
Increased digitisation can improve processes by controlling machinery remotely, constantly monitoring structures such as tailings dams and carrying out predictive maintenance.
An increased exploitation of data would make it easier for insurers to stress test mining business models and operations.
