Willis Analyzes Mining Industry ‘Insurance Crunch’

A new report from Willis’ London office concludes that the “global mining industry is caught in a ‘classic insurance market crunch’ as mining companies, faced with declining commodity prices and profits, have less to spend on coverage while insurers raise prices and limit capacity as they deal with the fallout of the credit crisis and react to record property damage and business interruption claims from 2008.”

Willis’ first annual Mining Market Review reports that in 2008, the mining industry submitted an unprecedented $3.5 billion in property claims against a sector premium of $600 million, “meaning mining underwriters lost nearly six dollars for every dollar of premium income.

As a result, Willis points out that “at least 12 insurers have withdrawn or are considering withdrawing from the sector at this time, and those that remain are finding tighter limits on their own reinsurance arrangements. The report found that reinsurers will be restricting available capacity from a 2007 maximum of $1.75 billion to between $1 billion and $1.25 billion by the end of the first quarter of 2009.

Steve Higginson, Willis Mining Co-Practice Leader, added: “In addition to record claims, the mining industry has been hit hard by the economic climate and commodity prices and profits are significantly down. This has created cash flow problems for many companies, with even the giants of the industry having to look very closely at every use of capital, including insurance. Clients are responding by looking into self-insurance and capital market solutions as alternatives to traditional insurance.”

Although Willis’ report found “no pattern to the cause of the 2008 losses, which were spread between natural catastrophes, fire and machinery breakdown, it did concluded that “80 percent of claims arose from Business Interruption, as mining companies sought to recoup lost revenues at the peak of the commodity bull market when they experienced operational downtimes of even a few days. The problem was exacerbated by equipment manufacturers that were stretched to capacity and were unable to keep pace with the demand for new equipment and replacement parts.”

Andrew Wheeler, Willis Mining Co-Practice Leader, explained: “The mining ‘super cycle’ drove mines to work to capacity and possibly beyond tolerance. When the very large risk losses hit at the end of 2007 and the beginning of 2008, they were consequently grossly underestimated by insurers, most of whom failed to fully appreciate the potential for such Business Interruption claims.”

In addition Willis said: “An insufficient number of mining specialist adjusters to service all of these claims has led to an increase in claims disputes, the report said, noting that the volume and complexity of the operational claims has created a service ‘expectation gap’ between many clients and the markets due to the perceived slow pace of the claims process. The report noted that only a few markets have grasped the PR advantages available to them from differentiating their claims service against their peers’ in the shop window of the industry.”

The Willis Mining Market Review said that miners with deep knowledge of their risk profiles and good enterprise risk management strategies have been able to secure competitive terms by trading lower policy and peril sub-limits and/ or higher self-insured retentions to continue protecting their largest and most complex risk exposures. Alternative Risk Transfer mechanisms, however, have proven technically and commercially insufficient to draw clients away from traditional forms of cover, the report noted.

While the Willis review focuses on the property insurance market, it also highlights developments affecting the mining industry in the Accident & Health, Directors & Officers, Kidnap & Ransom, Marine, Liability and Terrorism insurance markets.

Source: Willis – www.willis.com

Topics Claims