MINERS looking for global risk partners

Despite plummeting international commodity values — which over the last decade have made mining equities less than the darlings of stock markets — the Canadian mining industry is expanding at a healthy clip. It is estimated that 100 new mines will have opened in Canada between 1997 and 2000, with Canadian mining companies spending more than $1.5 billion annually in exploration ventures worldwide. From an insurance perspective, it is clear that the mining industry is far from being a dead horse, and with new technologies and global risks entering the picture, new opportunities are emerging for risk partnerships.

Canada is among the top global exporters of minerals and metals, with Canadian mining companies leading the world in exploration and extraction technologies. And, despite currently low commodity prices, the industry is proceeding with expansion activities both locally and globally. Globalization is, however, changing the risk issues of the industry and the manner in which exposures are dealt.

At one time, miners viewed insurance primarily in terms of capacity. And, while they still want significant capacity, greater emphasis is now being placed on seamless global coverage. To give an indication of the global expansion taking place, Canadian mining companies spent an estimated US$ 1.5 billion on exploration in 1997 — and this pace is not expected to slow down in coming years.

Global expansion, coupled with technology advances, is revolutionizing the operational process of the mining industry. This in turn is reshaping the risk exposure and insurance needs of the industry. Traditionally, worker safety represented a significant risk factor, however, with today’s technology advances such as the use of robotics and a more specialized workforce, safety risk has diminished considerably. On the other hand, the search for new mineral deposits (often in developing economy countries) at a global level has presented Canadian mining companies with new risk factors. These include possible political instability and lacking infrastructural support in developing areas. Furthermore, many projects in developing countries are joint ventures involving several companies and insurers.

Risk management and risk retention

As a result, mine-owners and operators have become increasingly sophisticated in their risk management and therefore demand more of their insurers. Since they are carrying greater proportions of their own risks, they are looking to partner with insurers. They want leaders with experience and expertise in their segment of the industry, companies willing to take a meaningful share of the risk.

In common with many other insurance market sectors, pricing for mining accounts are currently highly competitive. The excess market capacity, which dominated 1998, is unlikely to lessen in the year ahead. For the mining industry a competitive premium is attractive, especially when offered by good security. This can, however, turn out to be a false economy.

The biggest issue in the short term is problems of over risk engineering and claims. When businesses are expanding, particularly into new territories, they need the support of their insurer to identify the most vulnerable areas, control the risks and deal with claims efficiently and promptly when there is a loss. While the need for good security is a given, financial strength indicates only that an insurer has the ability to pay claims — not necessarily the willingness to do so promptly or easily.

Insurers who genuinely want to act as partners to the industry are in an awkward position when rates go into free fall and conditions broaden unacceptably. If they compete on price alone, they put at risk their own results and ability to remain in the sector.

On the other hand, if there is a sudden contraction in capacity and rise in prices, the better risks are likely to depart from the commercial market altogether for self-insurance, captives and other forms of alternative risk transfer. It also stands to reason that, as the mining industry matures at a global level, it will look to insurers for cover of larger, more difficult and less predictable risks. This has certainly happened in other industries. Those insurers with the capability and capacity to respond to this situation are likely to offer clients the best prospect of long term relationships.

However, to help clients make effective use of their capital, insurers must also be able to offer expertise in specific market segments in partnership with the mining company’s own quantitative risk analysis and engineering skills in identifying and controlling risks. As such, mining underwriters need industry-wide experience, global capacity, and a willingness to listen and to maintain long-term relationships.