Mining requires professional advice
The mining industry has the ability to generate insured losses that not only affect the country as a whole, but can also have a market-altering effect on the price of the product. The insurance programmes that are placed to cater for these types of losses, in order to be equal to the task, require the benefit of the best professional advice available.
Because of the unique nature of the risk insured for mining and processing risks, properly structuring these programmes requires brokers that are focused exclusively on the industry.
This is according to Neels Kornelius, Business Unit Head: Natural Resources for Aon South Africa, a leading global insurance broker and risk management company. "Mining companies typically buy big cover limits, and a large loss has the ability to alter the metal market dynamics. In cases of metals such as platinum, where South Africa has 80% of the worlds reserves being produced from only three refineries, understanding what cover limit may be required from a Maximum Possible Loss point of view can be a complex calculation," he says.
As an example, Lonmin Platinum suffered an explosion at its Marikana smelter facility, which removed an estimated 30,000 ounces of platinum output from the companys production forecast, and added significant production costs to Lonmin as their platinum concentrate had to be toll-treated by Impala Platinum. During the period after the loss, partly as a result of the markets reaction to the loss, the platinum price increased by 19% from $587/oz on 21 December 2002 to $700/oz on 3 February 2003. In a second, more recent example, the breakdown of a single conveyor belt feeding coal between Hwange Colliery and Hwange power station in June 2007 caused the power station to shut down, removing an estimated 500MW, or one third of the total electricity demand, from the Zimbabwean grid.
A specialist mining broker will need to have access to specialist technical knowledge in order to evaluate the exposure of the client to the unique set of perils facing miners, such as an earthquake, underground flood, spontaneous combustion, etc. "The policy wordings required to adequately deal with the specialised issues facing miners in the event of a loss are highly specialised all risks wordings that have over time been evolved out of earlier petrochemical all risks wordings. The sub-limits, exclusions and cover extensions contained in these wordings have evolved as the insurance industrys understanding of minings loss potential has evolved. For example, as a direct result of the 1994 Merriespruit slimes dam disaster, followed by a 2,000 tailings dam collapse at Boliden copper in Sweden, a tailings dam wall remains an uninsurable asset on most mining wordings to this day," explains Kornelius.
Kornelius says an additional factor to consider is that most mines have highly developed risk management systems not only as a result of good international practice, but also due to the legislation covering their activities. "In structuring comprehensive yet cost effective cover, a broker will need a detailed understanding firstly of those risks that can better be managed than insured, and secondly how better risk management can lead to the ability to accept higher policy deductibles and hence a better premium."
In addition to traditional assets insurance, which is where 60-70% of a client's premium spend is, there are a number of equally important classes of insurance that also require specialist input when they are applied to mining risks. "The proper structuring of a value-add mining insurance programme requires specialist skill in every area from the initial evaluation of the risk down to the selection of an appropriate insurance market," says Kornelius.
Some other areas that require specialist input:
Transport & Marine in many cases, the marine programme can be structured as a full stock throughput cover.
Political Risks especially relevant to clients who are expanding into African territories aided by debt financing from banks and institutions like the International Finance Corporation.
Covers on the lives and health of mining personnel accident and health covers for mining personnel also require special attention given the hazardous conditions under which miners often work. "In addition, the management of HIV/AIDS is a burning issue, as is specialist covers like Kidnap & Ransom / Medical Evacuation for expatriate personnel stationed in African territories," says Kornelius.
Environmental management and rehabilitation covers South African mining legislation states that no client can be granted a mining right if full provision for the environmental rehabilitation costs of an operation are not in place, and clients need to be made aware of the short-term insurance solutions available as one of the more elegant options for arranging this.
Directors & Officers Liability in the current commodity boom, which is mainly driven by Chinese demand for raw materials, there is renewed shareholder interest in mining companies, and much capital being invested. "In addition to this elevated level of activity, the South African BEE legislation, which requires a minimum BEE equity stake in mining companies of 26% by 2009 (and 51% for new projects), results in many investment decisions being made at a rapid pace," says Kornelius. "All of this requires specialist attention to the exposure to the directors of specifically mining companies, as the level of South African shareholder activism increases."
"An increasingly important part of a mining broker's job description is to find ways of tangibly demonstrating to clients just how much value is truly added, and how the service provided by a broker with the appropriate and vital skills can add value to the bottom line," says Kornelius. "A truly specialised mining broker will be able to add this value across the entire spectrum from those companies that prefer to leave all insurance arrangements in the hands of the broker, through to those that have highly sophisticated, multi-territory insurance arrangements and permanently employed insurance managers."
