Insurance opportunities in mining

COVER’s Tony van Niekerk spoke to Nick Salter, Marsh Global Head of Mining and Metals, on the back of the mining indaba that was held in South Africa. 

Among other things, the mining Indaba discussed the opportunities, challenges, and things that need to change to make the mining industry more effective as well as the key role insurance plays in the whole mining value chain. 

Tony: Mining and resources had a good run earlier last year and tapered down a bit at the end of the year, it seems like this year the lights won’t be shot out, but as an expert, can you give us a better idea or an overview of the global and the local mining conditions?

Nick: It is an interesting environment out there now. We all know that there is a green energy transition going on, and we are very much focused on how that is going to happen. The world needs a lot of commodities to do that, we need lithium, cobalt, nickel, and we especially need copper. The conditions should support a strong mining and metals industry.

Globally, however, we are facing a potential recession. Output from China is not as strong as perhaps it has been, which makes it challenging for many projects to raise the finance that they need to happen. Exceptions to that now are gold, which typically does well in a tough economic environment.

The energy crisis that followed the invasion of Ukraine in February last year did see a resurgence of thermal coal projects in some regions as they looked to provide energy security to citizens.

Tony: From an insurance industry perspective, are there any specific things that will impact the industry that we should be looking out for?

Nick: The insurance industry is in a transitional phase. It has been experiencing challenging market conditions since 2017, when after a long cycle of rate moderation and abundant capacity, , heavy market competition drove prices down. There were famously the three hurricanes, which hit the Gulf of Mexico in the US (United States) and so we often ask what that means for South Africa and other parts of the world. The reality is that the many insurers and reinsurers have diversify their risk globally and so where there is a high level of insured losses anywhere in the world it will typically have an impact on rates everywhere, . We were seeing market increases begin to moderate late last year and we were hoping that clients may begin to experience flat market rates as we moved into 2023. 

Last year was a difficult year for natural catastrophe events with floods in South Africa and floods in Europe that were unprecedented. And then, in October Hurricane Ian hit Florida and moved up into the Carolinas, – an estimated $65 billion insured event, making it the second most expensive insured hurricane on rescord. That really was a tipping point for many markets, particularly impacting their ability to provide natural catastrophe coveraage. 

We saw in the renewals for the reinsurance that insurers were buying in January of this year when they were finalized, rates increased quite dramatically. In the US, unsurprisingly, the rate increase was higher than elsewhere in the world, but certainly for catastrophe exposed areas we are seeing +25% to 40% increases. So, that has been a challenge. 

Inflation is another focal point for the industry. In Europe we talk about inflation, not having had inflation for 30 years, we know that it is not the case elsewhere in the world. We know, for instance, in South Africa, that inflation is a market dynamic that people live with. But in Europe, inflation is now running at about 10%. That has focused underwriters’ minds on exposure and the values that clients are declaring.

Underwriters are concerned that in the event of a loss, the actual loss, because of the inflationary impact on supply chain replacement equipment and the like, might be a lot more. Plus, supply chain dynamics were a challenge following COVID lockdowns, were further magnified by the Russia-Ukraine conflict. Here, we see many unexpected challenges where, for example, something I did not know, was the number of Russian and Ukrainian sailors that man merchant ships. That had a direct impact on the availability of cargo ships, which drives pricing and availability of boats. 

The impact that has on the insurance industry, let alone the industry itself, is that it extends the time it takes for replacement equipment to get to sites, and as we know, a lot of mines are in quite remote locations around the globe, which can lead to longer downtimes and increase the cost of a claim.

Tony: So, the bottom line at the end of the day, is what potential opportunities are there for a business like Marsh? 

The opportunity is that people need to buy insurance to run a safe operation and compensate for losses. It is a difficult environment out there, as I have said, the insurance market is in a challenged place itself. So, while obviously insurance and risk transfer does provide an opportunity to take the risk away from projects, as the name suggests, and make projects more robust giving people the confidence to take those more complex risks. 

The mining market is an interesting market. Mining people, operating and mining, are quite entrepreneurial. They are risk takers by the very nature of making the decision to start digging a hole in the ground or sinking a shaft for resources that you hope is going to be there. You expect that you have done your planning correctly so that, that plant you are building is the right plant to process the material to get the product out at the end of the day – but there are no guarantees.

A lot of projects are operating, in demanding environments. There is a lot of commodities in mainland Africa, as we well know, but doing business in mainland Africa offers its own challenges, certainly from a governance point of view, from a societal point of view. The mitigation of country risk using political risk insurance can help companies understand and quantify country risk and enhance the project’s returns. In addition, ESG (Environmental, Social, and Governance) is also something that we all need to be cognizant of as we try and support the industry. 

Marsh has been developing our own ESG capabilities. We launched a risk rating tool last year, which allows projects to understand what their ESG sustainability footprint is. This year we have been developing that further with our consultancy team to find solutions to help understand what the future climate risk is, not only to the project itself, but also to the supply chains. What will the change in the environment bring for these operations. We know about the threats of increasing temperature across the globe, but what does that mean?

That is an interesting dynamic that Marsh is looking at, which really compliments the risk transfer side of things to help clients understand their risk profile. We are also fortunate at Marsh to have our own mining risk engineers that can take assessments of our clients’ operations to help them understand the risks that we may well be able to transfer to the market.

But there are some risks that either we cannot transfer to the market or are just prohibitively expensive to transfer to the market. We enjoy working with our clients to find that balance, a cost-effective product that offers the widest cover available. 

It is what we do at the end of the day, and it has been that way for a long time. It is about how we harness all the different resources and the skill sets that we must work in partnership with our clients more than anything.