Claims disputes spark standard wording effort in mining sector

But an initiative started by Willis and to be discussed at this year’s RIMS conference in April could see the development of standard wording for mining. It is thought that standard wordings, should they be introduced, could reduce the number of costly coverage disputes that are currently plaguing the property mining insurance market. Gross losses for the mining insurance sector in 2011 are expected to be $3.5bn, almost six times the estimated annual premium base of $600m, according to Steve Higginson, Mining Practice Group Leader at Willis in Australia. According to a report from broker Willis, the mining insurance market was hit by $2.7bn in natural catastrophe losses and over 60 operational losses that totalled $835m in 2011. The high frequency of natural catastrophe claims and increasing severity of non-catastrophe losses were behind the large losses, said Mr Higginson.hideNatural catastrophes were a major contributor to losses in other recent years, driven by two separate major flooding events in Queensland, Australia in three years, said Stanley Cochrane of Swiss Re. However, losses also reflected the boom in mining which has seen delivery times for critical equipment rise and a shortage of skilled labour. “The commodity boom has contributed to the accumulation of mining assets in catastrophe exposed areas, such as Australia and Chile,” said Mr Cochrane. The cost of claims has been rising as commodity prices have increased, productivity has been ramped up and machinery has become larger, said Mr Higginson. The boom in mining has also affected maintenance levels, the quality of the workforce and put pressure on machinery and the availability of spare parts and replacement equipment, he said. The insurance market has been slow to recognise the degree and level of complexity which is inherent to the mining industry of today, said Mr Higginson. “The energy, power and utilities industries all have bespoke wordings which have been constructed in recognition of the complex nature of those industries, but the mining industry has continued to rely on old industrial property and business interruption policy wordings, which are simply inadequate to cope with the exposures in the mining industry today,” he said. “There has been both an increase in severity and frequency of loss, and when you add the prevailing degree of complexity, it creates misunderstanding and disagreement in the loss adjusting process, such that frequently buyers resort to legal action, and, in the eyes of the buyer, the market struggles to meet its promise to pay,” said Mr Higginson. With the exception of the earthquakes in Christchurch which have resulted in major changes to capacity, retention setting and pricing for business in South Island, New Zealand, the impact of last year’s losses has not yet had much of an impact on the terms offered by the market, said Mr Higginson. However, insurance market capacity has reduced by 30% to $1.25bn with one or two major players reducing their capacity for this class of business. Insurers have also looked to restrict business interruption cover caused by flood, he added. Prices and retention levels have increased, while terms and conditions have been tightened in some areas at recent renewals, said Gunter Becker, Head of Mining Risk at Munich Re. And for those clients hit by last year’s losses, price rises have been appreciable. “There have not been any reductions offered by insurers,” he said. There has not been a wholesale correction in the market, but there has been a sense of hardening of terms and conditions, said Richard Field of Lockton. “If you have a clean account there may be some tightening of terms—a minor correction—but we have not yet seen any major changes in wording.” “Given the need for the long-term players to remain in the segment and given that they are in a loss-making position, there is likely to be hardening in the market, particularly for those clients with losses,” said Mr Field. Ironically, the high catastrophe losses appear to be attracting new capacity, said Mr Field. “There are insurers looking to enter the mining sector to benefit from the turn in rates and the growth in the sector,” said Mr Field. “There has been tremendous growth in mining on the back of the BRIC economies and a massive influx of premium,” he said. Insurers need to work out how to better handle mining business interruption exposures, said Mr Becker. “This is very much a key time for the mining insurance sector. Uncertainty in contingent business interruption insurance has to change and can no longer be seen as a cover that is thrown in for free in a soft market,” he said. Business interruption insurance will continue to be offered, but it will come at a cost, said Mr Becker. Insurers are also likely to change the way business interruption cover is offered in the future, moving to a standing charges basis rather than claims based on gross profits, he said. The full version of this story is available in CRE's April newspaper.

Claims disputes spark standard wording effort in mining sector

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