Mining sector risk managers urged to seek parametric solutions

The mining sector will increasingly turn to parametric solutions to help cope with the rising exposures caused by climate change, according to a leading broker in the growing parametric market.

London-based Paul Jones, head of parametric solutions at Lockton, says that extreme weather events such as floods and droughts, and natural catastrophes like tropical cyclones are major causes of disruption in the mining sector.

The broker said that such events are expected to increase in frequency and severity and insurers are becoming more cautious in their underwriting approaches, particularly for tailings dams. “Parametric insurance can offer an attractive alternative solution, filling the gaps in the traditional insurance programmes,” said Jones.

Mining operations are highly exposed to water risk – both too much and too little as well as wider climate-related impacts which can disrupt supply chains, noted Jones.

“The environmental impact of such weather events can disrupt supply chains across different raw materials, mining sites and climatic zones. For example, flooding, following heavy rain or surges, can cause hazardous or toxic waste storage to spill and disrupt operations,” he said in a recent note.

“Insurers are particularly concerned about tailings dams. They can fail for many reasons, including floods caused by heavy rain, tropical cyclones, snow melt or storm surges. Tailings dams can represent a big risk for insurers as a failure can not only result in extensive environmental damage, but it can often also destroy livelihoods, damage infrastructure, and even cause fatalities,” continued Jones.

On the other hand, droughts can lead to water shortages, affecting both environmental aspects (e.g. less water available for dust suppression) and supply aspects (e.g. water-intensive production processes need to be slowed down). In addition, increased water stress might intensify water competition between mining and other water users (e.g. communities or agriculture).

“This is of particular concern to governments and local authorities. A combination or sequence of extreme events can amplify the impact: a wet weather event during a period of prolonged drought can worsen the impact on mining and processing operations,” pointed out the expert broker.

Jones explained that parametric solutions can help protect mining businesses against weather-related losses and the consequent non-damage business interruption.

“Parametric policies respond when pre-defined parameters (triggers) are met or exceeded. The client must suffer a financial loss due to a triggering event taking place but unlike traditional insurance, there is no need for loss adjusters to determine the loss and there are no exclusions for any assets or business interruption losses,” he said.

“For floods and droughts, the obvious trigger for a parametric insurance policy would be rainfall. There are various data sources available to insurers to measure and trigger policies. It is key that the data source is independent of both the client and the insurer to ensure complete transparency in the contract. Lockton works with several data providers to structure and price a solution that suits the mining company’s needs,” explained Jones.

“Traditional insurance policies include a number of conditions and limitations, exclusions and self-insured retentions that are assumed by the insured. Where insureds or captives want to reduce their exposure beyond what the traditional insurance market will offer, parametric insurance can supplement that cover and fill gaps left in the risk transfer programme,” added the broker.

There is no need for loss adjusters for parametric insurance claims, but risk managers do need to present proof of loss declaration signed and notarised. Some insurers do require the presentation of financial statements and invoices as part of the claims process.

“Parametric insurance will keep growing in the mining industry because it can fill the gaps in traditional insurance programmes. At Lockton we can create tailor-made structures that leverage data-driven triggers that can stabilise your business’ cash flow and reduce downtime,” concluded Jones.