International insurance and reinsurance broker Glencairn South Africa MD Nick Hall says that the global insurance market has suffered a spate of losses and financial difficulties in 2008 with regard to mining interests, and Africa is no exception.
He says that, following the global credit crisis and the ensuing devaluation of commodities across the board over the last six months, some mining companies’ share value has dropped by up to 70% year-on-year.
“I think, however, that the commodities will pull these companies through, even though it will take a long time for the global credit situation to sort itself out,” says Hall, referring to the familiar boom-cycle nature of commodities markets, which forecast an upturn again before long.
However, in terms of insurance, large losses were experi-enced since January this year, owing to an increase in the number of claims and the size of these claims across the world. Hall says that there have been a significant number of claims, termed losses to insurance brokers, in Africa and South Africa itself.
“There is no particular reason for these losses. It’s not down to mismanagement, which is actually improving globally,” says Hall. “It’s just a situation where losses this year have been more frequent. It has just been a bad year for mining.”
Hall explains that there are two aspects to a loss. The first is physical loss, which implies actual damage through a fire or explosion, or a mine shaft collapsing.
The other aspect is financial loss. Business interruption is one aspect of such a loss. “If a mine can’t operate for three days, that too is a significant insurance loss,” says Hall.
He reveals that in South Africa more than one claim has been made this year around the R500-million mark following serious accidents.
Hall says that mining groups will be bracing themselves next year, because insurance rates are likely to increase on the back of this year’s increase in claims. Further, insurance companies are likely to increase the levels of deductibles contained within the policies, so as to further discourage smaller claims.
“The mining sector of the insurance industry is hurting right now,” says Hall, stating that, on top of premium hikes, insurance companies are likely to underwrite more selectively on a risk by risk basis.
He says that they will look carefully at every mining risk, mining survey reports, and potential improvements to reduce risk wherever possible. Although this is common practice by insurance companies, the efforts will be more intensive in future.
Meanwhile, Hall says that there are many ways in which mining groups can contain rising insurance costs. Many of the larger mining groups have their own insurance divisions and will consult directly with them in an effort to reduce insurance costs. This means eliminating risk as much as possible, thus increasing safety factors throughout.
“Insurance and reinsurance for the mining and engineering sector is generally run by engi-neers around the world who have extensive experience in mining and know what they’re talking about,” says Hall. “There are divisions that are made up of engineers and mining experts that survey and assess the risk, after which they compile a report and make recommendations going forward.”
Many of the recommendations made remain up to the mining group itself to decide if it is willing to make the recommended changes, or if it is satisfied with what it currently has. The insurance companies and the mines work closely together on safety issues, says Hall, indicating that many decisions regarding advancements in safety matters are influenced heavily by the insurance industry.
In Africa, he continues, des-pite whatever reputations may abound about standards, the amount of claims made by mines is relatively standard when compared to the rest of the world. This could be indicative of world-class safety standards being applied on the continent.
However, Hall attributes this to the fact that the multinational mining groups who have significant presence in Africa are merely careful to protect their reputa-tions abroad, and so apply the same standards in Africa that would be applied in operations in the US or Europe, so as to avoid potential disgrace.
Nonetheless, Hall predicts that if the amount and severity of the claims decrease during the next financial year, so will the premium rates, although the drop in premiums will lag somewhat behind, because, as the mining insurance market becomes more attractive again, there will be new entrants to the market who will undercut current rates, forcing market prices down again so as to restore balance to the competition.
Navigating the various territories’ insurance legislative requirements as well as the current financial-market turmoil can be a minefield for the uninformed, putting the informed and well-connected Glencairn South Africa in a position to assist in this regard.
“We have extensive relationships with the best insurance companies within the various territories, as well as service agreements with local retail insurers and brokers where required,” concludes Hall.