Boom in extractive industries could lead to skewed asset valuations: Swiss Re

A boom in the extractive industries including the mining and oil and gas sectors has created new challenges for the insurance industry, including asset evaluations and determining true business interruption (BI) numbers.
“Reinstatement costs [are] often underestimated, leading to insufficient premium pool,” Swiss Re observes in notes to a presentation to the 33rd Annual Risk and Insurance Management Society (RIMS) Canada Conference in Toronto.
The notes accompanied a slide show presentation at RIMS delivered by Stanley Cochrane and Kurt Falk of Swiss Re.
The presentation slides list a number of challenges in the area of asset valuations and business interruption values.
These values are difficult to pin down, the slides indicate, because of the price volatility associated with the increasing demand for oil and gas, and metals such as copper and gold.
For example, a U.S. refinery might have had capital costs of US$3.2 billion in 2006, but only two years later seen its capital costs rise to US$6 billion.
Out-of-date or incomplete valuations could lead to underestimation of maximum probable loss (MPL) calculations, the presenters noted, which in turn might result in underinsurance.
Swiss Re’s slides also note there are more “first-loss covers,” with “partial losses eroding full loss covers or MPL scenarios.”