February 5, 2013 by Canadian Underwriter
Global insurance broker Willis Group Holdings plc advises that more dynamic risk management will be necessary to answer an unprecedented threat landscape in the mining industry.
Its report, Mining Market Review, highlights key challenges facing the global mining industry in the year ahead, notes a statement issued today by Willis Group Holdings. Global economic uncertainty combined with political upheaval has generated a volatile environment in which demand for metals, natural resources and commodities has ebbed and flowed considerably, Willis reports.
“Despite these challenges, insurers in the mining sector have been tightening their pricing, capacity and coverage following a period of poor underwriting results,” the statement notes. It is recommended insurers be “more flexible and innovative in continuing to provide solutions that take into account these rapidly changing circumstances, while urging mining companies to review their risks more frequently and more dynamically.”
Willis reports the biggest risks facing the mining industry include resource nationalism, poor infrastructure that impedes development, and supply chain disruptions. “Infrastructure and the supply chain are becoming increasingly important factors in the success or failure of projects,” the report states.
“More often than not, deposits are located in remote areas and efficient transport networks of roads and railways together with port facilities are crucial. In many of the countries in which mining is a core industry, the infrastructure is constrained, which increases risk, limits growth and places a burden on development,” it adds.
“Resource nationalism and business interruption as a consequence of strikes probably represented two of the biggest risks facing mining companies in 2012 and this trend is set to continue for 2013,” Andrew Wheeler, mining practice leader for Willis, says in the statement. Wheeler cites as an example the Bolivian government’s announcement last July to nationalize a mine operated by a Canadian firm, the third major nationalization project within four months.
Earlier, in May 2012, protests had erupted and one person died. Two months later, some of the mine engineers and a local police officer were kidnapped. The government negotiated the release of the hostages, including were complying with the demand to relieve the Canadians of control of the mine.
In the last 20 years, notes the report, more than 20 countries have announced or implemented plans to increase the government’s percentage of the profits from mining projects by increasing taxes or royalties.
Notes Wheeler, “One way in which foreign investors may mitigate the risk of resource nationalism is building relations with the host state by adopting a sound corporate social responsibility strategy, such as health care initiatives, building schools and other community projects.”
Investors may also wish to protect themselves with political risk insurance. This will provide “a degree of flexibility as the investor can tailor the precise terms of coverages required,” the report notes.
“Political risk insurance and terrorism cover are sometimes confused, with companies wrongly believing that their terrorism insurance will provide a payout after some form of political violence,” it states. Political risk insurance includes forced abandonment.
Though insurance can be an effective risk transfer option for risks linked to resource nationalism, the report notes, not all mining companies have recognized that threat. “Market pricing for 2013 is likely to increase due to increased reinsurance whilst pricing will likely remain static for the foreseeable future.”
Other risks cited by the report include dramatically rising costs, skills shortages, the threat of losing a social licence to operate, and the challenges posed by emerging markets. In emerging markets such as Africa and China, for example, challenges include political instability, poor liquidity, inadequate regulation, substandard financial reporting and large currency fluctuations.
Willis Group Holdings reports that certain emerging economies can be a natural haven for crime, corruption, extortion and the fomentation of terrorism. Added to those challenges is the further challenge that the locations of many of these economies, combined with their lack of infrastructural and service resilience, make them particularly vulnerable to natural disasters.
To achieve success in these markets, Willis Group Holdings emphasizes it is essential to have a good understanding of potential or current exposures as well as the appropriate risk mitigation measures.