NU Online News Service, Feb. 3, 3:27 p.m. EST

Rates for mining property damage and business interruption (PD/BI) insurance are likely to soften in 2010 but could harden again should this volatile sector experience a catastrophic loss, according to a report from Willis Group Holdings plc.

The insurance broker’s report, Mining Market Review, was released at the Mining Indaba 2010 conference in Cape Town, South Africa, put on by Summit Business Media, parent company of National Underwriter.

Last year saw calm return to the mining insurance sector after the unprecedented $3.5 billion in property claims–mainly the result of the commodity cycle boom–sent the market reeling in 2008, the brokerage said.

Steve Higginson, Willis Mining co-practice leader, said in a statement, “Last year was below average from a loss perspective, with claims totaling $400 million. Although the perils are no less significant, this has afforded a moment for the mining insurance market to take stock.”

Andrew Wheeler, Willis Mining Co-Practice Leader, added, “While we expect to see the emergence of a buyers’ market for mining in 2010, the huge losses of 2008 remain fresh in underwriters’ minds. Should we sustain a significant natural catastrophe event or considerable machinery, property and business interruption losses, the rates in the property market may well spike again.”

The return of rising commodity prices and the resulting increase in exposure, together with the continuing change in climate conditions, are the main concerns for mining underwriters in 2010. Four major factors on underwriters’ minds are:

o De-bottlenecking: Insurers are putting pressure on clients to implement initiatives that change certain aspects of the production process to reduce delays and gain efficiencies.

o Natural catastrophe capacity: After the market shock of 2008, capacity is returning with at least three new markets writing non-proportional business. However, the level of capacity supply going into 2010 remains below the level of demand in natural catastrophe-exposed areas. Capacity remains tight for earthquake and rain event and flood insurance, especially for open-cut operations.

o Commodity prices: Rising prices have resulted in increased exposure for underwriters. Willis predicts that price caps will be back in vogue in 2010 to provide underwriters with more certainty. If commodity prices return to 2008 levels, large placements may find capacity once again restricted.

o Market security: Many buyers continue to syndicate their risks to a wider range of reinsurers rather than to a single large capacity provider.

The report notes that total PD/BI capacity in this sector is now estimated at $1.75 billion.

The mining construction sector produced positive results for insurers in 2009. With few losses affecting the onshore construction insurance market, rates and premiums are softening as new entrants have joined the market to bring global capacity to approximately $2.7 billion.

Since the start of the credit crunch, Willis says there has been between $2 billion and $4 billion in political risk claims emanating from the mining industry. These have been concentrated in Ukraine and Kazakhstan but have also been seen in Brazil, Bahrain, Indonesia and Bolivia.

A number of political violence claims for mining assets were made in 2009, particularly in South America. This has resulted in reduced capacity and increased premiums that are contrary to the overall terrorism and political violence market, which is softening.