Underwriters of property coverage for mining operations identify business interruption as one of their biggest challenges—because severe fluctuations in commodity pricing can make it difficult to accurately gauge the ultimate exposure.

The underwriters expressing this view were members of a panel discussion at the 2012 North American Mining Summit in St. Louis, hosted by Lockton.

As an example of the extreme fluxes possible in these exposures, Gunter Becker, senior vice president of mining with Munich Re, recalls a particular piece of equipment used on a job for six years until a loss occurred.

The equipment's value to the business was, “for argument's sake, [originally] $1 million a day as exposure,” he says. Within the six years' time, however, because of a spike in commodity pricing, the equipment was extracting material worth $8 million a day.

James Aloway, vice president and director of mining for Zurich Global Energy, agrees that business interruption is perhaps the most challenging aspect of mining risk because it has the potential of creating the most significant impact. A piece of equipment that is lost may only be worth $1 million, he says, but the business-interruption loss may be $100 million when it breaks down.

The business-interruption component “is where our [mining] losses come from—and this is what is going to determine whether there is a different underwriter sitting across the desk from you negotiating your renewal the following year,” Aloway says.

How are underwriters hoping to get a better handle on their total exposure?

“A dirty word that some [risk managers] don't want to hear is 'caps'—commodity price caps, so that we can put a fence around what the exposure is, understanding what the production rates are,” says Aloway.

Michael Gunty, senior vice president at Chartis, agrees, noting that “underwriters don't want to be surprised. We can't afford to be surprised. We underwrite based on loss estimates, and those loss estimates are predicated on the values that we've got—and we have to say that those values have some credibility.

“We know commodity prices are going to fluctuate—that's a given,” Gunty adds. “So by using a cap, you put a ceiling on how big that loss adjustment might be.”

A cap with periodic adjustments would be a good solution, Gunty suggests. This would allow the underwriter to adjust premium accordingly, he adds, noting, “It's not the goal to leave an insured inadequate coverage.”

Panel members listed what underwriters like to see when they meet with mining risk managers:

Articulation of their risk philosophy—they need a vision of the direction of their risk-management practices.
Understanding of their exposures.
Demonstrating commitment at the corporate level.
Showing that continuous improvements are being made.

Special Reports /

Mining Underwriters Look to Commodity Price Caps to Limit Potentially Devastating BI Losses

Related Stories

Recommended For You