Soft Coal, Soft Prices

The massive global mining industry should see softer rates in 2010 as more insurance markets move in to write the business.

By DAN REYNOLDS, senior editor of Risk & Insurance®

The $2 trillion international mining industry should be in for a decent insurance year, from a cost of premiums perspective, anyway, according to a report issued earlier this month by Willis, the Dublin-based global broker.

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"The start of 2010 will mark a point where the market moves in favor of the buyer rather than the seller," wrote the authors of the Mining Market Review, who include Willis mining practice leaders Steve Higginson and Andrew Wheeler.

According to the report, the mining market seems to be in recovery from the outsized losses of the 2007-2008 cycle. The year 2008 saw mining losses in the $3.5 billion range, which stands in stark contrast to the years before and after it. In a sector in which there were $600 million in premiums, 2008 was a very bad year.

In 2007, the industry saw a fraction of that, with losses more in the $150 million to $200 million range. The years 2005 and 2006, according to Willis, saw no significant losses in the mining sector. Losses in 2009 were around $500 million, significant but not at 2008 levels.

Softer prices in mining are also coming about because of more than ample capacity. According to the Willis authors, more than a dozen insurers left the market after the disappointments of 2008. But as we head into the spring of 2010, some insurers are considering re-entering the market, and some have already joined up.

NEW PLAYERS DIG IN

New carriers in the mining sector include Bermuda-based Torus; Sonoma, Calif.-based Apollo General Insurance; and London-based Brit Insurance. They join industry leaders like the London-based Beazley.

The world of mining risk can roughly be divided into two camps, open-pit mines, such as the massive Grasberg copper and gold mine in Indonesia, and underground mines, such as those that are popularly associated with coal mining in the United States.

According to the Willis writers, one of the chief risks in underground coal mining is not the dramatic catastrophe of a mine explosion or collapse, but the value of the mining equipment that operates underground in those dark, dusty caverns.

A long wall miner--a massive and complex piece of machinery that can strip sheets of coal from the face of a coal seam--can cost as much as $75 million. Continuous miners--smaller pieces of equipment equipped with massive grinders more suited for tunneling--can cost as much as $3 million a piece.

"However, when combined with the ever-present possibility of roof collapse, or methane explosion, underground flood, fire, collision or human error, the uniquely hazardous nature of the class becomes apparent," the Willis authors wrote.

U.S. EXPOSURE

Although the United States has recoverable reserves of 246 billion metric tons of coal, by far the largest reserves in the world, the list of insurers that will underwrite U.S. underground coal mining risks is limited.

"Whilst a limit of, say, $500 million for a open cast (open pit) operator is feasible, a limit of more than $50 million for underground coal--while achievable--is more challenging and frequently becomes a function of price," the Willis authors wrote.

February 12, 2010

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