The history of mining is as old as the hills that are mined, and it still provides raw materials that are the basis for many aspects of everyday life, at a time when the sector faces significant challenges in a scenario of high demand and major environmental obligations.
Mining produces components used in construction, the production of vehicles and satellites, the maintenance of hospital equipment, as well as countless other everyday products. Something as common as a cell phone contains more than 70 different mineral elements.
The mining industry is vital to economic development, and demand for its products is growing. At the same time, however, scrutiny of its activity has never been so intense, given increasingly stringent environmental obligations. Ana Pedrouzo, expert underwriter in Mining and Irrigation at MAPFRE Global Risks, highlights the importance of mining for a sustainable economy.
“There’s a lot of well-intentioned talk about reducing carbon footprints and the much-needed energy transition, but I’m not altogether sure that society is fully aware that mining is essential to achieving both of these objectives. It’s also quite a maligned sector, and it’s good to know that we’re now at an inflection point: on the one hand, these objectives require an increase in the extraction of mineral products, while at the same time society is demanding increasingly more responsible operations,” she said.
Mining, progress and sustainability
The mining sector is improving its ESG standing, not just for reputational reasons, but also as part of its long-term strategy. The professionals involved are striving to make good on their commitments, which include aspects such as responsible water management, the integration of local communities and the restoration of areas exploited after the closure of mines. Energy transition plans have also been drawn up, which include the reduction of carbon footprints, the use of electric vehicles and the installation of renewable energy-driven plants and facilities.
Although mining innovation doesn’t capture the headlines, mainly because it doesn’t commercialize mass consumer products, it does contribute significantly to continued economic growth and technological development. Ensuring an affordable supply of mining products will be essential for sustainable progress in all sectors. Having said that, Pedrouzo noted that the consulting firm McKinsey, in its report The net-zero materials transition: Implications for global supply chains, forecasts an imminent shortage of certain critical materials by 2030. Taking into account that it takes approximately 15 years to get a new mine into operation, there appears to be little room for maneuver: “Analysts believe that a lack of supply will jeopardize compliance with global decarbonization objectives.”
The biggest challenge for mining companies when implementing sustainable technologies is the initial high investment, given that the activity generates very long-term returns.
The insurance industry: a strategic ally
Mining is riddled with complex nuances: it’s an essential component of the global economy, but requires enormous initial investment that is amortized over the long term. It is also exposed to risks of a diverse nature that can halt production overnight. “We can talk about the peculiarity of underwriting mining risks. And not all insurance and reinsurance companies are willing to accept them,” says Pedrouzo.
Due to these high risks, specialist insurers must apply strict and specific criteria. They use a very detailed and technical approach to assess the risks of a mining operation, which covers different areas, phases and approaches. “In addition to insuring the mine and the processing plant, a series of additional high-exposure assets must be taken into account. For the biggest mining groups these can include port facilities, multikilometer transmission lines, electrical power generation facilities, ore pipelines, desalination plants, and so on. These are vast and complex facilities, with very large equipment and, in many cases, in remote locations that aren’t easily accessible,” our colleague explained.
One of the main challenges for the sector in terms of insurance is the coverage of the most exposed parts of the activity, such as tailings deposit systems (the waste that remains after the mining process has concluded) and underground deposits. Claims in these areas have historically been severe, so it’s not possible to insure these risks up to the maximum limit of the policy. “In these cases, a sub-limit has to be established because there is no capacity in the market to fully cover these risks,” she explains.
This complex condition meant that, more than 10 years ago, an association was created to connect underwriters, mining operations and brokers. MIRA (Mining Insurance & Risk Association) was created to share technical knowledge, create training modules, facilitate networking and set up work groups to add value to the different relationships across the industry. “MAPFRE Global Risks is currently participating in one of them to create specific clauses for the mining industry,” says Pedrouzo.
What can be done to improve coverage?
Faced with the challenge of dealing with a complex scenario, where production is incapable of meeting global demand and with many dangers to consider, mining companies can count on the support of the insurance industry. In order to drive effective synergies between the two side, Ana Pedrouzo considers it key to promote the professionalization of risk management. For our colleague, this means developing a clear strategy that details which risks we are comfortable retaining and which ones should be transferred, especially in the largest operations: “When the insured party is the first to take on their own risk, it sends a positive message to the market.”
A very positive aspect on the insurers’ side is that they usually provide “quality and detailed information, with very complete information on the sums insured, profit sharing calculations and engineering reports drafted by specialist companies, and this is of particular help in the hard market phases.” This continuous collaboration between mining industry and the insurer nourishes long-term relationships, which in turn helps deliver better results for both sides when it comes to renewals.
A promising and challenging future
In the field of risk management, two trends seem to be taking hold: cyber risks and parametric insurance: “Mining is becoming more and more digitalized. Companies are innovating in operations many kilometers away and with autonomous vehicles”. This means that in addition to data protection and handling sensitive information, mining activity is now exposed to hacking and cyberattacks. Pedrouzo also points out that parametric coverage is starting to become common, especially for natural disasters, because they allow for “direct and rapid adjustment of the claim once the coverage is activated” and the fact that this type of insurance is used to supplement traditional damage programs.
In the insurance industry, underwriting based on ESG criteria is consolidating as a central aspect of the process, reflecting the commitment to more sustainable mining: “We don’t insure companies that don’t have an adequate ESG rating.” Insurance and reinsurance companies are implementing policies to limit support for thermal coal and request a transition plan. According to Pedrouzo’s, these trends reflect how the mining sector is evolving toward a more innovative, responsible and prepared activity so as to better tackle to the challenges of the future.
Article collaborators:
Ana Pedrouzo has a double degree in Business Law and Administration from the Comillas Pontifical University and a Master’s in Insurance Management from the Salamanca Pontifical University and ICEA. She joined MAPFRE in 2004 and has been part of the Property Underwriting team since the start of her career, always dealing with industrial businesses such as steel and aluminum. In 2013 she began working on underwriting the mining industry.
In April 2021, Ana was appointed Expert Underwriter in Mining and Irrigation at MAPFRE Global Risks, where she has become the principal point of reference for underwriting clients in the mining and steel sector. Ana represents MAPFRE Global Risks in her capacity as a member of MIRA (Mining Insurance & Risk Association).
