- Over the past 20 years, the mining industry has experienced several major tailings disasters including the devastating Brumadinho failure which triggered a regulatory and industry-wide safety review of tailings dams, and changed the insurance landscape very rapidly
- The insurance industry has now realised the exposure that these dams present and are evolving their cover and terms to protect their business
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With several major tailings disasters occurring within the last few years, tailings facilities have come under increased scrutiny with stakeholders demanding better governance, paying closer attention to the monitoring and maintenance of dams, and placing a strong focus on the role of independent audits. In particular, investors and insurance companies want to know that their respective activities are protected, and mine operators therefore must do whatever they can to make a risk quantifiable.
According to Willis Towers Watson, until recently insurance capacity was generally available and underwriting requirements were modest in nature in that insureds had to disclose relatively little information on their facilities, operational or decommissioned, to their insurers in order to obtain coverage.
Until the catastrophic failure of the tailings dam in Brumadinho, Brazil which caused a tidal wave of 11.7 million cubic meters of mining waste, killing 270 people, most mining companies had been able to transfer part of their tailings exposure into the insurance market, be it through their General Liability, Property or Environmental Liability Insurance programs as there was no specific ‘tailings storage facility insurance’.
The devastating disaster resulted in the operator posting a USD1.6bn loss in the first quarter of 2019 after they incurred expenses of USD4.5bn related to physical damage, business interruption and decommissioning. In light of this, the insurance industry has been revisiting its approach and has been eagerly awaiting the release of the Global Standard on Tailings Management for further guidance.
How has this impacted mining operators?
Almost overnight, insurers were waking up to the full financial impact that a significant tailings failure can have on their business, resulting in a complete overhaul in underwriting guidelines. As a result of this, mining operators have experienced substantial premium increases and a decrease in insurance cover.
In the recent AusIMM Global Tailings Standard webinar, Professor David Williams explained that some regions including Brazil, China, Russia, and parts of Africa have been refused insurance cover for tailings dams, while other regions have had their insurance cover significantly reduced by about one third and their premium has increased about twice.
“The effective cost of insurance is now about three times what it was previously for a lesser amount. Some companies are now choosing to self-insure as they’re finding it impossible to get insurance.”
“A typical coverage might have been in the order of $300 million for a tailings dam failure but that has been reduced by about a third…If you had a failure on the scale of Brumadinho now that would be a drop in the bucket, ”
said Professor Williams.
Obtaining coverage and reducing premiums with technology
According to Matthew Johnson, Head of International Mining Industry Underwriters (IMIU), mining companies now have to demonstrate they have a grip on the maintenance of both old and new dams if they are to secure cover for tailings storage facilities.
“The insurance industry and clients will have to come around to the exposure these dams present and evolve cover and terms to protect insureds, but on a sustainable basis for the insurance market.”
– Matthew Johnson, Head of IMIU
Given that insurance premiums have recently significantly increased while the insured value has dropped, insurers can afford to be very selective in where to put their capacity. In order to secure a satisfactory insurance renewal outcome, mining companies will need to:
- be transparent in the assessment of risks as cover is based on risk-adequate prices and conditions
- make risks quantifiable by fulfilling its obligation to do whatever is necessary to avoid an incident from occurring, as the insurance industry is only willing to assume risk that is assessable
- show that the facility adheres to certain standards and is compliant
- meets the industry’s public disclosure requests (such as the Investor Mining and Tailings Safety Initiative/Church of England)
- work with underwriters on third-party engineering reports (audit reports and dam break analysis)
- follow-up on any resultant risk recommendations from the audits
- comment proactively on any outstanding recommendations as highlighted within each third party audit or report, including status updates and anticipated timeline to completion
- include their own in-house geotechnical engineers and tailings management group in the insurance placement process