- Greater risk financing maturity needed to combat climate risk and green transition exposures
- Property, machinery risk frequently written in captives
- Mining and metals captives have unique challenges when faced with significant claims
A growing number of companies in the mining, metals, oil and gas sectors are looking towards captive utilisation, particularly in the metals and mining middle market segment, with traditional carriers reducing capacity and increasing exclusions concerning climate risk.
These companies are also assessing captives to avoid increasing rates in the commercial market, especially for property risk.
Companies in these sectors are exploring ways they can transform their operations as part of the green transition with captives providing an effective way for firms to make sure they have sufficient cover as they do so.
Most large companies in these fields already have captives retaining significant net retentions in the primary layer, frequently in the tens of millions.
Smaller players are increasing captive utilisation due to market pressures, leading to a growing use of cells as middle markets companies look for alternative risk financing methods.
“The constriction in the insurance market has intensified, though there may have been a temporary pause in the last 24 months due to energy insecurity caused by the Russia-Ukraine conflict,” Matthew Frost, head of risk advisory, regional leader, natural resources at WTW, told Captive Intelligence.
“Nonetheless, companies need to plan for the future, considering the possibility of limited access to insurance and developing a contingency plan.”
Jason Tyng, captive lead in the US captive solutions group at HDI, said it is common for companies of this type and of a certain size to have captives once their insurance spend exceeds $2m annually.
Climate change
Captives can be an important tool for mining and metals companies as they are increasingly forced to battle emerging risks as a result of climate change.
Jody Bisson, director at WTW in Guernsey, said he would split climate risk impacting mining and metals companies into two elements, with the first being the immediate impact on their businesses, such as increased rainfall affecting open mines.
“It is important to assess these risks and explore how a captive can help manage them, potentially avoiding additional capital expenditure,” he said.
Secondly, Bisson said these companies should consider their future direction over the next five, 10, or 20 years, including transitions to emerging markets or renewable energy.
“Emerging risks may not be well-covered by traditional insurance markets, but captives can provide tailored coverage and support the business through these transitions,” he said.
Bisson said that in the metals and mining sector, especially in fossil fuels, companies are taking a long-term view of the market.
“Instead of reacting to short-term trends, they are evaluating future developments,” he added.
“Many of these companies are relatively cash-generative, and from an insurance standpoint, they can be quite profitable.”
He noted that insurers are therefore interested in participating in this sector to build a strategic presence and leverage long-term opportunities.
Bisson told Captive Intelligence that WTW has a client with an area of land that will soon be no longer useful to them as its operations cease this year.
The company is planning to re-utilise the mine areaand build a 300+-megawatt solar farm on the site that will pump water to the top reservoir above the mine.
“As the water comes down, it will pass through water turbines, generating immediate and constant electricity dispatch power into the grid at peak times or when the energy generated by other renewable energy sources is unavailable,” Bisson said.
“We’re helping support this initiative.”
Frost said that the mining industry is experiencing ‘creeping exclusions,’ where new exclusions, including climate change exclusions, are appearing on excess layers of cover.
“Companies have to decide whether to accept the reduced coverage or use a captive insurance company to cover some of the excluded risks, setting aside premiums and capital for potential future losses,” Frost explained.
Despite the challenges, there’s still greater maturity needed in risk financing within the sector to catch up with the green transition.
“Additionally, there’s a cohort of mining companies, particularly those reliant on coal revenues especially metallurgical and thermal coal, that we’re encouraging to start considering self-insurance,” Frost said.
Frost highlighted companies in this sector face a future where insurance options may become more limited, so preparing for self-insurance is crucial.
“For these companies, a structured self-insurance approach is vital,” he said.
Frost said companies that are well-diversified in their commodity portfolios, like those focused on copper, may not face immediate issues but should still consider self-insurance as they grow.
“Companies specialising in coal need to start planning for self-insurance to avoid ending up either self-insured or uninsured in the future,” he added.
Captive structures
Single parent captives are the norm in these sectors due to the general volume of premiums and the size of retentions and limits.
“The single parent captive is the most widely used, but we also see structures within the single parent to further segregate business units from each other,” Tyng said.
“We also see risk retention groups (RRGs) for some of the smaller risks as well.”
Salil Bhalla, manager in global captive fronting at Allianz Commercial, said since the 1970s some energy companies have elected to access mutuals which have grown over the years to include mining risks.
“This supplements the capacity provided by their captives,” he told Captive Intelligence.
As mid-market companies within the sector increasingly look towards self-insurance the number of cells being utilised is growing.
“When we start looking at the mid-tier companies, setting up a full captive involves more cost than a cell captive,” Bisson said.
“There’s also the consideration of needing to travel for board meetings.”
Bisson said for these mid-tier companies, the cell structure is very useful because it allows them access to new markets.
“It lets them start controlling their insurance programme through their own cell captive without the requirement to travel for board meetings,” he said. “It’s a more cost-efficient method to take that first step.”
Lines of business
Due to the nature of metals and mining, property and machinery risk are the most frequent lines of business written within their captives.
“Most mining companies have 80% to 90% of their premium in the property space, whether it’s property and business interruption or just property coverage,” Frost said.
Once the property insurance is established within the captive, Frost encourages clients to consider adding other lines.
“Short-tail classes of business-like construction and terrorism are natural extensions,” he said.
He believes that having a captive with just a single line of coverage, such as property, is a missed opportunity.
“To maximise the value of a captive, it’s important to grow the portfolio over time,” he added. “Many companies set up a captive, put property insurance into it, and then do nothing for years.”
Frost said this approach often results in the captive having minimal impact on the overall insurance programme, making the captive less effective.
“Ideally, after establishing property coverage in a captive, clients should also consider moving plant and equipment policies into the captive,” he added.
Bisson said that when dealing with machinery in the mining and metals sector, the equipment is often high-value and important to business operations.
“Standard property insurance might not cover the unique risks associated with this high-value plant and machinery,” he said.
Bisson said that specialised insurance tailored to machinery is typically required.
“It’s essential to assess risks such as mechanical failure, operational downtime, and maintenance costs, in addition to broader operational risks like regulatory changes and environmental impact,” Bisson added.
Bhalla said captives in the oil and gas market write all lines of business and have very sizable net retentions.
“In addition to traditional lines of business such as property, marine cargo and general liability, captives owned by oil and gas companies write control of well and operators’ extra expense and third-party pollution liability,” he added.
Challenges
In addition to climate and green transition risk, there are a number of additional challenges unique to these companies, including difficulties surrounding significant claims.
“They invariably attract a lot of media, public and regulatory attention,” Bhalla said.
He added this is especially the case if it involves bodily injury, damage to adjacent property or sudden and accidental seepage, pollution or contamination.
“Such incidents require very careful management that go beyond normal claims handling, involving specialist energy loss adjusters and experts,” he said.
Assets for oil and gas companies can often be hard to comprehend and these assets may be located onshore or offshore.
“Imagine a structure that is taller than the Eiffel Tower with values approaching a $1bn but located in the North Sea or Gulf of Mexico,” Bhalla added.
“Such risks provide unique underwriting challenges which is why major insurers like Allianz Commercial usually have dedicated expert underwriters in the natural resources and energy space.”
He said working with an experienced fronting partner is key in this market to ensure there is a local admitted and compliant policy to respond to a claim.
“This policy should be issued in a timely manner supported by a robust claims protocol so that when an incidence arises, it can be dealt with quickly and professionally,” he said.