Canada, with its long history of mining, is home to some of the world’s largest mining companies whose operations extend far beyond Canada’s borders. And because Canada is a resource-rich country, most mining companies have a footprint here. However, history has taught us that diversification reduces the overall risk profile and provides an opportunity for greater economic impact.
Expanding mining operations to other resource-rich nations while maintaining Canadian mining standards and best practices is an ideal climate for insurance companies. The business interruption risk is spread across multiple jurisdictions, and the insurance industry finds comfort in adhering to Canadian risk management principles. But operating in jurisdictions where there is political instability or where there is a public opposition to mining poses a higher investment risk. Insurance products are available to transfer aspects of political risk as well as the risk of political violence, which helps reduce the overall balance sheet exposure. Multinational insurance placements are complex and require a strong understanding of local insurance regulations to ensure compliance. There are many strategic considerations to explore when placing a global insurance program, with decisions led by the organization’s risk management financing philosophy.
Canadian influence in international mining operations
Canadian mining is known to have some of the highest standards in safety, environmental practices, tailings management, and human rights. Mines operating in jurisdictions that have less regulatory oversight, compared to Canada, tend to be viewed as riskier because of the perceived lack of controls and protocols. Insurers do find comfort, however, in cases where the operations have a Canadian head office that maintains a good relationship with the local management team and where they are working together to support the implementation of Canadian standards.
Consistency in standards across operations within a company, regardless of jurisdiction, shows strong management and governance practices. When Canadian mining companies acquire assets in foreign jurisdictions from local or non-Canadian mining companies, top of mind for insurers will be whether the Canadian mining company plans to transition their newly acquired assets to Canadian standards, particularly with tailings management, given the unfortunate losses witnessed in recent years. For instance, if the company’s Canadian operations conform to the global industry standard on tailings management, insurers would expect the company’s international operations to also comply with the same standard (unless there are aspects that conflict with the local legislative requirements). Similarly, having each operation align with standards such as the International Organization for Standardization (ISO), including ISO 14001 environmental management system and ISO 45001 occupational health and safety management system, demonstrates a good risk profile.
When it comes to human rights, insurers are concerned about their own reputational risk if they provide insurance to a company that has been involved in human rights incidents linked to any of their operations worldwide. The term “social license to operate” is not new to the mining industry, but it is gaining momentum in the insurance sector. Insurers now face similar pressures to only provide capacity to companies that are good actors in the human rights space and adhere to the environmental, social, and governance (ESG) movement. Insurers have declined to write risks that have had human rights issues or that have not started discussing ESG with a focus on reducing their environmental impact.
Political unrest
Although the mining industry is important for the health of a country’s gross domestic product (GDP), there have been events of civil unrest, like the Chilean riots in 2019 and the recent Peru conflict, that have had a direct impact on the mining industry. Insurance products covering incidents such as political violence, including terrorism, sabotage, strikes, riots, civil commotion, and malicious damage, can protect a company’s balance sheet. However, the political violence insurance industry has been impacted over the past few years, and coverage that used to be afforded within a general property policy for this exposure is now being excluded, and the insured must purchase stand-alone policies. Jurisdictions with political unrest are concerning for insurers, but if the insured can evidence their positive community relationships and impact, it improves insurability. For example, water supply is critical to most mining companies for operations, but water is often difficult to source in mining regions. If the mining company builds a desalination plant and gives back to the community by providing excess water, it assists with the social license to operate and therefore reduces the risk of political violence.
Another consideration for Canadian mining companies operating in politically unstable jurisdictions is political risk insurance. This type of insurance protects the company’s investment in foreign assets by covering losses resulting from government actions, such as expropriation, or from economic turmoil, such as currency inconvertibility.
Complexity of placing insurance in multiple jurisdictions
An advantage global mining companies have when implementing a master global insurance program is the ability to maintain control over the insurance terms and conditions purchased at the corporate level. This approach ensures all operations are insured based on the parent organization’s risk management purchasing philosophy. It also allows the global risk manager to have a direct relationship with the panel of insurers and reinsurers of the local policies who are providing the coverage and paying the losses. If a locally admitted policy is placed, it should mirror the master policy. There is a risk, however, if the local policy is issued incorrectly. Or, if the local policy is required by regulation to be issued in the jurisdiction’s local language, there is a risk of coverage being unintentionally changed when translated. The master global insurance program will typically have a difference in conditions (DIC)/difference in limits (DIL) clause which allows the master policy to respond to an insurable loss on a non-admitted basis in the event the locally admitted policy denies the coverage.
Organizations benefit from economies of scale when purchasing a master global insurance program and placing admitted policy documentation in the local operating jurisdictions as required. The requirement of local admitted paper varies based on several factors, such as local regulation, tax implications, and risk management purchasing philosophy. If issuing insurance policies in foreign jurisdictions on an admitted basis, it is important to partner with global insurance markets who either have an office in the operating country or who have access to fronting arrangements with local carriers. A fronting arrangement is a special form of reinsurance where the insured purchases an insurance policy from an insurer who is licensed and can issue admitted paper in the jurisdiction requiring the local admitted policy, but the fronting insurer will only retain a small portion of the risk, if any at all, and will transfer the remainder or entirety of the risk to a reinsurer. The reinsurer in this arrangement would typically be an insurer on the master global insurance program placed in Canada.
In foreign jurisdictions where the insurance economy is not well-developed, often local insurers may lack the same financial strength and capacity as global insurance markets. For countries that require locally admitted paper, the insured should be cautious of how much capacity remains with the fronting carrier or local markets because of credit risk in the event of an insurance claim. At the same time, Canadian mining companies operating in foreign jurisdictions should support the community of their operations, including the insurance markets, which will help grow their financial strength and support the local economy.
Some business contractual agreements that Canadian mining companies enter require their insurance be placed with reputable insurers or that the panel of insurers meet specific minimum financial ratings. To fulfil these contractual obligations, the insured may need to partner with global carriers who are licensed in the jurisdiction of operations and that can meet the required financial rating. Opportunities exist for markets without an insurance license in the jurisdiction requiring the admitted paper to partner with fronting carriers, which can either be a global insurance market or a local fronting carrier. The insurance broker responsible for placing the master global insurance program should assist with finding the fronting arrangements required.
As the world transitions to cleaner energy and net-zero targets, the outlook on sustainable mining is strong. The demand for minerals and metals needed to support cleaner energy technologies is growing and can only be met by continuing to mine these precious natural resources. Canada has an opportunity to share its history of lessons learned and its best practices with other resource-rich countries that may be less-developed but who are keen to grow and be a part of our world’s current and future needs. It is an exciting time to be a part of the mining industry, with Canadian companies positioned to continue to lead the industry, both inside and far outside our borders.
Katherine Dawal is senior vice-president, risk management, at NFP Canada. She brings her risk management expertise to the complex risk solutions group of NFP in Canada, with a specialization in mining. Katherine has over 15 years of experience in the international mining industry, focusing on large and complex insurance placements, multimillion-dollar insurance claims, and enterprise
risk management.
Clinton Mora is a reporter for Trending Insurance News. He has previously worked for the Forbes. As a contributor to Trending Insurance News, Clinton covers emerging a wide range of property and casualty insurance related stories.