Mutually Captive: Can we reverse coal's risk vacuum?

Adam Battista, Executive Director, CRE Insurance Broking

In 2023, the cost of insurance and cover options for most participants in the coal industry continued its significant decline.

For those clients who cannot diversify their operations to dilute their thermal coal exposure below the arbitrary 30% threshold, thereby opening themselves up to more insurers to entertain underwriting their businesses, prospects of relief remain bleak.

Further, against the backdrop of undeniable global demand resulting in increased production in Australia and accelerated consumption in Asia, clients throughout the supply chain are struggling to narrate their ‘coal exit’ strategy to insurers amidst these increasing volumes. The International Energy Agency (IEA) admits these volumes won’t start levelling or tapering until at least 2030.

Despite demand being entirely unaffected, this apparently redundant underwriting position persists for most major insurers when assessing fossil fuels more broadly. This author knows for a fact that the individual technical underwriters who understand what the reality is, on balance, disagree with this dictatorial stance. However, at the behest of ill-informed activists, their executives have gone ‘all-in’ on the first hand of this rushed energy transition and will not willingly wind back their positions.

Can coal bypass traditional risk transfer?

So, with most in the traditional insurance sector refusing to fulfil their role, what are the solutions?

As a key theme of the Queensland Resources Council (QRC) Annual Forum in November 2023, many believe an industry insurance mutual could be the way to go.

To recap on part of last year’s BBMC article, an insurance mutual is an organisation owned by its policyholders, where they pool their premiums to insure against specific risks; they share in any profits the mutual may achieve, as well as being at risk to be ‘called upon’ to top-up the mutual if it suffers more losses than it can pay with its existing capital.

And while, in principle, this could work for Australia’s coal mining sector, the practicalities present some steep challenges.

What classes of insurance should be underwritten by an industry mutual?

Our experience suggests that all classes essentially fall afoul of insurers' anti-coal stance. Property and liability criticality are well known but also consider that motor, mobile plant/ equipment, travel, professional indemnity, directors’ and officers' liability, and marine are also caught with very limited remaining markets that still offer coverage for both thermal and metallurgical coal-exposed risks.

The days of relying on a standard insurance contract to pick up a large portion of the tab when an adverse event occurs in the coal sector are certainly becoming numbered.

Mid-large operators have the resources to establish their own captives (again, as a recap, a captive is essentially your own insurance company to self-insure risks that the traditional markets either cannot cover or charge too much premium for) for their major classes of insurance to reflect their own specific needs, rendering a broader mutual arrangement for them redundant on their key risks. However, they would potentially contribute to some non-core policies if these were on offer from an industry mutual.

While small producers, suppliers, contractors, and consultants would benefit from a mutual insurance structure, they represent a small subset of diverse risks with casual commonality at best. This makes scaling the risk data to quantify premiums actuarially and to establish rating criteria, while not impossible, certainly a difficult prospect.

Imagine the machinations required to set up an insurance mutual that can competently underwrite all these different classes of insurance in the context of these differing risk profiles, including the management of claims, when most insurers globally only manage to offer maybe four to five of these classes profitably.

It always comes down to that other critical mineral: money

If we can overcome these factors, the glaring issue is capitalising the mutual. Without the ‘big licks’ of premium contributions from mid-large operators, funding the mutual is, by far, the biggest challenge.

Mutuals, by their nature, are a not-for-profit structure that cannot cater to shareholders outside of the mutual itself. So, possibly securing equity investment from sources other than the membership struggles from the outset, as profits may only be returned to the mutual members.

Mutual Capital Instruments (MCIs) can be used to raise external (and internal) capital for mutuals to strengthen balance sheets and to expand operations. But is having them as an accepted form of base solvency and capital adequacy by the Australian Prudential Regulatory Authority (APRA) part of their considerations?

What about debt funding? Clearly, the traditional funding sources like the big four banks are out of the picture immediately, but even if they weren’t, would they (or other funders) provide finance to an organisation whose solvency requirements are only to retain pays it is required to pay in claims?

Further, extending debt funding to an organisation that will potentially use that debt to pay out large, unexpected claims looks a lot like sunk capital from the outset.

This is where others have attempted to get government funding to help in the initial stages, while the mutual self-capitalises. Clearly, in Australia, the current state and federal governments have only one interest in coal - wringing every royalty dollar and tax while they can. Supporting the sector is simply not on the popular agenda.

Can we use the corner we’ve been backed into?

With the financial and government sectors continuing to turn away from the coal industry, in the author’s view, a part of the solution may lie with the contracting parties within the industry itself.

The last time the insurance industry was entirely dislocated was in 2001, when the most significant corporate failure in Australia occurred: the $5.3 billion implosion of one of our largest insurers at the time, HIH.

Liability insurance was practically impossible to source in its aftermath, and revised civil liability legislation was drafted and passed to limit certain types of claims and cap the heads of damages available. This had the effect of encouraging insurers back into the market, easing the availability of cover and, eventually, stabilising pricing.

Changing hearts and minds

What happens when a task that is either so risky or so specialist in nature needs to be done that it’s uninsurable? The job still needs to be done, right? So, the parties determine a way to share or allocate the risk of something going wrong equitably.

If the broader industry is concerned about its collective survival, perhaps a change to how it contracts with each other to maintain a viable commercial relationship needs to be considered while preserving competitive tension and mutual interest.

While this approach does not nullify the risks, it may serve to take some of the heat out of the equation between like-minded, cooperating parties working toward a common purpose.

While not entirely unachievable, the days of relying on a standard insurance contract to pick up a large portion of the tab when an adverse event occurs in the coal sector are certainly becoming numbered.

Thinking differently

Some final questions to consider in this context:

The insurance industry developed and broadly adopted an ‘Adani Exclusion’ that is deployed on most clients’ insurance programs in the Queensland coal sector.

• How was the $2 billion Carmichael Project and its associated infrastructure built in the face of this punitive attack?

• Moreover, how does it continue to operate without the insurance industry supporting it or its suppliers?

Surely, this is not the only example of where great outcomes can still be achieved in the absence of traditional finance and insurance support.

Perhaps there are some learnings and some lateral thinking within the industry and its advocates that could offer some assistance in mitigating the failure of the traditional insurance mechanism to support this still vital sector.

And, like the concept of a mutual, which we may not all agree on, whatever the combination of solutions entails, one is abundantly clear: the industry itself needs to pool its collective minds and resources to push (or pull) in the one direction to support each other. 