Q&A: Fred W. Smith IV, Willis Towers Watson P.L.C.Reprints
Low commodity prices, increasing regulatory pressure — including on the workplace safety front — and major environmental events have challenged the global mining industry, leading to bankruptcies and an expanded search for new technology and insurance solutions. Fred W. Smith IV, director of natural resources and head of U.S. mining and metals at Willis Towers Watson P.L.C. in Knoxville, Tennessee, discussed these challenges with Business Insurance Senior Editor Gloria Gonzalez. Edited excerpts follow.
Q: What are the key issues or challenges the mining sector is dealing with?
A: The current Mine Safety and Health Administration in the U.S. is coming down on the mining industry fairly hard. There's a renewed focus on mine closure obligations and financial assurance that mining companies have to provide to ensure that after they disturb the land and extract the minerals, they put it back to its original state. The mine closure financial assurance is really being looked at closely, both in the U.S. and globally, because the financials of mining companies are under so much pressure that you're seeing bankruptcies. With that, some states are left with closure obligations that the mining companies previously were covering. Now they are bankrupt or liquidated, and there might not be enough money to cover the costs of reclaiming the land. That's really heating up the pressure on the mining companies that are left that aren't in Chapter 11.
On the environmental front, you've had a number of global events in the last few years related to tailings and impoundments, which is basically where the mine waste is stored after the minerals are extracted and processed. These are hundreds-of-millions-of-dollars events, up to a $1 billion event. Previously, what companies may have thought of as their maximum exposure for a liability event of an environmental nature are now double and triple what they thought they were, which could trigger a bit of a contraction in capacity. You may see some insurance companies start to review their exposure. At the moment, there is still plenty of capacity to transfer these risks to the insurance market, but with more of these events happening, it's going to be looked at closely.
Q: On the financial assurance issue, is there an insurance solution?
A: Companies can post cash or letters of credit to the state they're operating in, but more frequently they get an insurance company to provide a bond. Depending on the financials of the company, there will be some level of collateral required. Obviously, where we are right now with the financial health of a lot of companies, you're seeing that collateral amount raised because the surety companies are worried the mining companies won't be there to honor the obligations, and they'll be stuck with it. There are a number of (insurance) companies out there that do this, but there aren't dozens. There might be six or seven, and every day they're getting asked by senior management: “What's your exposure to coal? What's your exposure to mining?” It's under a lot of scrutiny. The industry for financial assurance is still good, but people are watching it pretty closely.
Q: How has the environmental liability insurance market changed in recent years for the mining companies?
A: It's not as robust of a market. It is expensive coverage, and you typically don't see companies in the U.S. buying really high limits, which they probably should. The environmental liability market has developed pretty well, but there are still not a lot of (carriers).
Q: Is there more that can and should be done with regard to workplace safety in the sector?
A: I think the overarching issue that the industry needs to do better job at is the mining companies and MSHA working together versus in opposition. It's the Mine Safety and Health Administration, but it's often viewed as an enforcement agency. With the mine closures, you have a lot more inspectors out there inspecting fewer mines. Most mining companies have an inspector on the site almost every day. It's disruptive. so I think that's where some of the conflict comes in, even though they are there to keep the miners safe.