Insurance in Natural Resource projects...

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  • Agreed David, there might be opportunities for insurance companies to get in volved in types of risks which they might not traditionally have considered...as long as they are comfortable with the types of probabilities we are talking about and as long as the exploration companies realise that the premiums might be relatively high...
    David Beer said:
    Robert you say what I what trying to convey more elegantly. Yours is really a good presentation of what I deem corporate risk management, of which insurance is a (relatively important) part. However it demonstrates that there may be a greater space for insurance companies than they currently participate in David
  • The best way to view a project (of any nature) is as a bundle of risks.

    By convention we think of these as distinct, belonging in separate markets – insurance, warranties, leases, equity, debt. Each market takes only what it is accustomed to managing, either through familiarity, or more likely because that’s what distribution for that particular market recognizes and can handle.

    A far better way is to lay out the full bundle, and create smaller packages for various markets, based not on tradition, but rather on the real underlying expertise and appetites of those several markets.

    In the mining example, traditionally the specialist venture capitalists known as wildcatters would sponsor a number of explorations, hoping through spread that one big win would pay for the many fails. No good quantification other than intuition and experience, so no proper analytics.

    Likewise, traditional insurers might take on the workers’ comp risk of the miners, property cover on equipment, and perhaps truck liability. Not for lack of many other low-beta risks in the example, but rather that traditional insurance brokers are not equipped to recognize, collect and bundle any but the classic risks.

    Now consider instead all the geology available, in part driven by earthquake science. Mines and wells are now far more amenable to statistical methods.

    Likewise, the real downstream risks come from factors like say the weather (which may drive the use of oil or coal), jointly with energy prices (which drives the value of the extracts). With proxies for both revenues (weather) and margin (energy costs), we can construct a fair match to profit.

    Note that the joint distribution of weather and energy costs is itself low-beta risk, since weather is random. That means it is amenable to actuarial pricing. But insurers are never offered that bundle, even though it is properly in their wheelhouse. (Think of insurers are simply specialist hedge funds for low-beta risks, with long-term lockups.)

    Right now, those quantifiable risk bundles all fall inefficiently on common. Just imagine if venture capital could focus on just what’s left, after the quantifiable risks are placed elsewhere.

  • Thanks David, would you be able to venture a guess as to what an upper limit might be on the total premium as a percentage of the covered loss amount? Also, w.r.t your comment on the fact that risk is insurable along the curve: surely there will be a point where the probability of failure (say 50/50) might be just too high (with equally high premium) to be insurable...In addition, I have been reading in insurance related literature the insurance companies typically shy away from insuring so-called speculative risks i.e. risk where you could be worse off or better off than expected. Appreciating you comments.
    David Beer said:
    In my opinion risk is insurable along the curve. However an insurance entity that does not have a portfolio of such clients is unlikely to be able to offer risk premia that are attractive to the expro company. Firstly the insurance company can utilise the portfolio effect and secondly it will gain experience in such ventures to enable its assessment of probability of success higher than others. There are many such expro companies and they often "insure" their risks by floating to investors or by farming out a share to another company.
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