Over the last 2 years, CRE has seen several insurance participants promoting and lobbying for a captive or mutual solution for the coal sector to help reduce costs and ease coverage acceptance.
So what are these silver bullets for the coal industry and how could they work?
What are captives?
A captive is effectively a structure created by a company (or in this instance an industry) whereby it acts as its own insurance company and is controlled by those owners.
Instead of paying an insurer premiums each year, you pay these into your captive who then acts as the insurer for potential claims – still governed by an insurance policy(ies), but generally with broader acceptance and potentially fewer exclusions.
Critically, it also purchases reinsurance to protect the captive from paying out on large claims on its own, which would potentially destroy or materially erode its liquidity.
… and what’s a mutual?
A mutual behaves similarly with a few critical differences. The main one is that while a mutual is owned by its policyholders (members), it is controlled by the manager of the mutual who sets the rules – and in our experience, with limited input from its members; if you don’t fit, you’re not invited.
These structures, from an industry perspective, have either been squarely focussed on the provision of significant government assistance in bringing them to fruition or a level of industry harmonisation and cooperation that is extremely difficult to achieve.
Who in government is going to come out and vocally support and galvanise party (let alone bipartisan) support for the coal industry? Most who do are shouted down within their own party and most definitely across the chamber.
Look at their level of support for insurance in Northern Australia which became almost uninsurable following constant cyclone and flooding disasters – they put up a $10B bond, but only for their constituent voters.
Home and contents policies, strata complexes beneath a certain value threshold and micro business are the only beneficiaries of this support; not business of any real size or scope. And even with this half-measure, the latest budget estimates from Treasury estimate premiums could still go up by a further 20% this year.
So who in government will step up in support of the coal industry?
The reality is no-one can; at least not publicly and keep their job.
The latest and most significant slap in the face to the industry is the horrific increase to the royalty system that makes Queensland the highest tax/royalty regime in the world… please, don’t get me started on where government stands on their support (or clear lack thereof) of the coal mining industry.
The toughest part of this strategy is not actually getting the industry galvanised around the issue, which to be fair is pretty much there in principle thanks to many great advocacy groups and their members, it’s the complexity and trust that is the real challenge.
The complexity involved in creating a captive solution for the coal industry in Australia is staggering. Forget for a moment the diametrically opposed risk profiles of industry participants from mine operators, contractors, professional consultants, and more generally the supporting METS sector.
It would require a level of trust, collaboration and patience that would simply be almost unprecedented for any industry.
To set up a captive for just one company involves providing all of your business critical information including risk details, asset schedules, financial statements and forecast/business modelling, claim histories (insured and uninsured) for the last 10 years across all of your key policies: Property and Business Interruption, Public Liability, Professional Indemnity, Plant and Equipment.
All this is needed so actuaries can crunch the numbers to understand how much capital would be required to run the captive with the required solvency to meet its liabilities – like any insurer.
A big ask for any company – now let’s extrapolate that to an industry wide approach with direct competitors, vastly different risk profiles and appetites and maybe most critically, different financial means.
Then you need to find the experts to trust in pulling it all together.
Captives are generally considered a solution for well-established businesses spending at least $1M-$2M in premium per class of insurance you want to run through it.
Mutual structures are generally a solution for client industries with a reasonably replicable and similar risk profile across a lot of participant members so the ‘input of the many to prop up the few’ mantra can work viably.
If you’re not in either of these spaces, our continued advice is that you should lower your eyes, challenge your broker to work harder for you, and get in front of your insurers to look them in the eye whenever you can.
Finally, standing up and being as vocally proud of your industry as you can on as many platforms as possible can only help; socials, LinkedIn, mainstreams, dinner parties if you can – after all, environmental activism and creating an opposing view through this tactic has worked remarkably well against the coal industry so far.
While we would personally love it to be otherwise, I’m afraid there are no silver bullets to this problem – particularly if a government is the proposed backer to any solution that is against the prevailing populist view.