(Some) royalty redemption for Queensland coal producers

Arising from the blindside cash grab being perpetrated by the Queensland Government against the coal industry in Queensland, there may be some potential concessions for producers on their insurance programs.

Given that many coal producers purchase business interruption insurance to protect against either loss of profits or standing charges/fixed costs so they can continue to meet their debt and financial obligations in the event of damage to their operations, the opportunity to now review these figures in light of the clumsy, ham-fisted approach to royalties imposed by the Queensland Government, should be instantly seized upon by the sectors insurance brokers in this state.

How it works

Your ISR policy (should have) an adjustment clause that is normally designed for insurers to claw back premium should the forecasts/estimates provided be exceeded by the actual performance of the business.

The way adjustments normally work is that producers forecast what their output will be in the forward 24 months, multiply by the assumed commodity price, then minus the costs that will either reduce (partial reduction) or not be paid at all (deleted from the equation entirely) with royalties being one of the latter; i.e., you don’t pay royalties if you’re not producing/selling so the policy will not pay these costs.

On a simplified basis, a 3Mtpa mine, at August 2022 thermal pricing, will pay a total of $548M in royalties on the new regime, instead of the $257M they were expecting to pay last year on the old system.

This equates to 30% of their total revenue paid as royalties, against 14% on the previous arrangement.

Extrapolating this out, removing a further $291M out of that mining company’s business interruption calculations through the uninsured working expense provision and declarations to its insurers could save up to $2.5 to $3M in premiums on the above example.

As a disclaimer, yes, CRE understands that there is a lot more that goes into establishing correct sums insured on a large ISR program, and this is a drastic over-simplification for demonstrative purposes, however the point is still highly relevant.

Ultimately, clients have potentially not deducted the correct amount for this uninsured expense, and this could have a significant impact on premiums that have potentially been overpaid.

Getting it done

This is a material change in your business that is entirely outside of your control and should trigger the reassessment of the risk under the contract – the Queensland Government has blindsided the industry – and coal producers who are already taking it in the neck for their premiums and coverage from the insurance market should not have to wait until their renewals to be given an opportunity to revise their declarations; mid-term adjustments on their insurance contracts and back-dated to 1/7/2022 should be demanded.

After all, should the worst occur (a large loss event triggering the business interruption section of their policy), that additional $291M built into the above scenario that was thought to be the coal producer’s money is now the governments, so it would never be paid by an insurer in a loss scenario from here on in.

If you need any guidance on this, or a second set of eyes, don’t hesitate to reach out.