Cedric Stephens | Securing income through insurance | Business

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Investment Week recently reported that nearly half of new do-it-yourself investors in the UK are unaware that losing money is a potential investment risk, new research conducted for the Financial Conduct Authority, FCA, a body of non-banking regulation, revealed.

‘Understanding Self-Directed Investors’, produced by BritainThinks for the FCA, found that 45% of self-directed investors, defined as those ‘who make investment decisions on their own account…without a financial adviser’, do not see “losing money” as a potential investment risk.

Some policyholders are surprised to learn that the risks covered by insurance are limited. Coverage rarely protects them from financial loss when the insured event occurs. My awareness of insurance operations, coupled with current events, predictably led me to ask about a different type of loss associated with damage to insured property. Business owners, banks, corporate executives, and even insurance professionals are often unaware of this.

Today’s article will focus on the loss of production capacity – or revenue – following property damage in the context of last August’s fire at Jamalco’s Halse Hall plant in Clarendon. Jamalco mines bauxite and refines it into alumina, which is exported from the port of Rocky Point. The bauxite mining and alumina production company is a joint venture between General Alumina Jamaica Limited, a member of the Noble Group; and Clarendon Alumina Production Limited, a company owned by the Jamaican government.

Jamalco’s insurance arrangements are not managed in the same way as those of a typical public company. They are, I assume, lumped into the global insurance structure of the Noble Group, for contractual and economic reasons. And they are, I suspect, excluded from government rules on public insurance procurement. Notwithstanding these issues, the effectiveness of Jamalco’s insurance coverage against last August’s fire is a matter of public interest.

Last Wednesday Gleaner said the company maximized its fire insurance claim. It was a surprising observation given the revelation that the subject of the fire is not expected to be rebuilt and refitted with facilities and equipment until 2024. This headline was this newspaper’s interpretation of the Finance Minister’s statement, Dr. Nigel Clarke, in Parliament. He said a “claim was made for the policy’s total limit of US$250 million on Jamalco’s fire insurance.”

The incident occurred in the power plant, which acts as the engine of the plant. A company press release last year said “the plant produces electricity, compressed air and steam for the refining operations.”

Temporary repairs are currently underway to facilitate the resumption of alumina production to 50% capacity by June. Mining operations are expected to begin “in the weeks leading up to alumina production” and full production should be reached by September.

Imagined insurance structure

Jamalco is part of the Noble Group, which operates in 50 countries. It is assumed that the property damage and business interruption (income loss) insurance arrangements for this entity are a subset of the overall Noble Group insurance program.

1. Losses resulting from physical damage to assets caused by fire and consequent loss of profit (income) are insured, subject to a maximum of US$250 million. It is unclear how much of the US$250 million applies to property damage and how much to lost profits.

2. The hedge is structured in a series of layers, for example: layer 1 – US$100 million; Layer 2 – $75 million on Layer 1; and Layer 3 – US$75 million on Layers 1 and 2 (i.e. US$175 million).

3. A consortium of foreign insurers and reinsurers participates at all three levels.

Noble Group states on its website that it operates “an independent risk management framework”. Additionally, “We actively manage Board-approved risks in pursuit of Noble’s strategic objectives by adhering to the following principles:

• Risks are taken within the risk tolerance levels defined and approved by the Board of Directors.

• Risks are approved by accountable executives through a board-approved risk and performance risk management governance framework and process.

• Risks are monitored and managed regularly and reviewed by senior management and Board committees.

“Noble has an independent risk department that ensures its overall risk principles are adhered to by the chief risk officer, who reports to both senior management and the board.”

Conditional capital

It is unclear whether a risk management structure like Noble’s exists in the local joint venture that manages Jamalco’s operations, or in its line ministries. A UK body representing corporate insurance buyers, AIRMIC, said in a 2014 brochure: “For most businesses, insurance is one of their biggest investments and their biggest source of contingent capital. . It protects them from events that might otherwise threaten production, jobs, and even the future existence of the business. This makes companies safer as business partners and places of investment. To understand the importance of insurance to the viability of a business, a policy should be viewed as having a value equal to the indemnity limit purchased. If a company pays £2m to buy an indemnity limit of £100m, the contract should be considered to have a potential value of £100m”.

In the case of Jamalco, its property damage/income loss insurance must therefore be considered as a source of $250 million of capital. Who is responsible for overseeing risk management functions and processes for the benefit of Jamaican shareholders?

The Finance Minister is reported to have told Parliament: “It is expected that the full restoration of Clarendon Generating Station will be financed from insurance proceeds without recourse to shareholder funds”. His use of the word “expectation” is significant. This contrasts sharply with the UK regulator’s recent criticism of that country’s insurers for their failure to provide “contract certainty or treat business customers fairly”.

Anthony Hilton of evening standard was quoted in the 2014 AIRMIC brochure, Trade Assurance Effectivenessas saying “companies need to be aware that many watertight insurance coverages are potentially full of holes and investors need to be aware that many companies that auditors say are in progress, may well not be in event of failure of their insurance.

Members of the public will learn in the future whether Jamalco’s US$250 million insurance agreements for property damage and loss of revenue were sufficient for the losses incurred last August, and whether the Minister’s expectations have changed. carried out.

Cedric E. Stephens provides independent information and advice on risk and insurance management. For free information or advice write to: [email protected] or [email protected]

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