From mine to finger

Accessories, Anniversaries, Art and auctions, Fashion, Insurance and Reinsurance, Jewelry — By on February 13, 2014 at 9:16 PM

WP_000887Thu 13 Feb 2014 - Will you be lucky enough to receive a diamond ring this Valentine’s Day? We talk to Graham Hawkins, XL’s Chief Underwriter of Fine Art and Specie, about risk and insurance through the many stages of a diamond’s journey – from the earth to the magic moment. (source: Lloyd’s of London)

Who buys diamond insurance?

It’s not just the diamond-related companies that require cover – insurance is also needed for the logistics firms that ship and store diamonds around the world, diamond investors, luxury brands, retailers and the individuals who buy the jewellery. Each contract is negotiated on its own basis. XL may be insuring many clients along the pipeline, but each has different contractual considerations and you have to make sure you are drawing the line at the right point so there is no blurring of cover. I don’t know of any one policy that covers diamonds right the way through the pipeline.

Is theft a key risk at all stages in the diamond pipeline?

Your average diamond mining employee may never physically see or touch a stone. This is because a lot of the extraction processes are automated, and the average diamond yield is less than one carat (0.2g) per metric tonne of what is mined – and only 20% of the diamonds produced are gem quality. Once the diamonds start aggregating in storage, there is potential for theft by staff, despite the controls put in place. The diamonds then need to be moved somewhere, and could be subjected to theft and misappropriation. Theft tends to be the main risk later in the pipeline – not just by attack but by sleight of hand and distraction. You’d be staggered by the techniques that are used. Sometimes they can be relatively simple.

Which risks can be the most challenging for underwriters?

Risks where there is a high concentration of exposure. The majority of our losses by frequency occur in transit, but the most severe losses are where there is aggregation of value at a particular location. Generally diamonds in storage are well protected, but when there is a high concentration of value, there is enough incentive for people to put a concerted effort into an attack as it could generate a significant reward. Large losses can occur in transit too though. As you may recall, there was a significant incident at Brussels airport last year.

Have you ever visited a diamond mine?

Yes, I have been down the biggest diamond mine in the world, which is in Botswana. I feel very privileged in the job I do. We travel extensively to improve our risk understanding and refine our offering to our clients. Working with clients to understand their risks genuinely helps me in the underwriting process. If you follow what happens to the diamond, you can see what the risks surrounding it are.

How significant a role does Lloyd’s play in the diamond space?

There are some big domestic US insurers and some very strong European competition, but many of these companies reinsure aspects of their business back into the Lloyd’s market, so I would estimate Lloyd’s has the largest share by premium and is the leading global market when it comes to diamond insurance. The Lloyd’s market has written these products for many years, and its entrepreneurial underwriting philosophy allows underwriters to work with clients to understand the risks and tailor their products accordingly to deliver the right solutions.

How do insurers work together to provide capacity for major risks?

High street retailers in the UK with limits under £1m may have policies that are written by UK domestic insurers, big conglomerates or other Lloyd’s syndicates. For mining groups, which require limits of hundreds of millions of pounds, or global luxury brands with very significant limits, the coinsurance market offers excellent capacity while reducing volatility of risk through diversification.

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The diamond pipeline

The “diamond pipeline”, as it is known in the diamond industry, begins with the extraction of unrefined diamonds by mining companies. According to Graham Hawkins, diamonds can be mined underground but also dredged from alluvial deposits such as ancient river beds, ice flows or even the sea bed.

The diamonds are often sold through a tender process, referred to as ‘sights’, sold on wholesale exchanges and then processed/polished – with Hawkins estimating that in excess of 80% of the world’s diamonds by volume are cut and polished in India.

Once polished the diamonds can be sold wholesale or manufactured into jewellery, entering what is referred to as the “downstream” phase of the pipeline where they are sold by retailers.

According to Hawkins, some retain control of the diamonds throughout the pipeline, but there are potentially many separate participants involved in a diamond’s journey from mine to finger.

Graham Hawkins is Global Chief Underwriting Officer of Fine Art and Specie at XL Insurance. He leads a team of 18 underwriters across 11 offices globally, and has insured some of the world’s most valuable items. Hawkins joined XL Group in 2003, having previously worked at Merrett, Bankside Underwriting and SVB.

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