Covid-19 adds pressure to firming marine insurance market

Covid-19 is adding further pressure to the marine insurance market that had already seen price increases amid a worrying trend of large losses, according to Richard Turner, president of the International Union of Marine Insurance (IUMI). The marine insurance market has yet to see significant claims as a direct consequence of Covid-19, but there will likely be an impact on insurers, he told CRE ahead of IUMI’s annual conference being held virtually from 14-25 September. Mr Turner said the economic fallout and its effect on trade will be the main implications of Covid-19 for marine insurers. “This is a challenging time for shipping companies. Covid-19 has introduced some short-term pressures from the economic impact and issues like crew fatigue. However, the majority of the industry has operated well in the pandemic and proven to be a lifeline,” said Mr Turner. “For the marine insurance sector, the biggest impact of Covid-19 is likely to be on the premium side, rather than claims. The question for insurers will be the degree of impact from the pandemic on the premium base, and the wider impact on profitability for the insurance industry,” he added. World trade fell 18.5% in the first half of 2020, according to the World Trade Organisation (WTO) that previously predicted it could decline by 13% to 32% in 2020 as the pandemic disrupts economic activity around the world. But with the pandemic ongoing, the economic impact in the second half of 2020 and beyond is unknown, Mr Turner said. “There is a simple correlation. Less trade means less cargo exposure and a reduced premium for cargo insurers,” he said. At the same time, the collapse in the price of oil has led to a fall in capital expenditure in the energy sector, which will mean reduced premium for offshore energy insurers, he added. The coronavirus pandemic struck as the marine insurance market was hardening. Following decades of price reductions and growing unprofitability, marine hull and cargo rates have been rising over the past two years. Lloyd’s, for example, has seen a number of insurers withdraw from marine lines as the market cracked down on underperforming business. “Over time, the soft market saw pricing fall to unsustainable levels, which combined with large losses from natural catastrophes, that hit the marine insurance market hard and led to poor results,” said Mr Turner. “Covid-19 will only add to the pressure in the market to restore profitability,” he said. Insurers have also faced larger losses in recent years with increased concentrations of insured values in ports, warehouses and onboard large ships. For example, the cargo market has been affected by a number of large weather losses and fires, while explosions in the port of Tianjin, and more recently Beirut, have resulted in sizable losses. “The number and severity of natural catastrophe events appears to be increasing, and marine insurers are more exposed with increase in asset values and with concentrations of high values on larger ships and in ports,” said Mr Turner. Recent years, for example, have also seen a disproportionate number of fires on very large containerships. According to IUMI, there were 56 reported container fires between 2000 and 2015, resulting in damage of over $1trn. In 2019 alone, there were 40 cargo related fires – one every 10 days – including the Yantian Express, APL Vancouver and Grande America. “Large containership fires are top of the list of worry points for IUMI. This is a particularly frustrating issue because it is largely avoidable, caused by insufficient fire prevention and fighting capabilities and the ongoing problem of mis-declared cargo. Once a vessel catches fire it is very hard to put out and we are seeing far too many of these incidents,” said Mr Turner. IUMI submitted proposals in February to the International Maritime Organization (IMO), requesting changes to fire safety regulations for containerships. The paper, co-sponsored by the German Flag State and BIMCO, would amend SOLAS regulations to enhance fire detection, suppression and fighting capabilities on new vessels. However, successfully reducing the number of large containership fires will also require the marine industry to tackle mis-declared cargo, according to Mr Turner. A growing number of hazardous goods are being shipped by container while mis-declaration has led to a number of major fires in recent years. According to the US National Cargo Bureau, some 55% of 500 containers sampled failed inspection, while more than 6% carrying dangerous cargo were mis-declared. The problem of large containerships is a good example of a wider issue for marine insurers that risk management and industry infrastructure has not kept pace with changes to risk, said Mr Turner. For example, salvage capabilities for large vessels have yet to be tested by a major incident. “There have been a number of incidents involving large vessels, but we have not yet had the really big one. If a 20,000 TUE containership were to get into trouble, the degree to which it can be assisted, given weather conditions and proximity to specialist salvage equipment, has yet to be tested,” said Mr Turner. The ability to adapt to changing risk is likely to become more important as the maritime industry faces a number of challenges ahead. For example, Covid-19 exposed weaknesses in supply chains and business resilience. “The virus has exposed the fragility of global supply chains, especially where there are concentrations on just a few countries. It will be interesting to see whether there will be a step-back from globalisation and how supply chains will adapt as companies build more stability into their business models,” said Mr Turner. Environmental factors are also a looming issue for the shipping industry and will have implications for insurers, according to Mr Turner. “The environment is probably going to have the biggest impact longer term, and not just from climate change. It’s easy to point to windstorm risk, but rising sea levels are already an issue – insurers have seen an increase in claims from storm surge – and unless there is remedial action taken, losses will only get worse,” he said. In addition to weather risks, the transition from fossil fuels to green energy will also affect the underlying risks covered by insurance. “The assets that we insure – which are now mostly related to fossil fuels – will change. Some industries will disappear while others will become much larger. The challenge for insurers is to remain relevant and provide a product that meets the needs of our customers’ changing situation,” said Mr Turner. The shipping industry has already had to make significant changes to meet the IMO’s 2020 sulphur fuel cap, including fitting ‘scrubbers’ or switching to low-sulphur fuels. IMO 2020 is just the latest example of the industry adapting to environmental concerns, according to Mr Turner. Meanwhile, autonomous shipping and new forms of propulsion are likely to emerge as the industry looks to cut greenhouse gas emissions. IMO emissions targets – which would see the shipping industry cut carbon emissions by at least 40% by 2030, and 70% by 2050 – are likely to trigger a period of innovation, Mr Turner said.

Covid-19 adds pressure to firming marine insurance market

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