Marine market rebalances amid choppy seas for shippers

The marine insurance market is undergoing a correction following years of soft conditions, as the maritime industry faces a number of emerging risks, including large containership fires, digitalisation and a slowdown in world trade, according to the International Union of Marine Insurance (IUMI). The marine insurance sector faces a “painful” period of adjustment, following a sustained period of unprofitability, said IUMI. There are already signs of a contraction in marine and cargo insurance and changes in behaviour from insurers, it said. For example, cargo underwriters are acting to address unprofitable business, reviewing technical rate adequacy, expenses, terms and conditions, deductible levels and the capacity they are willing to deploy. “There is a rebalancing of supply and demand in the market going on now as capital has become less tolerant of losses in marine, cargo and other specialty lines,” IUMI president Richard Turner told CRE. “A number of insurers in London have withdrawn from marine hull or cargo and this has affected the level of capital in the market. That is not to say risks are not being placed; there is still lots of capacity. But it is an indication of insurers’ reduced tolerance for losses,” he said. The marine insurance industry has paid large claims in recent years for a series of containership fires and natural catastrophes. While these large loss events support changes in marine insurance, a broader market shift is underway, according to Mr Turner. “The rebalancing of the marine insurance market is not just a response to natural catastrophes and fires on container ships, it is much broader. The soft market was with us for a long time and a volume of attritional claims has had its effect on the sector,” he said. IUMI's statistics show the hull insurance market is running at a technical loss – when the gross loss ratio exceeds 70%. It has only made a technical profit in three years since 2005, while the 2018 underwriting year is forecast to record a gross loss ratio of about 90%. Last year also saw a rise in the frequency and cost of machinery claims, an issue that could worsen with the implementation in 2020 of a sulphur cap and the wider use of low-sulphur fuels. The insurance industry is also undergoing a structural change with digitalisation, explained Mr Turner. “The specialty sector has lagged behind with regards to the development of technology, but we are starting to see the emergence of better data analytics, which will allow underwriters to use more scientific methods to measure risk and set prices,” he said. Other technologies will impact the sector, such as the internet of things and blockchain, which will improve efficiency and challenge the role of intermediaries, said Mr Turner. Connected sensors can already monitor the condition and location of cargo, enabling real-time risk monitoring. Such developments will speed up claims payments and enable product development, including pay-as-you-use insurance, he said. “Technology is creating options and potentially will create opportunities to rethink insurance. Many vessels continue to be insured under decades-old conditions, written long before the modern digital age. Out-of-date conditions represent an opportunity for the industry to rethink coverage and how marine insurance can respond to modern claims scenarios,” said Mr Turner. Cyber is one of the biggest emerging risks facing the marine industry, with the digitalisation of supply chains and increased automation on ships and in ports. IUMI is due to release a paper on cyber risk in the marine sector shortly. “Cyber is an emerging risk for the marine industry. Most people think of ships, but cyber in the context of marine insurance goes beyond shipping and includes ports, logistics, warehouses and supply chains. And it is not just the risk of malicious cyberattacks, there is also the use of cyber to initiate theft,” said Mr Turner. But cyber is not the only area of increased risk for the maritime sector and its insurers. Larger ships and ports, climate change, political and economic uncertainty all threaten to disrupt trade or cause physical damage. A recent joint report on top risks to watch in the marine sector, by IUMI, the Global Maritime Forum and Marsh, was dominated by environmental, cyber, political and economic risks. The shipping industry faces an uncertain outlook with rising geopolitical risks and concerns over a global economic slowdown, explained Mr Turner. China’s economy is slowing at a time of heightened tensions between the country and the US, with raised tariffs in an ongoing trade dispute. Disputes and conflict in the Middle East are also affecting shipping in the Gulf, a critical east-west trade route. Even the UK’s departure from the EU threatens to disrupt trade flows. “The insurance sector underpins international trade. Every piece of cargo moved worldwide is supported by insurance and when there is disruption it ultimately feeds back to the insurance industry, be it trade disputes or Brexit,” said Mr Turner. According to the CPB World Trade Monitor, global trade contracted in the first seven months of the year, driven by the US-China trade war. “As demand for goods falls, there are fewer goods being moved, which has a direct correlation with insurance premiums,” said Mr Turner. Environmental factors are also impacting the marine industry, ranging from rules to cut emissions to new environmental regulations. Increased values and concentrations of risks in coastal areas and ports have resulted in large exposures to extreme weather events and climate change. “The strength of recent storms and increase in economic values is creating a potent cocktail where claims incurred by insurers go up and up,” said Mr Turner. One of the biggest challenges facing the marine and cargo sector at present is the increased size of vessels. The biggest containerships today have a TEU capacity of 21,000, compared to about 6,000 just 20 years ago. “The concentration of values has grown significantly with the increased size of container vessels, which has a knock-on effect with the exponential growth of accumulations of cargo through ports and on container ships. The loss of a large container ship, fully laden on its way from Asia, would result in a claim in the billions of dollars,” according to Mr Turner. The past year has seen an escalation of container ship fires, including the Yantian Express, APL Vancouver, Grande America, ER Kobe and KMTC Hong Kong. This is of growing concern to marine insurers, which are calling for urgent improvements to onboard firefighting systems. Fires on large container ships are down to ship design and the wider problem of misdeclared cargo. “When a fire takes hold on a large container vessel, it is very hard to put out. Firefighting capabilities are not adequate and a fire incident can take months to play out,” explained Mr Turner. IUMI is urging the International Maritime Organisation to take action, but the solution to containership fires will most likely require regulatory changes to improve the design and firefighting capabilities of such vessels, as well as shipping industry action to tackle misdeclaration of cargo, Mr Turner said. In particular, IUMI is calling for changes to international maritime convention SOLAS to require fire protection onboard new container vessels.

Marine market rebalances amid choppy seas for shippers

Want to read this article?

Read Next

New CEO of Davies’ multi-sector global consulting division

Cyber cat consortium launched to help transfer systemic risk

Climate change could spread malaria risk to new countries, warns International SOS

Europe records 300% surge in farmer protests this year

London market to remain closed for construction SPPI cover

New CEO of Davies’ multi-sector global consulting division

Cyber cat consortium launched to help transfer systemic risk

Climate change could spread malaria risk to new countries, warns International SOS

Europe records 300% surge in farmer protests this year

London market to remain closed for construction SPPI cover

Want to read this article?

Read Next

New CEO of Davies’ multi-sector global consulting division

Cyber cat consortium launched to help transfer systemic risk

Climate change could spread malaria risk to new countries, warns International SOS

Europe records 300% surge in farmer protests this year

London market to remain closed for construction SPPI cover

Related Articles