P&I rate rises are tempered by soft commercial marine market

The thirteen members of the International Group of P&I Clubs—which collectively provide liability insurance to more than 90% of the world’s ocean-going tonnage—concluded their renewal negotiations with ship owner members on 20 February. Early indications are that the clubs were successful in pushing through substantial rate increases. Clubs faced a challenging underwriting and investment environment in 2012/2013, and so took a tough line during this year’s renewal negotiations, according to Simon Schnorr, Head of P&I at Aon Risk Solutions. Clubs had sought general increases of between 5% and 15% and ‘fought hard’ through ‘protracted negotiations’ to get these increases, he said. Price increases in 2014 follow similar hikes in 2013, with clubs expected to raise rates again in 2015. According to Nick Taylor, Head of P&I broking at Marsh in London, rates at the 2014 P&I renewal increased by an average of around 7.5%. He is expecting an aggregate increase of almost 25% for the three years of account starting February 2013 through to February 2015.hideThese increases are in stark contrast to most other lines of insurance, including those in marine, which are under pressure from intense competition. The increases in P&I partly reflect higher reinsurance costs for the International Group, which pools the retained risks of its member clubs and purchases reinsurance in the open market. The placement is thought to be one of the world’s largest. Big losses, including the grounding of the Costa Concordia in January 2012, have hit the group and its reinsurers. The group suffered record-breaking claims in the 2011/12 policy year. The result was higher deductibles and an increase in reinsurance costs of approximately 5.25% for tankers and dry cargo vessels, and 20% rises for passenger vessels. Clubs have also sought to push through additional rate increases. In particular, P&I Clubs have seen an increase in the cost of larger claims in recent years, with collisions and wreck removal having a greater impact, according to Mr Schnorr. “Having studied clubs’ reports and accounts, we have seen a consistent theme of larger claims being similar in frequency but higher in severity. As technology has advanced, wreck removal costs have increased, while the litigious aspect of collision claims has been rising. Crew claims have also increased with the rising crew costs,” he said. Clubs may also be seeking increases in anticipation of an expected uptick in the shipping environment. Increasing trade and price rises could bring about an increase in claims linked to a recovery in shipping, explained Mr Schnorr. For example, the UK P&I Club said that premium increases were needed to address underlying claims inflation, as well as a future pick up in claims frequency. Other clubs are also concerned that increased trade—although not yet at pre-2008 levels—could lead to a rise in claims. “Over 2013 charterer activity has picked up, which is a good sign, and world trade looks like it is increasing. But with increased activity comes the increased potential for claims,” said Douglas Jacobsohn, Chief Executive of Skuld, an Oslo, Norway-based P&I club. Rating agencies are also having an influence on clubs’ ability to soften the blow of rating increases by delaying or smoothing price hikes. “Standard & Poor’s is having a major influence on the way that clubs are behaving, and some of the austerity seen at the renewal reflects some clubs’ desire to protect their ratings,” said Mr Taylor. Despite the increase in P&I insurance rates, the cost of insuring vessels and cargo is unchanged due to high levels of competition among commercial marine and cargo insurers in London, Scandinavia and Asia. “Insurance costs for marine are generally flat to reducing,” according to Mr Schnorr. “If clients are willing to re-market their risks and move insurer, there is enough quality capacity around to get reductions on all lines of marine business,” he said. Insurers continue to be attracted to the marine market by its diversification benefits, adding to the already ample supply of capacity, explained Mr Schnorr. Even the recent large losses in the hull market have not had a market-wide impact, he said. “There was no flight of capacity from the marine market, and, if anything, rates are flat to down,” noted Mr Schnorr. Despite large losses—notably from the sinking of the Costa Concordia and cargo losses from Superstorm Sandy—the ripple effect of price increases in the commercial liability insurance market has now started to level out, according to Kristof de Bremme, Head of Marine at AIG in the UK. Despite increases in the commercial (non-P&I club) liability market after Costa Concordia, surplus capacity means that liability prices in 2014 are likely to be flat, at best, said Mr De Bremme. The effect on rates of these two losses (Costa Concordia may eventually cost insurers $2bn, making it one of the most expensive marine losses in history) was only marginal for the cargo market and has since faded, said Mr De Bremme. “The rating environment in the cargo market remains competitive, driven by surplus capacity and a reduction in insurable loss,” he said. In another sign of the soft market, terms and conditions are also widening. For example, catastrophe limits are increasing after cover was scaled back following the Chilean earthquake in 2010 and Superstorm Sandy in 2012, according to Mr De Bremme. Marine underwriters are also offering cover for cargo stock throughputs at more competitive levels than property insurers, he added. With such high levels of capacity, there is little or no expectation that rates in the commercial marine hull, liability and cargo markets will start to climb any time soon. “The marine market is still characterised by over capacity. Rates are flat to reducing and the hull market faces challenging times. I can’t personally see any change in the marine insurance market,” said Mr Schnorr. Overcapacity and new entrants are also making it harder for established marine insurers to address genuine concerns about increasing exposure, at a time when business volumes are flat. These concerns include the rising cost of wreck removal and trends in shipping that are driving ever bigger ships and ports. “Twenty years ago pollution was the greatest fear of insurers, but the safety of tankers has improved enormously driven by charterers’ demand for safety and by operational improvements initiated by owners in the tanker sector. But now the pariah in the P&I market is wreck removal,” said Mr Taylor. The commercial liability market is also concerned with wreck removal. It is a volatile exposure, politically driven and very difficult to control, said Mr De Bremme. While a decade ago a wreck might have been allowed to remain, improvements in salvage technology and environmental concerns mean that some jurisdictions now ask for complete removal. There has been talk among the P&I clubs of limiting cover for wreck removal. But by reducing cover the industry is not addressing the problem. “Limiting exposure just provides a financial way out for insurers and does not provide a solution to the shipping industry,” said Mr De Bremme. Wreck removal is also a key concern for the growing numbers of mega-ships. Vessels with some 18,000 containers—such as the new Maersk Triple-E—will become a more common sight on the seas, with yet more new vessels due to be delivered or under construction. While the insurance market has the capacity to insure these large vessels, and has already done so, there are concerns over how the industry would cope with salvage, said Mr De Bremme. The grounding of a large container ship and the resulting salvage could generate a cargo loss of $500m to $800m alone, said Mr Taylor. New mega-sized container ships challenge underwriters in terms of the accumulations of high value hull and cargo exposures, explained Mr Schnorr. “From a P&I perspective, the cost of salvage and wreck removal for a mega-sized containership would be very expensive,” he said. “Bigger ships are harder to salvage, so size can have an impact on major claims. But better crews and better technology and systems help to mitigate potential losses,” said Mr Jacobsohn of Skuld.

P&I rate rises are tempered by soft commercial marine market

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