Although 2003 appears a benign year for marine losses to date, there is still gloom and despondency among marine underwriters.
In marked contrast to 2002, it would appear that 2003 could be a relatively benign year for the marine insurance market, although there is still some way to go. So far, 2003 has not been blighted by the type and magnitude of losses experienced during the second half of 2002, when the litany of disasters included Tricolour, Prestige, Diamond Princess, Hanjin Pennsylvania, Hual Europe, Alva Star and Limburg. One major incident to strike during 2003 was Typhoon Maemi, which caused devastating losses in South Korea in September. According to Lloyd's List, damage to the container terminal and to cargo at Pusan is estimated at $100m, with a similar tally for the shipyards in the region.
Market buoyancyThe maritime industry as a whole is currently enjoying a buoyant period, in which strong demand for cargo space has been reflected in a widespread increase in freight rates. However, as was all too apparent at IUMI 2003 (International Union of Marine Insurance) in Seville in September, the gloom and despondency among marine underwriters, particularly those involved in the hull sector, is all pervasive. Rates generally remain unsustainably low, despite steady, ongoing increases throughout the year, and there is a genuine concern that a further series of substantial losses would risk undermining the security of the sector as a whole. The message from senior market figures at the Seville conference was stark: the hull market is in real danger of collapse unless serious action is taken to obtain adequate rates.On the face of it there appears to be widespread recognition of the problem, although this has not been supported by concerted efforts to rectify the situation. The French market, for example, is reported to be seeking an increase in hull rates of between 15% and 20%. Their Norwegian counterparts have indicated an intention to obtain higher levels, which is unsurprising given a predicted loss ratio of 160% for 2003, the fifth consecutive loss-making year according to CEFOR, the Norwegian marine insurance association. The picture is similar in P&I, with rates predicted to rise by up to 25% during next February's renewal season, according to IUMI. In Lloyd's, hull results for the 1997 to 2002 years of account are in the red. Some London underwriters remain unwilling to impose significant increases in pricing where they are clearly necessary. Instead they continue to focus on market share. Competition for the most prestigious fleets and newer ships is particularly strong. Overall total premiums in the marine market appear to be increasing slowly, rising to $13.6bn in 2002 from $11.7bn in 2001.The 2004 renewal season will be a critical test of the market's resolve. Unless the steady hardening of rates is maintained, ideally accompanied by more rigorous risk selection, it is by no means impossible that terminal cracks will begin to show for some participants. Some leading figures have suggested that this may not be a bad thing. In Seville, Tore Forsmo of CEFOR commented: "Maybe the market, and the marine hull market in particular, regretfully needs a collapse. Maybe there are too many of us making a living out of a business that is too small." Mr Forsmo suggests that a reintroduction of tariff-based underwriting may be necessary should the market prove unable to sustain its upward trend. Alternatively, the Lloyd's market has taken the view that stricter control and discipline in the underwriting of hull risks is needed. In any event it is clear that stern measures are needed to ensure the continued viability of the market if underwriters are unable to exercise the required discipline voluntarily. It is reinsurers who may hold the key. Their influence in the market could well bring about the discipline required to ensure the survival and growth of the marine insurance market.At the time of writing, the revised set of International Hull Clauses had just been published as IHC (1/11/03). Having remained unaltered for over 20 years, the clauses were subject to a substantial review during 2002. It had been anticipated that the new format would have a major impact, but to date market reaction has been distinctly lukewarm. Most participants appear firmly wedded to the old clauses, and few, if any, have been willing to stick their heads above the parapet and risk losing business by insisting on the 2002 clauses. It remains to be seen whether the output of 2003's planned review will result in a major shift towards them. The Joint Hull Committee has stated that the new clauses are intended to provide greater flexibility and clarity, and to speed up the claims handling process and thus provide an improved service to shipowners and insurers alike. Arguably, however, the marine market could provide a greater service to their clients by grasping the nettle of disciplined underwriting and thus ensuring that a vibrant, stable market is in place for years to come.