Increasing information and greater understanding of the shipping industry will help create safer seas and better underwriting. David Taylor explains.
Shipping is the ultimate international industry, so it follows that marine business is the most international sector of the insurance industry. Thus, marine insurers have to weigh political, environmental and commercial considerations when underwriting risks in a market where national and international legislation combine with shipping and trade regulations to produce a risk-intensive atmosphere unequalled in any other industry.
The classic hypothetical example frequently used to illustrate the potential for disaster inherent in international shipping is a collision between a gas carrier and a passenger ship in a busy international port. Such an incident hardly bears thinking about, but there are countless other supposedly less serious situations which, almost on a daily basis, demonstrate the huge levels of exposure which form the typical marine underwriting portfolio. As ships get bigger and faster with the capacity to carry more cargo and more passengers, then so the potential for loss and damage increases.
Small wonder, then, that insurers rely so heavily on information about casualties and losses and a wide range of technical issues in order to underwrite marine business. Given the plethora of changes affecting the marine insurance industry in the past couple of years, underwriters' need for this information is only likely to increase.
Marine insurers recognise that they must now have a global mentality. These days, underwriters have to know their shipowning clients and understand their business. By the same token, it can only help if shipowners are made more aware of underwriting issues. It was not always the case. Today, closer relationships between owners and underwriters have improved the quality of risk in marine insurance.
To paraphrase an old saying, you cannot insure what you do not understand. This global mentality is further evidenced by last year's production of a manifesto by the Joint Hull Committee (JHC), a long standing body of hull underwriters from Lloyd's and the Institute of London Underwriters (ILU).
The JHC is being born again. Under its manifesto, the JHC has effectively reinvented itself for the new millennium. It has documented its recognition of the need for greater professionalism, and the need for underwriters to be better informed on technical issues and the business of shipowning and operating. To this end, it has developed better contact with shipowners and effective working relationships with strategic organisations in the shipping industry. A further examination of the functions of the JHC is on the way a year later to take account of further dramatic changes in the market.
The effect of this increased level of professionalism can only be good for the shipping and marine insurance industries, both of which have been accused over the years, with some justification, of an inappropriate and unjustified aversion to the wider dissemination of information for the common good. Replacing secrecy with transparency may yet prove to be one of the most powerful forces for good to emerge in the struggle to improve safety at sea.
A watershed year
The year 1998 will be remembered as a watershed year for marine underwriters - and one which threw into relief the level of technical support available to the market - following the coming into force of the first stage of the international safety management (ISM) code, and the formulation of a response to deal with the year 2000 threat.
Y2K is a unique problem, the like of which no underwriter will have to deal with more than once. It is also linked to the entry into force of the ISM code, which stipulates that: “Where critical equipment and systems on board are identified, appropriate tests and other procedures should be developed to ensure functional reliability or the use of alternative arrangements in the event of a sudden failure.”
Marine underwriters have wholeheartedly embraced the spirit and intent of the ISM code, recognising it as a regulatory system which will provide benefits to good, responsible shipowners, operators and all providers of marine ancillary and support services.
Hull underwriters made it clear from the start that they wanted to be involved in a fundamental way in the application of the ISM code. As a further demonstration of underwriters' commitment to the code, an ISM claims consultation panel was set up in the London market last year consisting of a panel of experienced claims adjusters offering a helpline-type service on problematic ISM elements in claims. The panel is now established as part of the market culture and includes both hull and cargo adjusters. Its remit is being extended to include Y2K issues.
The year 2000 problem is common to both insurers and shipowners. From the underwriters' point of view the challenge has been to offer a sound, balanced commercial solution to a problem which nobody - notwithstanding the efforts of all the experts - is able to define with any degree of certainty. In the marine market, each class of business is likely to be affected in different ways by Y2K problems, and so each market sector has been heavily involved in consultation and discussions with its own insureds and brokers.
Underwriters in London, again making extensive use of the technical support available to them, have evolved an overall underwriting strategy for Y2K, which includes continuing discussions with shipowners, brokers, classification societies and other technical bodies: a continuous process of co-operative self-education.
The London market approach to the ISM code and the Y2K problem is a further demonstration of its commitment to developing a culture of dialogue and consultation between shipowners, brokers and other experts, using the exhaustive technical support services available to underwriters. The broad objective of the JHC is to be a focal point for the London hull insurance market for the monitoring, collection and dissemination of information, including technical underwriting information and statistics, about what is happening in insurance markets and in the shipping industry worldwide.
Meanwhile, anybody analysing information on the market last year will be aware that 1998 was an underwriting year notable for a continuing softness in both hull and cargo rates. But it is worth noting that London remains the world's premier marine insurance market in terms of premium volume, contrary to recent suggestions that Japan had taken over the top spot.
There was little cheer, either, in the casualty statistics published by the IUA in March. The statistics, produced for many years by the ILU, are rightly regarded as the most authoritative source of reference on marine losses and major casualties worldwide. For 1998, they show a significant increase in the number of vessels, but a reduction in the amount of tonnage, totally lost compared to the 1997 year of account.
Any encouragement which underwriters might glean from a fall in the amount of tonnage lost is tempered by the realisation that the reduction is entirely thanks to a fall in the amount of tanker tonnage lost. Fluctuations in tanker tonnage losses are deceiving, because the number of vessels is comparatively small, while the average tonnage is much larger than in other categories.
Bulk carrier losses, meanwhile, continue to give cause for concern. Thirteen bulkers were reported lost in 1998, more than twice the number the previous year.Other discernible trends to emerge from the 1998 statistics include the significant number of casualties involving heavy losses for both hull and cargo underwriters. There is a huge potential for loss in today's massive containerships, fully laden with high-value cargo, when they meet the sort of severe weather conditions which occurred on a number of occasions last year.
The year was also notable for the number of big partial losses which hit the market, a grim reminder that underwriters cannot count the red ink in total losses alone. Worrying, too, is the fact that a number of casualties are occurring to comparatively new vessels. The statistics also continue to reinforce familiar worries concerning age, classification and flag, and their effect on ship casualties.
The rationale behind the statistics goes far beyond maintaining a grim register of the losses to which marine underwriters are asked to respond. The increasingly sophisticated technical resources traditionally available to the ILU, and now to the IUA, mean that underwriters can carry out ever more meaningful analysis of casualty statistics which will be used ultimately to make shipping safer. There can be no better demonstration of the proper use of technical resources to eliminate unacceptable risks. The need for technical support is, in fact, greater in a soft market, such as we have today, than in a strong one.
If you can sow good seeds in a bad market, you are in a much better position when the upturn does finally come. The London marine insurance market has shown that it is prepared and technically well equipped to work with its insureds to create a safer industry in which risks can be assessed and rated fairly on an individual basis. The combination of industry knowledge and technical support, when wedded to commercial intent, should prove to be a powerful remedy for both marine underwriters and owners.
David Taylor is permanent secretary of the Joint Hull Committee and special adviser to the International Underwriting Association of London.