Any textbook history of the foundations of the modern insurance market acknowledges the maritime roots of the industry. Whether it is Chinese merchants, Phoenician traders or the shipowners at Edward Lloyd's coffee house that are cited as the inspiration for the modern market, there is little dispute that burgeoning international marine trade kick-started insurance as we know it.
Since then, however, marine insurance appears to have been on a slow decline. At the beginning of the last century, the Lloyd's marine syndicates were the genesis of the aviation and motor markets. Indeed, it was only at the beginning of the last decade that general business was opened up to the Lloyd's non-marine market; before that time, non-marine, aviation and motor syndicates were only allowed to write their core business, while marine syndicates were permitted to write a certain amount of non-marine insurance. Now, marine business represents 18% of the premiums written at Lloyd's, lagging considerably behind non-marine's 59% of Lloyd's premium income. The burning question is whether this decline in Lloyd's marine business is indicative of a more general decline internationally.
There's little doubt that marine insurance is now effectively a niche business, running at less than 2% of the total global non-life insurance premiums last year. But a report released earlier this year by WIS Research Ltd, a London-based consultancy, predicts that its relative importance will grow year-on-year over the next few years. In its ‘Global Marine Insurance Review 2001', written by Laurence Winter of WIS and Professor Gerry Dickenson of the City University Business School, the authors predict that gross marine premiums will increase until 2005, when they will represent 2.24% of the estimated $1206.2bn global non-life market. “Two main points can be drawn from these figures,” states the report. “The first is that the rising ratio reflects a slightly faster recovery in rates for marine insurance compared to those in the non-life insurance sector. The second is the predicted proportion of marine insurance to total non-life insurance in 2005 is still expected to be less than the actual ratio of 2.55% in 1994. This reflects the assumption that competitive pressures are likely to remain in the marine market and rates are unlikely to return to their relatively high level in 1994.”
Developing economies translate into burgeoning insurance markets, with a particular emphasis on marine insurance in the early days of evolution. “As economies evolve, the business sector expands, personal wealth grows and financial awareness increases, all of which are conducive to more spending on insurance,” explains the review. “In general, the supply and demand for insurance grows faster than the growth of GDP for an economy as a whole. In economic terms, insurance is income elastic above a certain threshold of economic development…. At higher levels of GDP, as economies mature, insurance markets continue to grow but at a slower rate, sometimes at about the rate of GDP itself. Insurance markets in North America and some part of Northern Europe fall into this mature market category.”
In particular, the large infrastructure projects, cargo marine and transportation insurances, and commercial property coverages take up a high proportion of national insurance premiums in the early days of economic development. “As a market develops, liability insurance, business interruption insurance, accident and private health insurance, credit and various types of financial insurance all increase in importance,” points out the report. “There is a shift in insurance from the protection of physical assets towards the protection of corporate and personal income. Moreover, the range of contingencies which can be insured against also broadens under the pressure of market change and the liberalisation of insurance legislation, which increases the scope of what insurance companies can supply.” As a result, marine insurance peaks early in the life of a developing economy, and other forms of coverage quickly supplant it, though the rate at which this happens is individual for each country.
To complicate matters, insurance is subject to an underwriting cycle, with premium income dependent not only on sums insured but also on the price of insurance. The review's analysis tries to take account of this, though it admits “this is a difficult task and can only be approximated,” using extrapolations from underlying trends in past data to average out fluctuations. As a result, the review anticipates global non-life premiums increasing year-on-year as an underlying trend, with variations as a result of unexpected changes in the political, economic and commercial climates.
Table 2 shows the pre-eminent position of the North American, European and Japanese markets, but also clearly illustrates the growing proportion of non-life premiums emanating from emerging economies. Taking together Africa/Middle East, Apex (Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam), China, Eastern Europe, India and Latin America, the table shows that these emergent regions represented 7.67% of non-life premiums in 1994, and are forecast to take a 12.46% share by 2005. “One factor slowing the growth of non-life insurance in more developed economies is the faster growth of self-insurance which affects the growth of corporate non-life insurance business,” comments the report. “Corporations in more developed markets tend to be larger in size and thus are more able to self-insure. An additional factor which is likely to influence the growth of corporate non-life insurance premiums is the growth of ART, especially risk securitisation. The adverse impact of the growth of ART has not been factored into the forecasts. Informed opinion suggested that ART-type covers are likely to be less than 5% of conventional insurance by the year 2005.”
More specifically to the marine market, international trade – unsurprisingly – is the main driver for cargo business. “With the globalisation of business, and greater economic specialisation that this imposes on countries, the patterns of trade change,” comments the report. “Because of their lower labour costs, emerging markets now account for more and more of global manufacturing and agricultural production. And trade patterns now have a more international than regional emphasis and the distances that cargoes travel have increased. These changes in the pattern of trade translate into higher insurance premiums.” In addition, the intrinsically international nature of marine insurance has frequently resulted in it being liberalised ahead of other classes of non-life insurance.
At the same time, governments are being encouraged to liberalise their international trading practices, lowering tariffs and increasing access to foreign businesses. And export guarantee schemes have encouraged international trade, “since governments have seen export growth as being a key aspect of their own economic development.”
Marine hull business has also been changing, reflecting the move away from merchant shipping, with an increase in numbers of passenger ships, as well as personally-owned vessels such as yachts. Perhaps more importantly, there has been a rise in the numbers of specialist types of ships, resulting in increasing numbers of vessels. “These more specialised vessels are more complex to maintain and repair and hence this has also increased the sums insured over time,” comments the report.
Balancing this out is the move towards higher risk retentions that has taken place in recent years. Mergers and acquisitions activity in the international shipping industry over the last two decades has led to economies of scale, and the larger shipping groups have moved towards self-insurance models. “Moreover, large shipping groups can use their bargaining power to negotiate lower insurance rates,” says the report, though “emerging markets are showing a fast growth in hull ownership and these are smaller-scale owners with less ability to self-insure.”
As with other areas of non-life business, the liability side of marine insurance has been impacted by the trend towards increasing litigiousness seen across the world. Liabilities include:
The CLC operates under a polluter pays formula, irrespective of how the pollution occurred. “This change means that shipowners must now have higher levels of insurance protection since they will be held accountable even if their degree of negligence is small,” points out the report. In addition, US legislation such as the Oil Pollution Act (1990) imposes higher limits of financial responsibility on shipowners, and similar legislation is emerging in other parts of the world.
As with other industries, shipowners are perceived as ‘deep pockets', “thus there is a continuing upward pressure to increase compensation levels,” and the report's authors foresee marine liability coverages growing faster than hull and cargo insurance as a result of this.
One of the newer classes in the sector is offshore marine business, predominantly driven by the development of the offshore energy sector. Offshore development is notoriously pricey, with high oil platform construction costs, pipeline expenses and oil platform movements all contributing to both the expense and riskiness of the sector. As for the more conventional marine liability sector, environmental concerns have upped the ante, and national and international legislation is being brought in to ensure environmental protections are in place. Although these pressures lend themselves to increasing offshore energy-related insurance premiums, in reality the offshore energy sector fluctuates more than the overall energy exploration and production business. “These variations in offshore activity translate into a greater volatility in demand for offshore marine insurance,” comments the study. “Because of concerns with long-term energy sustainability and the wish of the large oil companies to diversify their sources of supply, the offshore market can be expected to continue to grow. Offshore exploration and development are increasingly taking place to satisfy the growing energy demands in rapidly-emerging markets, such as China and India, especially where onshore oil and gas supplies are limited.” But as with the large shipping lines, the large offshore energy companies are moving towards self-insurance and increasingly looking towards alternative risk financing techniques, in a trend which will inevitably take premiums away from the conventional insurance market.
In fact, the proportion of marine insurance premiums represented by offshore energy business has fallen to 4.4% in 1999, compared with 7.41% in 1994. In real terms, offshore-related premiums dropped from $1.5bn to $702m over that period, falling faster than the overall market, which registered a decline from $20.9bn premiums in 1994 to $15.9bn in 1999. In fact, of the five classes of marine business – cargo, marine hull, marine liability, protection and indemnity (P&I) and offshore – only cargo and P&I saw their relative proportions of the marketplace increase, although they both decreased in real terms, from $10.1bn to $9.3bn and $1.9bn to $1.6bn respectively.
The study attributes the overall fall in premiums to increasing competitiveness, “reflecting the pressure of globalisation, deregulation within national markets and the increase in domestic and international supply (capacity) due to more capital being available within the insurance and reinsurance industry, arising mainly from buoyant stock market values.” Marine cargo held up relatively well because of the growth in international trade resulting in greater sums insured. With much marine cargo being written locally, often under local tariffs, rates came down more slowly than those for classes of business such as hull and offshore which are written in the international markets. P&I premiums held up because of the mutual nature of the clubs, states the report. This feature means the clubs “are a little less subject to the impact of extreme international competition,” and during that period they also benefited from shipowners switching from the conventional liability insurance markets to the P&I clubs.
But what of the future? The report's authors predict that marine rates will recover slightly faster than the rest of the non-life insurance sector, though competitive pressures are likely to remain. “Past experience shows that if there are sudden shortages of capacity, caused by a sudden drop in the stock market causing the capital base of insurers and reinsurers to fall, or caused by a catastrophic level of claim costs, marine rates can rise quickly above their trend for a while,” comments the report. This would appear to be the current trading environment, though the study warns that commercial insurance rates such as marine business are heavily influenced by international competitive forces, and as a result are volatile.
Nevertheless, the continuing globalisation of the industry and deregulation of insurance markets, allowing in large international re/insurers, will increase local supplies of insurance capacity, as well as introducing technical expertise. “Takeovers of local companies by larger foreign insurance and reinsurance companies, and joint ventures, will accelerate this process,” predicts the study. This will reduce the current concentration of capacity from the main markets in Europe, the US and Japan to local activities, albeit those businesses may be owned by international organisations. “However, it must be stressed that the pre-eminent positions of London and other established centres will remain, but with a changed role,” comments the study. Those traditional centres of marine business will also find new competition from “supply hubs” in certain geographic regions. Thus, cities with financial services and shipping traditions such as Singapore, Dubai and Buenos Aires or Rio de Janeiro could emerge as regional powerhouses of marine insurance.
ART will be increasingly used within the sector, predicts the report. On the one hand, there is likely to be a growing use of securitisation products in the onshore and offshore energy sectors, while cargo insurance risks may increasingly be packaged with foreign currency and credit risks. “The more progressive insurers, reinsurers and brokers are currently building up their ART and treasury risk management capabilities, through the creation of new in-house departments of subsidiaries or through strategic alliances with investment banks, and hence they are positioning themselves so that they do not lose out from these wider market changes.”
Copies of Global Marine Insurance Review 2001, sponsored by Cooper Gay & Co Ltd, are available from WIS Research Ltd, tel: +44 (0) 20 7626 5200.