As profits continue to leak from the marine insurance sector, Sam Ignarski asks whether enough is being done to plug the holes?

Rather like 2002, 2003 was supposed to be the year that the mariners clawed back ground lost in the great softening market of 1996 to 11 September 2001. Those years had witnessed an erosion of rates which, in many cases, removed the word profit from the lexicon of many companies in the market. Yet this year at the gathering of the International Union of Marine Insurers in Seville, the industry could not but acknowledge that the tide of red ink continues to lap at the doors of the industry. One rather pungent background briefing which circulated after the Seville meeting and which has attained some considerable notoriety said what had to be said in a series of bullet points:

  • for every 1% drop in interest rates, the technical combined loss ratio of marine underwriters needs to improve by 2%;
  • the eternal question arises: "Why do marine insurers give more cover when prices go down?" -could brain damage be an answer?
  • the energy market is a very sick patient. 1996 to 2000 produced $1bn in premium yet claimed $1.9bn in losses, 30% of which were due to defects in cover (bad wordings);
  • the hull market has in recent years eroded by $6bn in value. This is more than twice the current premium income;
  • shipowners' cost levels (including insurance premiums) have remained fairly stable over the last decade, irrespective of what they may tell you. Their buying habits have not. Repair costs have also remained rather stable;
  • virtually all the major fleets go on global tender. Trust shipowners to find the best deal;
  • the reasons for the current dismal state of marine insurance cannot be found 'outside'. It's us. Lloyd's results (hull) have produced red ink for six years (1997 to 2002), as have those of France, Germany and Norway. No wonder, what produced $4 to $5 in premiums in 1995 was available in 2000 for less than a dollar;
  • the time has come for a good old-fashioned market collapse. Volatile marine return targets should be five to ten points higher than for property and casualty business.
  • Most people agree that marine insurance and particularly marine hull insurance is at a crossroads and affirmative action is desperately needed if those concerned are not to attend a variety of funerals soon.A slightly wider take on the industry, which also reviewed P&I insurance and marine liabilities, does not make for any more comforting reading. During the years concerned, P&I rates lagged behind losses by some 20%, the difference being made up by the investment returns earned by the P&I Clubs' fund managers. Since the year 2000, returns of this order are no longer achievable and the Clubs are having to come to terms with this by raising their rates. Marine liabilities have produced underwriting casualties by the score. Specialist divisions in insurance companies that once took in and rated the liability and PI exposures of transport and shipping companies such as forwarders, terminals, and other players were in many cases closed down by their appalled capital providers. So even in what is a rather mature sector of the insurance industry, which is hitched to the growth in world trade, change has come a-calling. The next turn of the marine insurance cycle - one assumes that sooner or later price competition will give way to a marked stiffening of rates - will surely have to take greater account of a number of emerging factors.

    TransformationFirst, the scale of marine insurance has changed. Where a decade ago there were hundreds of shipping companies and thousands of freight forwarders, the consolidation effect has whittled down the number of operators which buy insurance. Today the customers of marine insurers are gigantic lines running bigger and bigger ships (especially in the containerised sector) and posing larger catastrophe risks. The latest generation of container ships on order have room for 9000 teus (20 foot equivalent units). Assuming a full load, the value of cargo at risk is $270m (say $30,000 each). Second, the cottage industry quality of marine insurance, with long lists of subscribing underwriters who themselves knew something of shipping, is largely a notion of the past. Today, the remaining players of note in marine insurance tend to be owned by larger capital. Great names in the London market, once at the apex of the marine insurance triangle of influence and power, are often now owned by companies located in Australia, Bermuda, Germany or Switzerland. Strategic decisions thus have a tendency to come from afar. This also affects where the parties can go to find their reinsurance. The sources for this are also now bigger and more limited. Major claims tend to wing their way to Munich, Zurich or Hamilton much more than they used to.A further factor is that the drive to write for cash, which has been such a feature of underwriting in this sector, has been most marked in hull insurance, where a multiplicity of capacity still prevails. The market is still fragmented, with no one company enjoying anything near market dominance. Cargo insurance has in the past decade become a very local industry. Only distressed lines and hard to place risks come to the London market from overseas these days. Cargo insurance tends to follow industrial production, which tends to explain why the largest cargo insurers are located in countries like Germany and Japan.Another factor is that the world of shipping and transport is undergoing large long-term changes as the Pacific Ocean becomes the dominant trading ocean and the Atlantic recedes in importance. For every container crossing the Atlantic Ocean, seven cross the Pacific. This shift in the centre of gravity of international trade has profound implications for service providers, not least those who insure such risks. The marine insurance executive of the mid-21st century will find that speaking an Asian language or two will be part of a typical skills set.

    Globalisation's impactMarine insurance and its customer industries led the way in globalisation in the era before and after Marconi. Yet today, with the colonisation of the earth by the internet, one can sense the hesitation and confusion of an industry still wedded to face-to-face trading. The losses suffered by both insurers and shipping companies during the bubble years were as high as any, as venture after venture crashed against market unwillingness. The need to be global and local at the same time is very much in the industry's pending tray in 2003. Looking to the future, some things seem more certain than others. More consolidation is likely if only because this is the insurance industry's characteristic response to years of repeated losses. In an era where mutuals in general have been 'leveraged' (i.e. demutualised) it is striking how many mutuals still serve the maritime industries. This is perhaps a testimony to the continuing difficulties presented by shipping and transport to insurers. There have been some attempts by P&I insurers to combine their activities in the field of shipowner's third party liabilities with those of hull insurers, but so far it has not been possible to say that the market has beaten a path to these newer doors. With the new, bigger scales in shipping and the sheer size of risks, it is regularly possible to see shipping and manufacturing companies of incomparably bigger size and solvency transferring risks to smaller, weaker insurance companies. Absent a run of fine profitability, one can see the amount of risk being insured in the world as primary risk continuing to decline. In response to the raising of insurance rates many companies turn to self-insurance and set up their own captive vehicles.It is possible in describing the marine insurance world, as this writer often does, to relate the decline of a once great industry and to describe the marginalisation of what was once a core activity of the insurance industry in general. Yet world trade continues to expand and the owners of assets and liabilities continue to need care and financial assistance.

    Thinkable lossThe scale of thinkable loss continues to climb. Typhoon Maemi, which in September made its landfall in the Port of Busan, the centre for shipbuilding and container shipping in South Korea, caused a degree of havoc seldom hitherto seen in the modern shipping world. Marine claims handlers are already opening files on ten LNG (Liquified Natural Gas) newbuildings, a semi-submersible craft, an FPSO (Floating Production, Storage and Offloading mono-hull) and several tankers which suffered extensive damage. There are eight collapsed and three derailed container cranes with another 40 cranes within the port damaged to some degree. Some 2,800 containers standing in the port suffered flooding, many containing cargo. A floating hotel worth $15m was also blown ashore. This scale of loss, which altogether will test the mettle of marine insurers (and their reinsurers) once again, will probably compute into one of the largest losses of the year. Will the market really turn this year? The signs are certainly not all one way. A recent report in the maritime press dwelled on the extraordinarily competitive nature of the insurance premium agreed for the new $780m Queen Mary 2, the maiden voyage of which is scheduled for 12 January 2004.By Sam IgnarskiSam Ignarski is Director of Research, Charles Consulting plc.