Given the current pressures on the offshore energy and marine sectors, Andrew Brooks and Andrew Moulton discuss the influences at play and suggest the best way forward.
The marine blue water hull market was relatively unscathed by the hurricane losses in 2005. The same would be true in 2007 should another active season occur. This is due to the movable nature of the asset class and its ability to route around weather systems. As a result of this, and due to the global nature of marine trade, there is no disparity between US and non-US pricing for this sector.
The first half of 2007 has seen a number of significant losses in the hull and machinery market, such as the explosion on board the Sea Launch platform, the sinking of the Sea Diamond and the Bourbon Dolphin, and the collision between the WD Fairway and the MSC Joanna to name but four incidents (see table 1). It is estimated that the major losses have cost the marine market in excess of $600m so far in 2007 and that is without the smaller attritional losses that hit the market.
The cost of steel repairs has escalated significantly over recent years due to the demand for the basic commodities of iron ore and coal, particularly from the ever-expanding Chinese markets. This increase is also coupled with a significant increase in costs for repair slots at shipyards where, due to demand for new vessels, as much space as possible is given over to new constructions rather than repair.
What is surprising is that the blue water hull market is in a soft stage of the market cycle. This is in spite of the recent losses and the upward spiralling of repair costs. An interesting comment from several brokers is that, in spite of the majority of the losses hitting the London market, it is the London market that appears to be the most aggressive at the moment.
This situation is particularly odd given that major market leaders appear to have had an involvement in some, if not all, of the major losses. This is potentially a very dangerous situation in a market characterised by overcapacity and major players writing for premium income rather than quality of risk and profit.
In terms of wordings, the revised Institute Clauses for Builder's Risks are due for release imminently. Time will tell how readily the market will adopt the new clauses or whether there will be a reluctance to move on.
“An estimated 75% of the claims from Katrina and Wilma are yet to be settled in their entirety
The introduction of the new market reform and contract certainty issues appear to have focused a number of minds on administration issues, rather than on getting pricing and conditions correct. This could lead to major problems in the near future as poor terms become entrenched in the history of owner's contracts.
The recent major loss patterns have shown that something fundamental will have to occur in order to affect a change in pricing in the blue water hull market. This can only come in the form of a significant withdrawal of market capacity or a major loss. Even here, this would have to involve a brand new cruise vessel full of passengers and a fully-laden very large crude carrier in an environmentally-sensitive area in the US.
As we go through the 2007 US windstorm season the allocation of available catastrophe aggregate for offshore energy portfolios has dramatically diminished.
During 2007 the pricing for offshore Gulf of Mexico catastrophe aggregate has reduced significantly more than was envisaged in October 2006. Pricing is now at a level where some oil companies that retained this risk in 2006 have now re-entered the commercial insurance market and purchased cover.
At the same time, the vast majority of oil companies are benefiting from significantly increased wind sub limits compared with those available in 2006. This is happening despite an alarming deterioration in the 2005 hurricane claims. If 2006 had suffered an offshore windstorm loss of $1.5bn-$2.5bn, would the insurance industry be as generous with their terms and conditions for 2007?
The current loss estimates for both Hurricane Katrina and Rita stand at $7bn. During the course of 2007 the insurance industry should anticipate further deterioration as an estimated 75% of claims are yet to be settled in their entirety. The market is still debating the breadth of coverage afforded under certain coverage endorsements and the supply and demand factors affecting labour, equipment and materials are pushing industry costs and ultimately insurance exposure to unprecedented levels.
Andrew Brooks is chief underwriting officer and Andrew Moulton is marine hull and war underwriter at Ascot Underwriting.
Four large marine losses in 2007
1. The explosion in January of a rocket and satellite on board the Sea Launch space-craft launch platform;
2. The sinking of the Sea Diamond cruise ship in April, which ran aground off the Greek island of Santorini;
3. The sinking of the Bourbon Dolphin, an anchor handling tug supply vessel, off the coast of Norway in April; and
4. The collision between container vessel MSC Joanna and the world's largest hopper dredger WD Fairway during dredging operations in China.