What lessons have been learned after Ivan? asks Matthew Vitoria
Hurricane Ivan resulted IN an estimated price tag of approximately $1.7bn to the insurance industry including a massive loss to marine underwriters insuring Gulf of Mexico offshore oilrigs and pipelines, despite affecting fewer than 5% of the platforms in the Gulf. But lessons have been learned and Ivan has triggered increased professionalism in the marine reinsurance market.
Although rates had hardened slightly following the 9/11 terrorist attacks, Hurricane Ivan - a category 4 storm - demonstrated to the industry that prices in some areas were still inadequate. Ivan has helped the marine reinsurance industry recognise it needs to be more focused on actuarial pricing, capital utilisation and obtaining adequate return on equity for the risks underwritten. Indeed, the marine industry has lagged behind the other insurance markets in the development of sophisticated actuarial pricing and modelling tools.
Immediately after the storm, which hit the Gulf in September 2004, loss estimates for marine insurers were estimated at approximately $1bn - derived almost entirely from the offshore energy portfolio. However, as the months passed, the loss estimates increased as damage to platforms and pipelines became evident and further coverages, such as business interruption and loss of production, were triggered.
Ultimately, after retentions and primary coverage provided by the Bermuda-based mutual, Oil Insurance, the loss crept upward to approximately $1.7bn, according to market estimates. The reason for the loss escalation? Major factors were one-in-a-100-year waves and sub-sea mudslides from the Mississippi Delta. Additionally, the storm re-entered the Gulf, which delayed damage evaluations, escalated the time for repair and added to the time when production was shut down. As a result of the storm losses, some marine underwriters in the London market have reviewed their realistic disaster scenario exposures in the Gulf of Mexico in order to reassess the methods of loss calculation, understand the drivers in development of loss amounts and provide a more pertinent conclusion of loss potential.
The industry has learned that it needs to fully understand the inherent exposures and values in areas such as the Gulf of Mexico, and this has to translate into day-to-day pricing of risk so that capital is properly allocated.
While much of the focus of the 2004 underwriting year has been on the insured losses from Hurricane Ivan, the marine industry in 2004 had already experienced large losses in its traditional marine segments. For example, in the hull market, the cruise ship Pride of America had damages costing approximately $180m after it caught fire while under construction; the Rocknes, a bulk carrier became stranded and resulted in a loss of approximately $80m, and the dredger Cristoforo Colombo ran aground also with estimated losses of $80m. In the energy market, risk losses from the Sonatrach gas plant in Algeria and the Moomba gas processing plant in Australia generated losses to the market of approximately $475m and $300m, respectively.
Even the cargo and specie market did not go unscathed. The Hyundai 105, a car-carrier vessel, sank off Singapore after colliding with an oil tanker.
While the hull value was relatively low, the cargo value was in the region of $50m to $60m. Furthermore, the Momart Warehouse in East London, which contained fine art and was heavily damaged by fire, will cost the market an estimated $120m. Even before Hurricane Ivan, these losses had a major impact on the marine market's 2004 results. But why is it that it requires a front-page event such as Ivan before the market will sit up and react?
All these losses demonstrate that strict underwriting discipline needs to be deployed and that analytical techniques continually need to be developed, enhanced and improved. The industry can no longer afford to ignore actuarial pricing and modelling, which support a scientific approach to the art of underwriting and provide data from which the capacity providers gain knowledge and comfort.
The 2005 hurricane season is in full flow; Hurricanes Dennis and Emily provide a timely reminder of the marine insurance industry's inherent volatility. But underwriters should not sit on their hands waiting for the next loss when they have tools to help price and understand marine risks. Capital providers want to be assured that the marine market can demonstrate a firm control of its risk exposures and loss potential.
- Matthew Vitoria is a marine and energy excess of loss underwriter for GE Insurance Solutions.