On the face of it, the global economic slump created conditions that should have left marine insurance clients bearing the brunt of a hardening market and spiralling premiums.  But according to Mr Philip Bilney, Group Executive Director, FP Marine Risks, not only did that not transpire, but it is not likely to happen in the foreseeable future either.

At the recent IUMI conference in Hong Kong, Ms Deidre Littlefield cautioned that whilst the global economy may be through the worst of it, there were still signs that insurers in Asia would need to focus on “underwriting, underwriting, underwriting”.

This would suggest that underwriters should be seeking universal rate rises, higher deductibles and self-insured retentions, tighter conditions and the imposition of further risk management requirements for their Assureds.

However, from an Asian marine insurance perspective, it is apparent that this has not happened and nor will it.

There are three key reasons for this – Asia’s quick economic recovery as demonstrated by the rebounding trade figures, investment in Asia and the subsequent capacity it has brought with it, and finally the ever-maturing environments in which the assureds are operating and thereby lowering their associated risks.

Recovery

There is no doubt that Asia is recovering quicker than Europe or North America.  The IMF has forecast GDP growth of 4% worldwide, but 10% in China and 5.3% in Asia overall for 2010.

The world seems to be recovering from the recession but whether it is a sustainable recovery is yet to be seen.  Recent figures from the World Trade Organisation show that the downward trend in trade experienced worldwide during 2009 has come to an end, with world merchandise trade up 25% in the first quarter of 2010 when compared with the same quarter in 2009.

Importantly, intra-Asian trade has played a key role in sustaining growth within the region.  The WTO has recently reported that the trade flows within Asia have rebounded more strongly than those of developed economies and believes this is due to trade within the region.

China – An engine of growth

Furthermore, China’s imports grew at 16%, twice as fast as its exports (8%), suggesting that the country’s fiscal stimulus package has benefited trade within Asia as a whole.

China is now the world’s largest exporting country and probably stronger than ever relative to the West as we emerge from the financial crisis.  Unless something catastrophic happens, we expect to see the continuing, phenomenal growth of that economy.

The benefits of Asia’s growth in GDP and trade will of course filter down to the shipping, trading and maritime industries as a whole.  There is no doubt that because of this, Asia is certainly the most exciting place in which to be writing insurance business at the moment.

Investment and capacity

Accelerating a trend going back at least two decades, the last two to three years have seen an uninterrupted, headlong influx of new insurance capacity into the Asian market.

I am therefore not surprised that we are seeing continued investment into Asia.  There are now 15 Lloyd’s syndicates operating in Singapore and another five in Hong Kong plus 11 independent coverholders, most of which write Marine.

International insurers have either entered the market or dramatically increased their underwriting capacity.  With the new Asian-domiciled start-ups and increases in existing capacity, according to our own estimates, total Hull and Cargo capacity in Asia is today around three times that of just five years ago with no signs of abating. We expect to see more international insurers active in Asia before the year is out.

Whilst the capacity available is considerable, Asian marine underwriters now have unprecedented levels of authority at their disposal. US$100 million Project Cargo lines and US$25 million Hull lines are no longer unusual (without reference to treaty underwriters or to an overseas head office).

This trend has given Asia a self-contained marine market capable of supporting the great majority of insurance exposures arising in the region.  No longer is there an automatic need to seek capacity or expertise in London or Europe because it can all be found here. Insurers are realising this and repositioning themselves accordingly.  If they want to be part of the Asia Pacific Century, what choice do they have?

The developing world is highly developed

Many of the major cities in Asia enjoy world-leading infrastructure – ports, airports, roads and railways – which operate with modern technologies and are expanding daily.

Asian-focused logistics companies are highly efficient and move cargo through the system seamlessly and – in their own highly competitive environment – with ever greater regard to the safety of their customer’s goods.

Losses are being minimised throughout the supply chain as newer technologies and a continual push for international competitiveness have helped improve safety records.

Meanwhile, the shipping industry is ever-more regulated for the benefit of seafarers and the public alike.

Benign and sophisticated claims environment

The combined benefit of this is a relatively benign claims environment.  There have been some increased cargo losses in particular areas and circumstances, but on the whole we believe this downward trend will continue.

According to IUMI, total losses have, on the whole, followed a downward trend over the last 30 years.  Whilst the costs of some claims have increased, repair costs for damaged vessels have largely fallen, and with fewer ships in service losses have been muted.

Claims are an inevitable part of insurance, but when losses do occur, the Asian claims infrastructure is ever-improving.  Every major adjuster, or international law firm, is heavily represented in the region and local expertise is growing.

Market with credibility and strength

Not only are the risks getting better, they are more plentiful too. The new capacity in Asia is addressing a growing pie, as the economic data demonstrates, but what it does not reveal, and what we are witnessing, is that more marine insurance business is being attracted to the region’s markets.

Asian buyers now have better insurance options here than overseas, and foreign companies trading in Asia are more easily convinced by the international insurance brand names which are now on offer locally.

A number of international insurers have brought their existing Asian books with them and further still many Asian underwriters are increasingly writing non-Asian business.  This has created a market with credibility and strength.

Good news for Assureds

The world recovery, which is proving to be strongest in Asia, combined with plentiful capacity and better risks means it is unlikely the Asian marine insurance market will harden.  Whilst no one believes we are truly out of the woods just yet, there is no reason to assume that insurers in the region will do anything other than carry on being competitive.

As more underwriters continue to build up their regional presence in Asia, the need to increase rates and narrow conditions is suppressed.

An abundance of options for Asia’s Assureds combined with a determination on the part of underwriters to increase their market share has naturally created a competitive environment.  But, with continued investments in infrastructure and an increase in trade volumes combined with a reduction in claims, insurers in Asia understand that underwriting, underwriting and more underwriting does not need to translate into rate increases and a tightening of conditions.

Instead, underwriters in the region can utilise their local knowledge to write more business and a greater premium volume through a broader spread rather than increasing premium through increases in rating.

The EU sanctions ban European companies from investing in Iran’s oil and gas industries, while restricting trade and financial links including barring any European company from providing insurance services to Iranian entities.

The EU sanctions go further than the UN sanctions currently in place.

This has subsequently had the effect of a large majority of EU and UK insurers declining risks that involve regular trade to Iran, carriage of goods to Iran and/or risks that are known to have an Iranian entity involved in the operation of the vessel.

Notwithstanding the parameters of the sanctions, underwriters are being advised to take a very cautious position and are already including the new JH Sanctions Exclusion Clause in all policies.  In addition, the treaty market is starting to impose mid-term amendments which will translate to all original policies being issued with the Sanctions Exclusion Clause included as a matter of course.

Companies trading into Iran, trading with Iranian entities and/or chartering vessels to Iranian companies (notwithstanding the nature of those trades) should consider their position carefully as cover may not be available for all or part of the trade.

We would urge companies involved in this trade or considering becoming involved in trading to or contracting with Iranian entities to seek confirmation from their insurer in advance that cover will continue unaffected.

For anyone who wishes to discuss their insurance situation with FP Marine Risks, please contact your usual broker or email info@fp-marine.com

Clyde and Co have released the following information which provides a good overview of the situation: http://www.clydeco.com/attachments/published/19085/Iran%20EU%20sanctions%20update%20July%202010.pdf

The sanctions prohibit the trade of petroleum products to Iran and seek to limit the provision of “goods, services, technology, information or support that could directly and significantly facilitate the maintenance or expansion of Iran’s domestic production of refined petroleum products including any direct and significant assistance with respect to the construction, modernisation, or repair of petroleum refineries”.

Previous sanctions were limited to contracting with IRISL and utilizing the services of specific named banks in Iran.  These have now been broadened significantly with a view to restricting trade with Iran where such trade may or could support the refined petroleum products industry.

In terms of insurance, the Act does impose sanctions for the provision of insurance to those involved in the sanctioned trades, which is creating a great deal of consideration by the market generally.

The London market Joint Hull Committee recently introduced a new clause which they are seeking to include within all renewals with immediate effect.  The clause, JH2010009, is known as the Sanction Limitation and Exclusion Clause.

This clause confirms that the insurer will neither offer cover nor pay any claims under a policy if by doing so it places the insurer in breach of any sanctions.

Due to the significant penalties, insurers are being overly cautious in their approach to the sanctions and, more importantly, are placing the onus on the Assured to ensure that they are not in breach of the sanctions.

Separately, BIMCO has introduced a sanctions clause for Time Charterparties.  Shipowners are being encouraged to include the new clause in all their charterparties as it allows them to use their judgement as to whether or not to comply with charterer’s orders where to do so may constitute a breach of the sanctions.  This is already having an effect as owners are invoking their right under that clause to avoid trade to Iran.

The International Group of P&I Clubs have issued numerous circulars on the issues arising from the sanctions and we would be pleased to provide copies of these upon request.

For anyone who wishes to discuss their insurance situation with FP Marine Risks, please contact your usual broker or email info@fp-marine.com