Tagged: Asia, Cargo, forecast, Hull and Machinery, marine insurance, soft market, tsunami

Written by FP Marine Risks and first published in the Asia Insurance Review, July 2011

Almost a year ago, we wrote about the marine insurance market from an Asian perspective.

We said that to focus on “underwriting, underwriting, underwriting” in response to the global economic slowdown, suggested that insurers should seek rate rises, higher deductibles and self-insured retentions, tighter conditions and the imposition of further risk management requirements for their Assureds.

And we argued that (in Asia at least) this was not likely to happen because of the region’s economic recovery, inward investment and capacity, and the ever-maturing environments in which assureds are operating.

A year on and economic recovery has been slow in many parts of the world and forecasts for growth are conservative in most regions. However, Asia’s growth has been relatively strong, investment and capacity continues to grow, and markets continue to mature.

Despite the usual forecasts of the prophets of doom, marine insurers are, for the most part, still profitable and marine insurance markets have not moved sharply in any direction. Over the next 9-12 months, we expect that the markets will remain soft, even in light of the recent natural catastrophes in Australia and Japan.

What has happened over the course of the year is for the Japanese tsunami to clearly highlight some of the failings – and opportunities – that exist for marine insurance markets worldwide.

MARINE CARGO

Overall, we have seen cargo markets remaining soft with only a handful of insurers trying to maintain their rates with no reductions. Profitable accounts, as ever, are still able to access the best rates.

We have seen new players enter the market in both London and Asia, contributing to the continuing growth in capacity. This capacity is also broadly based, which has a dampening effect on the leverage available to any one company or underwriter. This is, of course, good news for Assureds as rates continue to be kept low.

We are seeing London competing hard with Asia, often coming in cheaper and putting paid to the notion that Asia is always able to undercut London.

Despite all of this, premium volumes have been increasing as economic activity picks up and commodity prices have risen.

MARINE HULL

The hull markets were trending slightly downwards for the most part, until the Japanese tsunami when the market started to flatten. This was perhaps a knee-jerk reaction which particularly affected clients with renewals falling in the immediate aftermath of the event, who might otherwise have been expecting a reduction. The reality is that whilst this was a devastating and tragic time for Japan, very few markets suffered any significant hull losses.

Nevertheless, hull insurers remain under pressure to seek a minimum of expiring terms on clean renewals. In London however, the market is still relatively soft, no doubt helped by the introduction of hull capacity from six new syndicates. There is also new capacity available from continental Europe and, as with cargo, we are seeing new markets opening up in Asia.

The hull underwriters who enter Asia often aim to not compete on price, but in reality are forced to do so if they are to win business. This is particularly the case when the necessary service infrastructure – experienced claims teams and risk managers – is lacking.

There have been some high profile accounts achieving significant reductions on their renewals, and savvy shipowners are continuing to press for, and achieve, competitive renewals by utilising new capacity as well as their existing markets.

MARINE LIABILITY

We have previously talked about the lack of marine liability expertise in Asia, but we have since started to see the development of a credible liability market in Asia, with the potential for good capacity on Asian and worldwide risks.

There are no widely acknowledged leaders yet, and there remains a lack of experience amongst many intermediaries in this class of business. It will take time to break the old habits in this class and London is not yet under any threat.

However, we are confident that there is the opportunity in Asia for a market to grow, and that there is sufficient credibility of expertise and claims staff to gain traction.

NUCLEAR RADIATION

In light of the Japanese earthquake and subsequent radiation leak, the insurance industry was very quick to point out that radioactive exclusion clauses are paramount and apply to ship and cargo owners. However, we believe that there is a commercial and humanitarian case for providing an insurance solution for some nuclear incidents.

The relevant radioactive exclusion clauses clearly state that Assureds are not covered for loss or damage as a result of nuclear radiation produced by nuclear fuel, waste, matter, nuclear combustion or any nuclear weapons.

Clauses such as these serve a very important function. If radiation contamination were not excluded, the insurance industry could face collapse if a widespread nuclear incident or conflict occurred. These clauses therefore exist to prevent that, and rightly so.

However, their introduction originally arose from fears of a catastrophic nuclear conflict and we believe that the time has come to reconsider the market’s approach to relatively finite incidents such as the Fukushima radiation leak.

The industry has an opportunity here to meet the needs of shipowners, charterers and cargo interests by offering insurance cover that can respond to this type of incident. That cover would necessarily be strictly limited in quantum and perhaps also by some measure of the scale of the nuclear incident. Ideally the initiative should encompass physical damage buybacks for ships and cargo which may be leaving, entering or transiting an affected area. Extensions to P&I and Charterer’s covers addressing the concerns of owners and charterers affected by a nuclear incident and at risk of disputes might also be made available.

In a situation such as that following the Japanese earthquake and tsunami, where the chartering of ships to bring relief supplies and reconstruction equipment is problematic because of the risk of irradiation, an appropriate insurance solution should not only be commercially feasible, but represent an attractive product for the industry’s customers. It is also in the public interest.

Lloyd’s syndicate Hiscox recently announced the launch of a new product, Crew Radiation Insurance. We hope to see more insurers seize the opportunities that the Japanese tsunami has revealed in order to protect their clients further.

FORECAST

Compared to the rest of the world, Asia remains resilient, with strong growth rates and good trade forecasts. The IMG are forecasting 8%+ growth per year over the next five years for the countries they term “Developing Asia” and 5-6% growth for the ASEAN 5 countries.

Over the course of the next year, we anticipate that the cargo marine insurance market will remain soft but with overall premium volumes rising, especially in Asia. This will be fuelled by continuing economic growth, high commodity prices, and public and private sector-funded construction projects. Underwriters will remain profitable in the whole, and as new players continue to enter the market, we do not believe that cargo rates will harden.

The hull insurance market will probably remain relatively flat. More capacity is still entering the market, principally in London and continental Europe. This will continue to keep rate rises at bay, however we expect Asia to harden in comparison to London as capacity growth stabilises.

Moreover, Asia is still not writing a large enough book of hull business to have much influence on overall rates. The new capacity in London, combined with the need to write substantial amounts of business, will influence the market by keeping prices low through excess capacity.

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