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.

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 exists 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.

To date, we have heard confirmation of the following new entrants into the Marine Hull sector :

1)    Barbican
2)    Canopius
3)     Liberty
4)     Skuld
5)     WTK/ Munich
6)     WR Berkeley

Scor may be about to enter the Lloyd’s  Market, although we are not aware as to their areas of interest as yet. Furthermore Aspen are reviewing their existing marine hull book and may start to write Asian Hull business.

We anticipate that such a significant influx of new capacity in to the market will only benefit Assureds as it further increases the excess of capacity in the hull market.

We await with interest the effect that this increase of capacity will have on rates, but it’s fair to assume that the new incumbents will want to gain market share either through targeting previously written accounts or the acquisition of new business or, more likely, a combination of both.

In addition, we are already seeing a number of existing markets extend their core business either geographically or by tonnage in a bid to gain market share and premium income.

Asia, Asian owners and Asian based managers look set to continue benefitting from the opportunities that this represents as the burgeoning capacity is likely to put further downward pressure on rates.

The maritime news continues to be filled with articles about pirate attacks in the Gulf of Aden, while piracy also continues less reported in several other key areas such as Nigeria, the Philippines and Brazil. There has been some discussion, and perhaps confusion, about what support is available to shipowners in the event of a pirate attack.

To mitigate the risk, some shipowners are avoiding the area but at substantial additional expense, and others are using organised convoys or employing security staff for the vessel.

Marine Kidnap and Ransom insurance can play a key part in any shipowner’s risk management strategy because it covers the specific costs associated with piracy attacks, however there has been some misunderstanding regarding the detail of the cover.

Andrew Brooker, director at marine insurance brokers FP Marine Risks, says: “We are often asked what insurance protection is available to shipowners in light of the increased risk of piracy. Marine Kidnap and Ransom needs to be seen as a service that shipowners can draw upon that isn’t catered for by traditional hull insurance.”

Traditional hull insurance only protects the shipowner from loss or damage to the vessel as a result of piracy and is only designed to work in a reactive manner once the claim is made after the event.

In the absence of physical loss or damage, the ransom and associated costs would be considered a General Average expense and settled by all parties against their respective values. However, the legitimacy of these costs being claimed in GA has never been tested and could be disputed by the cargo parties’ insurers.

Given the amount of shipping traffic that transits areas such as the Gulf of Aden, statistically the risk of a pirate attack is quite low. However, when it does happen, shipowners are faced with a challenging range of issues they are unlikely to have encountered before.

Brooker explains: “Shipowners suddenly find themselves with a host of questions about how to move forward – how do they find the necessary help from specialist negotiators; how do they enter into effective communications with hijackers; how do they deal with threats to their crew, vessel and cargo; how do they raise and deliver the ransom?”

Marine Kidnap and Ransom insurance is designed to specifically meet the needs of shipowners in dealing with these issues. It also provides the security of having an insurance in place that ensures the shipowner receives priority treatment from kidnap negotiators and other personnel involved. It covers all the necessary related costs that are needed to secure the safe and quick release of the vessel, crew and cargo, including the ransom and its delivery.

Furthermore, if a shipowner were to declare General Average in an attempt to raise the ransom, it could jeopardise their commercial relationships.

Brooker says: “There is generally no deductible with Kidnap and Ransom insurance, so owners are not exposed to additional costs after the premium and our cover ensures the Kidnap and Ransom insurers do not seek to recover any aspect of the costs from cargo or charterer interests, thereby preserving those commercial relationships. It also has the effect of protecting the owner’s existing Hull & Machinery or War cover from a loss which exposes them to an increase in rating for the following year – in effect, Kidnap and Ransom insurance has no memory and will not seek to recover claims through increases in premium.”

Uniquely, there was no longer a vessel or cargo being held for ransom.   The captain was now the only hostage, but within a standard (UK or American Institute or Norwegian Plan) Hull and Machinery policy there is no specific cover for ransom payments made specifically for the crew. This is also the case for P&I policies.

A ransom is only covered by existing H&M policies in a General Average claim if the pirates do not specify the amounts for the separate release of the crew, cargo and vessel. This usually does not present a problem because the pirates tend to take the crew hostage as part of the vessel hijacking and effectively hold all parties to ransom for a single amount.

However, in this instance, the pirates’ demand for a ransom was only tied to the holding of the captain on the drifting lifeboat. It would therefore be difficult for a shipowner to recover an insurance claim for the ransom, when the hostage was being held away from the vessel itself. If the ransom was paid, the owner would have to submit the claim to their P&I Club, likely under the discretion afforded by the Omnibus Rule.

On this occasion, the US navy launched a successful operation and rescued the captain so we do not know how the situation may have unfolded had the shipowner entered into ransom negotiation talks.

Moreover, the recent attacks on the American-flagged Maersk Alabama and the two French yachts have seen the respective navies taking military action against the pirates to secure the release of the hostages, whereas previously ransoms were paid.

According to mainstream media, the immediate effect of this action appears to be retaliatory. From an insurance perspective, we are likely to see an increase in premiums for vessels transiting the area as the risk of violence escalates even further.

Unless the shipowner had specific Kidnap and Ransom insurance, any claim made to cover the ransom for the crew would only be at the discretion of the P&I Clubs’ board and only then if it was an International Group Club.

If any party is interested in learning more about what is covered under their existing Hull policies and what additional services Kidnap and Ransom insurance provides, please do not hesitate to contact any one of our shipping team to discuss further.

The amount of return will depend on whether the vessel is under repair or not and the number of crew on board. Theoretically, the percentage is fixed at the outset of the policy, however the underlying annual rate is usually higher where such lay-up returns are allowed. This is in contrast to a “Cancelling Returns Only” (CRO) designated policy where the annual rate will be lower but the Assured continues to pay full premium during the lay-up. This decision, which must be taken at the outset of the policy, has in recent times not been an issue for the majority of owners because freight rates were high and vessels were rarely being laid-up, hence CRO was almost invariably being taken to reduce annual premium costs.

However, in the current climate, we are advising owners to consider whether or not, during the policy period, any of their vessels might be laid up and if so, to consider their options. It is worth noting that if lay-up returns are excluded, owners may not have a right to cancel an ITC – Hulls policy if the vessel does enter lay-up. This may be a matter for negotiation with underwriters who are now seeing a general decline in premium volumes, given the reduction in vessel values.

To assist owners, we have also created an insurance facility to allow our clients to reduce their insurance premium for vessels entering short or long-term lay-up, whether under repair or not. The facility is directly focused on owners who have any part of their fleet out of service and can be utilised easily and cost-effectively where a complimentary underlying hull policy is in place.

As we wrote in our opinion piece Piracy – How Covered are You?, the methods and style of piracy have moved on from its “traditional” routes where pirates would board ships and steal cash and equipment. This didn’t present any particular problems for insurers. The new method sees Somali pirates only interested in the ransom, demands for which have run into the millions of dollars, and it is the settlement of these ransoms that are likely to push premiums higher.

There are further fears that the Somali methods of hijacking will spread to other regions, including South East Asia and Latin America. Whilst this is possible, current circumstances suggest the need for a specific set of geo-political characteristics to make this work, i.e. a sea lane near land in calm waters without any issues as to sovereignty, a passive government or legislature, a lack of concern of that government of outside pressure to take action, and an inability of external governments to take action.

However, if other hot spots were to occur, then we would likely see a quicker shift of Piracy from the Hull to the War policies. Whilst there is the increase in premium to contend with, there is also the question as to who is going to pay for it.

It means owners and charterers should be paying increased attention to their War clauses and obligations under the charterparty, and account for the increases accordingly, irrespective of the anticipated trading pattern.

International security efforts have increased, but their presence is having minimal impact on what is unquestionably a lucrative crime.

Somali pirates are making ransom demands of up to USD10million, threatening the crew and warning the shipowners that they will ground the ship if their demands are not met.

Understandably, the safety of the crew and the release of the vessel take priority. However, whilst the affected shipowner does what is necessary to secure the release of the crew and vessel, cargo owners can be significantly affected.

The cargo is often more valuable than the vessel itself, yet in the event of a hijacking, cargo owners may not be alerted to the situation and are unlikely to be involved in the subsequent negotiations and ransom payment.

Recent hijackings have lasted between seven and 100 days; 58 days is the average duration of a hijack in Somali waters. Cargo owners can see disastrous delays particularly affecting any seasonal or other time-critical cargo, and in the worst case, deterioration or material damage to the cargo itself.

We are also witnessing an increasing number of shipowners attempting (some successfully) to recoup a share of the paid ransom from cargo interests in General Average.

Given the cargo is more often of significantly greater value than the vessel it is being carried on, ship owners will seek to recover the significant majority of the ransom payment and any other general average charges from them.

Irrespective of the ultimate position, shipowners are likely to have a prima facie right to demand general average security and we would expect owners to exercise their lien over the cargo in order to obtain that security where they consider it necessary to do so. Unsurprisingly, we are also aware that cargo interests are attempting to resist the claim in General Average.

What action can Cargo Interests take to protect themselves?

It would appear critical to establish a protocol for communications with shipowners in the event of an incident.

In addition, we suggest cargo interest obtain confirmation from shipowners regarding adequate Hull and Machinery, P&I, and War Risks insurance for the voyage in question.

There is specialist Marine Kidnap and Ransom Insurance available which provides not only cover for the ransom payment but, arguably more importantly, access to specialist security consultants who will assist in negotiations for any ransom payment. We recommend that cargo interests check with the shipowners to see if they have purchased this cover.

We are also witnessing collaboration between the parties involved in the voyage (charterers, owners and cargo interests) to purchase this cover for all interests.

Please see our separate news article on Marine Kidnap and Ransom Insurance for details or contact us to discuss your requirements further.

To keep up to date with reported piracy incidents and to learn more about prone areas, please visit http://www.icc-ccs.org/prc/piracyreport.php