Whilst the harsh realities of the global economic downturn have struck the shipping and trading industries, the predicted knock-on effects on the marine insurance sector have generally not materialised.

The marine insurance market is alive and well; there has been no noticeable hardening and in some cases the cargo market has softened slightly.  Far from a decline in business, many insurers – notably Lloyd’s syndicates – have seen an increase in gross written premiums.

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. There have been some increased cargo losses in particular areas and circumstances, but on the whole the claims environment has been relatively benign.

Moreover, there has been ongoing investment into marine underwriting in many parts of the world.  Cargo in particular continues to be one of the most favoured lines for general insurers, and many companies have invested further in their marine teams even during the recession.

Will the market change move in the medium-term? The FP Marine Risks Crystal Ball predicts little, if any, change over the next six months.  We expect that rates will remain at current levels, or possibly even drift a little lower in some areas – particularly cargo.

It is believed that the majority of goods had not been insured.

The Delhi Exporters Association’s president, Mr S P Agarwal is reported to have said: “It is the responsibility of manufacturers to bear the insurance from factory to Concor premises. The goods remain for a few hours there before they are sent for shipment to destination. Generally traders avoid insurance during this transit period. Once the goods are transported, buyers take care of insurance.”

We wrote a previous blog about the hazards of cargo accumulation after a similar fire in India earlier this year and the necessary steps cargo interests must take to protect themselves against substantial losses. The risks in depots are often underestimated, particularly in situations such as these where it is believed that the depot exceeded its maximum container capacity. And whilst many containers might only be stored in depots for a short period of time, a very real exposure to loss exists, especially given that the spread of the fire is often so rapid that it can wipe out entire warehouses within a few hours.

We recommend that all cargo interests, including freight forwarders and those insurers who may cover such cargo consignments, speak to a specialist marine insurance broker who can help design the necessary cover to protect them from the full range of risks they face.

Freight stations and warehouses can each contain hundreds of millions of dollars worth of goods that are at risk of becoming total losses from perils such as fire, flood and wind.

Earlier this year, a serious fire swept through the Punjab Conware Freight Station in India. The facility is 15,000sq ft and was storing a mixture of cargo from chemicals and tyres to garments. Due to the nature of the cargo, the fire was able to rage on for over 24 hours even though a significant number of fire engines attended the scene.

Most cargo policies provide limited extensions for cargo stored in these types of facilities or on the wharves, in stockpiles or train depots but the policy extensions need to be looked at carefully by both the policy holders and Insurers.

Freight forwarders and cargo owners need to ensure they have adequate scope of cover and sums insured clearly stated in their policies.

They should anticipate that with the growing use of transport hubs at any point in the transit / storage chain, there is always a possibility of such large high-value accumulations occurring.

Likewise, cargo insurers should anticipate all possible exposures, including unforeseen accumulations. They should clearly state intended location value limits and ensure they have sufficient facultative reinsurance in place.

All cargo interests should speak to a specialist marine insurance broker who will be able to design and secure the best cover for cargo owners, and place competitive reinsurance for underwriters.

And catastrophic incidents do occur. In August 2009 there was an accident in Talaja, India, when a bridge collapsed and a 128-wheel truck carrying a turbine to a power plant in Pipavav plummeted into the river below killing at least 5 of the crew and causing substantial damage to the cargo.

Marine consequential loss insurance exists to indemnify the insured in respect of expenses, standing charges, anticipated profit or actual loss of profit, including interest on loans etc., arising out of late or non-delivery, or damage to the cargo during transit. It is believed that the financiers in the Indian accident did not have the necessary insurance and are likely to be facing multi-millions of dollars in losses.

This type of cover is particularly relevant to those companies and governments embarking on major infrastructure projects such as new power generating plants, water desalination operations, port developments and construction of mining operations etc. In relation to these major projects, the cover is referred to as Delay in Start Up (DSU) or Advanced Loss of Profit (ALOP). Failure of a project to start on time can cost developers or financiers many hundreds of millions of dollars in lost earnings and interest.

As a specialist Lloyd’s marine insurance broker, FP Marine Risks is seeing a growing demand from clients seeking protection for these types of exposures. Although these risks are often very complex and can involve hundreds of millions of dollars, FP Marine Risks has access to world markets keen to provide competitive and individually tailored cover to insulate clients and financiers who could otherwise be facing disaster.

Charterers who have been lucky enough to have had no claims in recent years may consider discarding the cover as an easy to decision to make.

However, as the volume of trade reduces, so do the margins for everyone involved – the receiver, the shipper, the shipowner and, of course, the charterer. As projects are mothballed or cancelled completely, more cargo is being rejected that would have been otherwise acceptable. Previously, minor damage to the cargo would have made little difference in a climbing economy where the value at discharge was significantly higher, but this no longer holds true as values and demand fall.

So, what happens to these losses? To protect their margins, receivers will claim from their cargo insurance, where they previously did not. Cargo insurers will be more interested in pursuing a recovery against the carrier using recovery consultants or lawyers working on a ‘no-win, no-fee’ basis. Carriers will then look to pass on those losses to charterers.

Similar issues arise with damage to hull claims by owners. Previously, owners were too busy trading and enjoying high charter rates to consider off-hiring vessels or conducting minor repairs. However, these same owners are now suffering from a lack of income, which in some cases is making slow repairs a more attractive option than trading at a daily loss. Owners will now be seeking to make those repairs and recover their losses from the charterers.

In addition to the above physical loss exposures of a charterer, there are also the legal costs implications for charterers in any position in a long charter-chain. Most owners and charterers are currently saying “I am fine as long as my counterparties continue to trade and pay”. However, if one charterer fails, then the whole chain is very quickly exposed to losses as each party tries to protect themselves and/or frustrate the contract. If one party in a multi-charter chain goes bankrupt and is left owing others, then extricating yourself from the intricacies of the chain will be time-consuming and expensive – the legal process is almost certain to be protracted and potentially multi-jurisdictional.

Whilst FD&D (Freight, Demurrage and Defence – legal costs insurance) doesn’t cover the underlying exposure to pay or recover charter hire, it does provide cover for the legal costs of both defending the incoming claim/frustration of the charter and the costs of pursuing the bankrupt charterer for unpaid losses.

Charterers are more exposed to risk now than they have been for some time, from cargo losses, hull losses and legal bills.  Whilst the need to cut costs is weighing heavily on charterers minds, it is as important as ever to be protected.

The global economic gloom is casting its shadow over insurance like everything else, with sharp rises in premiums likely across the board in the near future. We asked logistics-industry insurance expert Philip Bilney* why reducing cover is not a good idea.

Can project forwarders avoid paying more for insurance?
The temptation is always there to skimp on insurance cover. Reducing the level of cover or seeking less comprehensive policies may save money short-term but the risk is that it would be a “false economy”. It does look as though the insurance market in general will harden over the next several months – in other words premiums will rise – for a number of reasons. This applies to most sectors including Marine Cargo insurance, E&O, projects and project-related cover such as Delayed Start-Up (DSU) or Advanced Loss of Profits (ALOP) insurance. But the answer at a time like this is to look to an organisation such as the WCA Family that has the buying power to reduce the impact of any market price hikes.

So insurers are seeking to restore their profits?
Essentially, yes, because insurance companies have to make a profit like anyone else. Here are some of the reasons why – reasons you may care to pass on to project owners tempted to cut back at this difficult time.

First, supply and demand: insurance capital is derived primarily from equity markets and when that capital dries up, the amount of risk any one insurer can accept is reduced. Less equity market capital means a reduced supply of insurance capital, which in turn leads to a higher price to buy that small part of it which you need to cover your risk. In this regard it behaves in much the same way as any other commodity, but in the opposite direction.

Similarly, there is not an abundance of capital sloshing around looking to take advantage of a perceived increase in rates. After Hurricanes Rita and Katrina, which hit the Energy and Offshore market so hard, there was a rush of new capital into the industry to take advantage of the anticipated hardening, with the result that it never actually happened. That sort of capital ingress often tends to manifest itself in the form of new start-up reinsurance companies which are effectively the wholesalers of insurance capital.

But surely premiums are already expensive?
Actually, premiums will be rising from a relatively low level. The market has been at historically soft levels for the last year or so and thus is due an upturn anyway (in my experience upturns only really happen when the market is already genuinely soft). We had the same situation immediately before 9/11, which prompted the last serious hardening of the market.

Also, major losses were unusually high in 2008. For example, claims from
Hurricane Ike alone are expected to reach USD16 billion.

Insurance companies are famously known as “investors with a bad habit” (underwriting), so many have been hit hard by a collapse in their asset values. The thing is, very few are admitting to it yet.

What other factors contribute?
Generally speaking, recessions on a scale now being encountered worldwide produce more crime, including fraudulent claims and associated losses, and that of course drives up premiums.

Insurance buyers will often ask why the cost of their particular insurance has gone up in a hard market although the risk remains the same. The answer is that all classes of insurance are connected because the source of capital is much the same, and reinsurance costs (the mechanism by which insurance companies offset their risks) tend to rise across the whole industry. So the tide of the whole market rises and falls as one, although of course individual anomalies do occur here and there.

When will the premium increases start to hit home?
Curiously enough given the depressing economic news, there is some debate over whether this hardening is actually happening as yet. The ‘rescue’ of AIG has actually had the effect of reducing some prices because AIG has to compete harder to retain market share, and in other areas some insurers are maintaining prices in order to avoid losing good business.

But in general, insurance companies are refusing to reduce premiums now and there are some areas (Marine Hull for example) where increases of 5-10 percent are already being applied. The jury is still out, but the general view in the industry is that prices will move sharply upward from early 2009.

Trade Credit premiums, on the other hand, have already doubled. If you can buy cover at all. Default & bankruptcy claims are escalating dramatically and most insurers in that sector (there are only a handful) are hunkering down and declining to accept much new business while they wait for the storm to pass. But business is still being done.

So what can project forwarders do to economise?
Despite some rising prices, now would be the worst possible time to run uninsured. Claim frequencies will rise, not only for the reasons I mentioned above, but also because more goods will be rejected by customers than would normally be the case, and if they are genuinely damaged, then cargo insurance will cover this.

FSL (freight services liability cover) also becomes more vital as people get more litigious and the nmber of disputes rises. Forwarding businesses are highly exposed at the best of times, but the risks can only worsen as the world’s economies slide into recession and trading becomes more difficult.

It’s also worth bearing in mind that insurance companies tend to give a much better deal to long-standing clients than they do to companies who are perceived to dip in and out of the market. So while there is every reason to ‘shop around’, there is also value in building and maintaining a good relationship with an insurer over time – try to work only with reputable, secure insurers and where possible leverage off the influence of those organisations who have genuine buying power.

*Philip Bilney is group executive director of FP Marine Risks, a specialist provider of insurance products and services across the entire spectrum of Marine and related sectors. Based in Hong Kong, in 2006 the company was the first Asian-based insurance broker to become a fully accredited Lloyd’s of London broker following three years of mandatory provisional accreditation. FP Marine Risks, the sole broker for WCA Family of Logistic Networks, developed Project Cargo Insurance, one of a suite of products available exclusively to members of WCA Family that includes Marine (cargo) insurance and Freight Services (E&O and legal liability) cover.

Whilst attacks in the Malacca Strait and Indonesia have dropped by over 50% in the same time, the Somali coast and Gulf of Aden have seen a drastic rise from only 2 incidents in 2004 to 44 in 2007.

The data available for 2008 shows that between January and September there were 50 attacks off the coast of Somalia, 32 hijack incidents and over 260 crew members held hostage.

The pirates have hijacked vessels from over 20 countries, including Germany, Japan, Malaysia and France, and members of the crew are predominantly from the Philippines and Malaysia.

The pirates targeting vessels near the Gulf of Aden and Somali waters are predominantly local fishermen and disaffected youth from Puntland, a semi-autonomous region in the north east of Somalia.

They threaten to kill the crew and run the ship aground from the outset, and make ransom demands of between USD2m to USD10m for which they leave little room for negotiation.

Ten countries have sent in military forces to the waters surrounding Somalia and the Gulf of Aden to try and prevent further attacks, but with little success.

It is argued that as long as the issues internal to Somalia remain unresolved, piracy in the area will continue.

Avoiding the area entirely will limit a shipowners exposure to the risk of piracy, but it is also a costly and time consuming alternative.

Marine Kidnap and Ransom Insurance, on the other hand, ensures that if a vessel is captured and a ransom demanded, the shipowner is able to respond quickly and with the support of experienced crisis-handling professionals to ensure the safety of the crew and expedient release of the vessel.

The Cover

In summary, the Marine Kidnap and Ransom Insurance covers the following:

1. The ransom that has been paid

2. The loss in transit of the ransom

3. The fees and expenses of security experts who specialize in advising clients on how to handle crises such as kidnap-for-ransom

4. Additional expenses including those for an independent negotiator; a public relations consultant or interpreter; reasonable costs of travel and accommodation of the assured; plus all other reasonable expenses incurred subject to the insurer’s approval.

5. Legal Liability to cover settlements or awards, fees and judgments imposed upon and paid by the assured as a result of an action for damages brought by or on behalf of any insured person, or his / their legal representative or shareholders, as a result of the kidnap. Defence costs incurred by the underwriters are payable in addition to the limit for legal liability.

What would you do without insurance cover?

Without the necessary Kidnap and Ransom insurance, shipowners understandably find themselves unsure about how to proceed in the event of a hi-jacking.

They need to consider how to enter into effective communications, how to handle the demands and threats made by heavily-armed pirates, how to advise family members of the situation and how to raise and deliver the necessary ransom to guarantee a swift and successful release.

Most, if not all, owners would consider it an unprecedented strain on finances, resources and expertise to manage the crisis effectively.

However, with adequate Marine Kidnap and Ransom Insurance you have the necessary support from experienced professionals as soon as you need it.

They have the ability and know-how to advise you through every stage of the negotiations and release, their costs being covered by the insurance.

In addition, the insurance also covers the ransom itself along with a wide range of ancillary, but necessary, expenses that may be incurred either during and/or after the successful release of the crew and vessel.

The above information is intended solely as a summary of the cover – for full details regarding the conditions of cover, exclusions and definitions, please email or telephone your usual FP Marine Risks contact or call the Hong Kong office on +852 2544 3410, the London office on +44 (0) 207 397 4920 or email info@fp-marine.com

With growing trade volumes, vessel sizes and government legislation, supply chain managers face increasing risks and liabilities in their industry. Insurance is an important risk management tool, but one that has yet to be fully utilised in Asia. For an effective insurance purchasing strategy, supply chain managers should be aware of the changing risk exposures, the breadth of cover available and the long-term benefits that insurance provides by protecting profitability.

Supply chain management, by the diverse nature of the business, is exposed to constantly changing and, in most cases, increasing risks and liabilities. Depending upon the geographical spread of the business, those risks are likely to range from political risks to business interruption and the more specific threats of piracy or theft.

The insurance market has always been keen to respond to these varying and changing risks, not only with more sophisticated products, but also greater expertise and knowledge. In the increasingly competitive environment that the trade insurance market has become, differentiation is a key driver for insurance solutions that can dovetail with existing covers and/or risk management devices already in place.

What remains constant and critical is for supply chain managers to be able to identify the risks and react to them positively. That requires a high degree of both understanding of the exposures as well as the resources required to implement the required risk management procedures. As part of that process, the involvement of the insurance market and its knowledge base can be invaluable not only to determine the possible solutions available, but as a cost-efficient external resource.

Changing Exposures

Supply chain managers have become more risk averse in recent times due in part to the falling cost of insurance, but also due to an increase in the understanding of risk and the constantly evolving legislative environment.

A gradual, but steady, improvement in the understanding of the liabilities of service providers and the courts’ willingness to find new areas of liability or affirm previously held views has focused more attention on the involvement of insurance as a risk management tool. But, is there sufficient focus or understanding on this area?

There can be no doubt that it is difficult to maintain adequate knowledge of new risks and the evolution of existing risks. As the size and demands of the industry continue to develop, both in Asia and globally, so too does the list of potential losses that might arise.

One such example is the risk of accumulation brought about by the increased volume of trade. Accumulation arises where a series of shipments are in the same place at the same time, whether that be a warehouse, vessel or other conveyance.

For supply chain managers, this is a difficult exposure to monitor on an ongoing basis, yet can give rise to a significant underlying exposure in the event of just one single incident. Whereas this used to be predominantly the preserve of static risk insurers, due to the progress of, specifically, the shipping sector of the industry, it now has a broader effect across the supply chain.

As the size of vessels increase to meet the cost efficiency demands of global trade, so does the possibility of an accumulation of risk on those very vessels. The capacity of the ‘Emma Maersk’ and her 11,000 twenty-foot equivalent units (TEUs) is a forebearer of things to come. It is perhaps noteworthy to compare her with the recent losses incurred by cargo interests alone on the ‘Hyundai Fortune’ of potentially USD75m and the ‘MSC Napoli’ in the region of USD66m, both of which were unavoidable losses from the point of view of the supply chain managers unlucky enough to be involved.

But the issues of accumulation do not stop once the cargo is discharged from the overseas vessel. As trade volumes continue to rise, specifically to and from China, so consolidation and deconsolidation points become more congested and/or capacity increases.

If we add to the equation the risks of port congestion either through natural or man-made causes such as the recent strike in the US Pacific Northwest, those exposures can result from a number of causes making them difficult to predict.

Being able to calculate these exposures, with a degree of accuracy, requires a high level of risk management capability, which may not be viable within certain areas of the supply chain. It is, of course, difficult enough to manage risk successfully where all the information is available; where that information is not available, it becomes a considerable challenge.

The result of this is that there is only a limited level of protection for even the most sophisticated risk manager. Offsetting risk in the form of insurance should, therefore, play a pivotal role in the overall risk management strategy.

Insurance in Asia

To this end, the insurance market in Asia continues to grow as more and more insurers enter the arena, either as additional offices to bases in London or the US, or Asian headquartered and capitalised. The London and Lloyd’s market is and will remain the epicentre for the complex risks that the supply chain management industry requires, but there is significant shift in knowledge as insurers place expertise on the doorstep of the risks they write.

Indeed, Lloyd’s itself now has hubs in Singapore and Shanghai, allowing Lloyd’s markets to utilise their capital based in London to set up at minimal additional cost in Asia. While the spread of insurance placements is often global, insurers are seeing a real benefit to a presence geographically alongside the risks they are writing.

This provides insurance buyers in the supply chain sector with the services and knowledge base that, all too often, remains under-utilised. While the insurance market is keen to provide this support, generally speaking it has not been considered a traditional option for the supply chain industry. This, though, needs to change if the supply chain sector is to benefit from all the available tools, including insurance, and meet the risk management challenges that Asia will continue to present.

Regulatory and Legislative Environments

The concern, however, has to be that Asia’s trade volume is increasing at a pace considerably in excess of other markets, while regulation and legislation in many of the region’s countries remain in their  infancy. However, this has not dampened the expectation of clients of the supply chain industry in the region, who demand the highest levels of service.

Given the current pace of growth in countries such as China and India and the relative lack of focus on ensuring that the regulatory environment keeps pace with that growth, the protection of that exposure becomes ever more difficult. The changes in regulatory practice will take some time to gain traction and is, perhaps in part, contrary to the desire of those who wish to reap the benefits of the regional growth in trade.

This is likely to continue to have a negative effect on the ability of the supply chain industry to manage their exposures in the developing economies for some time to come.

However, the news is not all bad as insurers have an equal desire to be involved in trade to those regions and, to do that, they want and need to understand the risks involved. This is, in part, the reason for the increase in focused expertise being brought in or propagated in the region by insurers.

To properly understand the environment, they want to be accessible to their assureds and to the risks they face. Whether this proximity will give rise to a consequent increase of insurers’ involvement in the risk management strategies of the supply chain industry remains to be seen.

At present, there remains a relatively low penetration of insurance purchasing in Asia but a change is unlikely to be driven by the regulatory bodies, even with the full support of the supply chain management sector.

Ultimately, an effective risk management strategy needs to be seen as an asset to any company before the costs involved will be accepted. That will require a fundamental change in thinking in some sectors regardless of the regulatory environment.

Premium versus Risk Management

An effective risk management strategy that is able to react to new risks and control existing ones can expect to have a long-term beneficial effect on the insurance costs.

When this is compared to the falling cost of insurance even as trade levels continue to climb to some of the highest levels ever achieved, the actual costs of risk management can be eroded, in some cases, to a large degree.

This also gives rise to more specific options within the insurance programmes to create greater premium efficiencies as the risk management strategy provides more predictable results. Increases in self-retention of risk, for example, can mean a beneficial reduction in premium.

Other, significantly more sophisticated, products start to be made available as the risk management strategy becomes a key aspect of the profile of the insurance buyer. The equation between a reduction in claims experience and a reduction in premium becomes weighted in favour of the insurance buyer with a history of successful risk management.

The Impact of Unused Risk Management Tools on the Balance Sheet

Experience shows that, even where a strong risk management structure is in place the understanding and knowledge may not be filtering across to operational levels. This will reduce the ability of companies to extract the most from their risk management strategy and, ultimately, will have a negative effect on profitability. Put in insurance terms, opportunities to recover losses from insurers are simply not identified on an all too often basis. This can be either due to a lack of knowledge of the breadth of cover available or, perhaps, a perception that making insurance claims will increase premiums in the future.

With an otherwise effective risk management strategy in place, it becomes even more important. The reimbursements not only provide financial recompense, but provide the insurer with valuable knowledge of the operational or commercial risks that are occurring. More importantly, it tests the insurance to ensure that it responds as it should do when it is required. The cost benefit to the assured is clear, but the long-term risk management benefits of stressing the insurance purchasing strategy are perhaps not as obvious, until a significant loss arises.

Andrew Brooker, Associate Director of FP Marine Risks, a leading marine insurance broker based in Hong Kong, explains: “The S&P market can have a huge impact on the ability of shipowners to receive full reimbursement from their insurers in the event of certain types of loss, specifically a salvage, general average incident or total loss.  Unfortunately, many assureds don’t realise this until they come to make a claim”.

The science is simple – for example, a vessel valued at USD2.1million and insured accordingly could see its market value rising to USD3million as a result of a buoyant S&P market. If the valuation on the insurance cover is not adjusted accordingly, the assured could find themselves having to meet the additional costs.

Andrew says: “For example, if a vessel has to be towed to port as a result of an accident or breakdown, salvage charges are payable from both the ship and cargo.  However, if a vessel is underinsured, the amount of reimbursement the shipowner will receive from the insurer for these charges will be reduced by the same proportion that the ship is underinsuerd.”

It is up to the assured to advise insurers of any changes in the value of their vessel.   “We recommend that shipowners keep an eye on the S&P market and speak to their insurance broker if they believe there have been significant changes in the value of their vessel,” Andrew continues.

And for those who are thinking the easy solution is to overinsure, unfortunately the insurer may refuse to accept the increase in value and demand proof by way of an independent valuation.