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.

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.

The report was bleak, with slower demand and falling freight rates forcing shipowners to find efficiencies across the board, and insurers likely to feel the effects through increasing claims and pressure on pricing and conditions. Insurers at the time were predicting a hardening of the marine insurance market, however we saw no evidence of this.

Three months on, and we can report that we have still seen no widespread, significant hardening of the core marine insurance markets. Whilst Hull rates are generally flat, or perhaps rising slightly, Cargo premiums remain negotiable and it is not unknown to see some reductions being offered.

Inevitably, underwriters are seeing a decrease in commodity values, turnovers and ship values. But fortunately for shippers and shipowners, whilst many other classes of general insurance are witnessing premium increases, marine rates are staying low as capacity continues to be allocated to this market by insurers.

A recent Australian marine insurance claim involved the total loss of a key piece of machinery en route from the US. The importer received the claim payment but when the company reordered the machinery, the cost was 70% higher because of changes in the exchange rate. This was not covered by the importer’s insurance.

The importer suffered further; in addition to the higher re-order cost was the extra amount which had to be paid in interest to the bank that financed the original purchase, not to mention the loss of use (Loss of Profit or Consequential Loss) which his inexperienced insurance broker had forgotten to recommend.

For shipowners the warning is particularly stark. A hull fleet, which included some reasonably new specialist vessels, was insured in Australian dollars at last renewal (when the Australian currency was very close in value to the US dollar). A re-appraisal and adjustment had to be undertaken a few months later when the Australian dollar dropped 40% to around USD0.60. The Insured values were changed to US dollars and an additional premium paid. Fortunately, no losses occurred prior to the change so the insured was saved from what could have been a potentially damaging and costly situation.

The US dollar has recently become quite high in relation to some other currencies and this volatility must be taken into account if a shipowner or cargo interest is to be properly protected. Many marine insurance buyers who have not taken exchange rate fluctuations into account do not survive these types of disasters and are often forced into bankruptcy.

Specialist marine insurance brokers have seen these situations occur many times over the years and have the experience to assist marine insurance buyers, both in helping clients recognise the exposures and by placing specific covers on the most appropriate terms at competitive pricing.

Anyone one who is concerned about their Insured Values should talk to their specialist marine insurance broker to ensure, as far as possible, they have adequately provided for the possibility of future fluctuations. The costs to replace ships or cargoes when damaged or lost may otherwise be out of their reach.

Deidre Littlefield, IUMI president, said “There is no doubt that the all-time historic profits made by owners during the halcyon period marked by the last five years were helped in no small measure by driving ships and crews as hard as possible.

“Inevitably, such a strategy impacts heavily on claims, and we expect that many ship repairs and onboard unit replacements, which have been deferred or ignored during the sky-high profit years, will start to surface, along with the results of skimped maintenance, leading to a further escalation of claims. And adding to the financial pressure on insurers, we will see spiralling requests for return of premiums applying to ships going into ‘cold’ or long-term lay-up.”

The pressures on insurers may be offset by certain benefits that lower trade brings, namely fewer older vessels on the water and fewer problems finding suitable seafarers, although as Ms Littlefield adds, “recruitment going forward remains a huge problem when seen against the threats of piracy and the criminalisation of mariners.”

At FP Marine Risks we have not yet seen a sustained or widespread hardening of the marine market, despite many insurers’ predictions at the end of last year.

Lowering worldwide consumer demand has already heavily impacted commodity prices. Profit margins have narrowed, and markets have diminished, which we expect to lead to increasing numbers of claims from buyers who reject goods on spurious grounds where previously they might have accepted them. Manufacturers and shippers also cut costs by using cheaper methods of packaging and shipping, and cutting the size of their workforce (often including the number of qualified staff and surveyors).

We also anticipate an increasing number of smaller claims as it becomes more profitable to pursue them; an increase in claims for theft because of organised crime and petty thefts; and an increase in abandoned cargo as buyers struggle to manage cash flow, access credit, or declare bankruptcy.

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.