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.

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.

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.