Marine insurers need to abandon their “old fashioned” business model, regardless of any impact from the Costa Concordia casualty, the world’s top spokesman in the sector has insisted.
Ole Wikborg, president of the International Union of Marine Insurance, was speaking in London. He told a market briefing organised by the International Underwriting Association that it was too early to tell whether the grounding of the cruise ship would in itself be a force for higher insurance prices – the event was at the time of his address just 12 days old, and surveyors appointed by underwriters had not yet gone on board. He accepted that it was possible the casualty could be “a market changing event, ” but while several leading insurers syndicated the hull and machinery risk, a significant part of the market would not be involved in the loss. There was sufficient underwriting capacity in the hull and machinery sector not to make the Costa Concordia a market changing event.
Mr. Wikborg said that as much as the cruise ship incident, the current financial climate might be a market changing event. Underwriters needed to rely on technical underwriting results as opposed to any income that might be gained by their companies from investments. That need “ will force us all to take a more technical view of what we are doing, including the pricing of significant exposures, ” he said. In general the insurance market was more focused on frequency of loss than cost. Pricing was on the assumption that five vessels out of 1, 000 would be lost [taking into account all types including brown water craft: clearly the record of ocean-going ships is better]. Pricing was not a reflection of the cost involved in such a loss performance, “and that needs to be revisited and changed.”
The global marine market has not made a profit since 1998, demonstrating according to analysts that the whole product is under-priced. Observers have speculated that the Costa Cruise disaster could cost the insurance industry up to US$1bn, double the 1989 Exxon Valdez market loss and wiping out a substantial part of the likely 2012 marine premium. Half of that figure would be borne by hull insurers and reinsurers, it has been unofficially suggested, and half by liability providers. Carnival Corp, the ultimate owner, said soon after the incident that it is self-insured for the loss of use of the vessel, which is insured for damage with a deductible of about US$30m. Its third-party personal injury liability insurance carries for this incident a deductible of about $10m. Referring to hull claims generally, Mr. Wikborg said that collisions and navigation errors represented a major part of costs. He urged that more attention be given to “the human element” and teams on the bridge of ships. “We must ask the question if the long list of safeguards implemented by the IMO are working as per their intentions, or if they have failed, ” he said.
Mr. Wikborg had said at a press conference the previous day that passenger ship operators should tighten up safety procedures and standards of crew training. He told the IUA meeting that IUMI members had total premium in 2010 of US$25.3bn across hull, cargo, marine liability and offshore classes, which indicated that the global premium received by all marine insurers was around US$30bn. IUMI has 54 national members including a new Chinese company member. In addition, P&I clubs wrote some US$3.3bn worth of business. Most marine business was written in Europe, but Japan was the largest market for cargo, with the shares taken by Brazil and China were growing, to 5% and 9% respectively.
The IUMI chief warned against any complacency following a decline in the number of successful maritime hijacks in 2011. It was probably the threat of armed guards on board merchant ships that was significantly reducing the risk. The pirates might be regrouping and considering how to carry out attacks in a different way.
On the European Union decision to increase sanctions against Iran, Mr Wikborg said: “The major issue is to figure out what these sanctions mean. For the time being, our activities are more focused on the financial transaction, rather than [whether] we can insure or not insure.” The industry was seeking clarification on the sanctions.