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Maria Mavroudi
Over 80% of the global trade, by volume, relies on Shipping to transport goods. The global seaborne trade is expanding, supported also by the 2018 upswing in the world economy. After a long period of stagnation, the world economy is finally strengthening. In 2017, global economic growth approached 3%— the highest rate since 2011- according to the UN world economic situation prospects report for 2018. Maria Mavroudi, Business Development Manager, SEASCOPE HELLAS S.A., writes:
The global fleet growth was estimated at about 3.3%, and although it was marked by decreased demolition activity, it was still outpaced by the trade growth. The balanced growth in world shipping demand and supply supported freight rates bringing about encouraging signs, despite contrasting realities across sectors, especially between the earnings of tankers and dry bulk carriers.
The Greek shipowners continue to top the league table of shipowning nations, controlling more than 20% of the world fleet (by GT) and a 200 million GT fleet with a value of some $100 billion. The world fleet continues to grow, especially in tonnage, while the hull premium deteriorated in line with the ship values. As such, there was an increasing mismatch between fleet/vessel growth and income.
According to IUMI reports, the total global hull premium for 2017 was US$6.9bn. With regard to market share, Lloyd’s market wrote 21.5%, China 10.6%, Nordic 9.0%, Japan 7.3% with France and Italy to follow with 4.0% and 4.5% respectively.
With regard to all claims frequency, we see a long-term downward trend in recent years. According to the annual overview of marine casualties and incidents for 2018, the number of very serious casualties has continuously decreased since 2014. The soft market premiums are to a large extent down taking advantage of a benign claims environment for the past two years. It was reported that the most costly 1% of all claims account for minimum 30% of the total claims cost in any year. This means that gradually there is a move away from this benign claims environment with a small number of major claims.
The Hull and Machinery Insurance Market
The above trends in combination with the recent natural catastrophes and big losses have an impact on the underwriting results, pushing the global insurance market into the red for the first time in six years. At $132 billion, 2017 marked the costliest year on record for insurers for weather disasters, with 60% of global insurance payouts caused by the HIM hurricanes. 2018 continues to be costly for insurers with the impact of the recent several major catastrophes push losses up:
- Hurricanes in Florida & North Carolina, along with the severe weather damages in Canada are expected to result in losses that could reach USD15 bn. By November 2018, eight hurricanes had formed in the Atlantic region, while the extreme weather conditions are expected to be the new normal.
- Typhoon Mangkhut in mainland China, Hong Kong, Macau and the Philippines with estimated insured losses between USD1-2 bn.
- Recent shipyard losses in Panama (Eastern Shipyard) and Germany (Lürssen Shipyard) with estimated losses that could reach up to USD900 m.
- Camp and Woolsey wildfires could cause USD15 bn. to USD19 bn. in residential and commercial losses, according to the property mapping firm CoreLogic.
- Fire in Vohburg Bavarian refinery in September 2018; the property damage is likely to cost the market at least USD300 m. according to market sources.
- Ituango dam loss in Colombia – the construction markets largest-ever loss after Grupo Sura
As a result, the cost is spread to all lines of business. The marine insurance market seems to have reached bottom-price levels. We currently see the market hardening, leading to unattractiveness for the Lloyd’s market. Putting it down to numbers, Lloyd’s has reported a pre-tax loss of GBP 2bn. last year, compared with a GBP 2.1 bn. profit the previous year with a loss ratio almost 135.00% in marine and group’s combined ratio of 114.00%. As a result, Lloyd’s is cracking down on underperforming syndicates and lines of business with hull, cargo and yachts under the microscope. Capacity is leaving the market and as a result underwriters are quite hesitant writing accounts that are not perfectly in line with the strict underwriting parameters set. Considering also the changes to the insurance regulatory framework, the Brexit implications and the ongoing Lloyd’s business planning to lead to market changes, the insurance environment continues to be volatile.
There is still capacity of underwriters writing marine risks globally, emanating from Continental Europe, the Middle and the Far East, albeit in great percentage on a follow basis. However, this capacity is available mainly for Far East business; the available options for European business are far more limited. Therefore, it is important to bear in mind that overseas markets can offer a competitive rating structure, provide excellent claims service, thus increasing the options for shipowners. On the other hand, it shouldn’t be forgotten that most of the overseas markets rarely have the expertise and capacity to lead a marine hull policy and they rely mostly on proper re-insurance arrangements. Therefore, it is essential for an owner to be aware of all parameters pertaining to an underwriter writing marine business overseas. One must factor in things like company’s retention, reinsurance structure, experience of the team (underwriters, claims handlers, technicians).
Of course, we must recognize the fact that Lloyd’s still retain their significance as a unique market place for sophisticated, specialized and non-packaged risks; Lloyd’s was in essence the only market that would look things other insurance markets would not even discuss (such as singleton, doubleton accounts, non-IACS classed vessels, specialized tonnage etc.) and as such remains a key player in the global insurance arena. However, based on the strict underwriting parameters set and the constant monitoring and reporting on their results, underwriters have limited appetite for singletons and/or doubletons above a certain age.
Of course, it is the role of the broker to ascertain the peculiarities of the proposed risk and present it to the right market/underwriters for consideration and navigate the Owners through these uncharted waters. If I may say, despite the global character of the marine insurance market, Lloyd’s remains the most sophisticated market and the market leader, writing currently 16.4% of the global hull premium. Also, during this volatile environment, we see consolidation in broking houses and insurers in an attempt to increase their market share and at the same time drop the cost of doing business. Also, more and more, insurers are using reinsurance for earnings protection and volatility reduction. The results of these developments remain to be seen. Also, another parameter that is expected to play an important role is the reaction of the reinsurance market and the renewal of the reinsurance treaties due at the end of the year.
The Protection and Indemnity insurance
The above mentioned catastrophic events are not expected to affect much the IG P&I Clubs. The Clubs’ underlying financially strong position following the repeatedly good underwriting results, have increased common surplus but also the seemingly positive investment environment. 2017 has seen, nonetheless, increased pool claims (compared to the benign 2015 and 2016) with the northern winter still ahead.
The 2017 renewal was the softest on record with premium reductions for members with a good loss record and further reductions in reinsurance cost. 2017-18 saw a zero percent general increase for all Clubs. A second round of zero general increase was imposed for 2018-19. Although some Clubs have seen an increase in claims’ activity during 2017, this has been offset by solid investment returns. In view though of the geopolitical instability and volatility in the financial markets, the investment income is more likely to collapse. In addition, the actual premium collected appears to be declining with a slight rise of the entered tonnage.
Addressing the Cyber Risks
In view of the emerging technologies, the pace of innovation, the new cyber exposures and risks, it is inevitable that the dialogue on marine insurance will also change and become more sophisticated with greater concentration on the advisory role of the brokers.
The Shipping Industry is based on IT solutions with global interfaces and we all currently witness the transformation as we are moving towards the digitization era with discussions about the vessels’ digitization, remote controlled unmanned vessels, security and compliance challenges that arise from cyber risks etc. This means that shipping companies should be prepared and have the ability to recover from potential cyber incidents in order to minimize their impact in case of a cyber incident, including but not limited to significant financial losses.
Given continuing escalation of cyber-attacks such as ransomware, data breaches, web-based attacks, phishing and the all-too-common distributed denial of service attacks that continue, the banking regulators start focusing on cyber insurance. The EU’s General Data Protection Regulation (GDPR) push for harmonization of data privacy laws across Europe, protect and empower all EU citizens data privacy. As a result, organizations were asked to reshape their data privacy approach to comply with the new regulation. It may not take long before regulators require compliance, incident response plan in place and cyber insurance for capital access and finance.
