Marine insurers adapt to new realities
BEING in the business of selling insurance is fundamentally about assessing risk and setting premiums accordingly. On that basis, marine insurers appears to be doing reasonably well.
The International Union of Marine Insurance’s (IUMI) Global Marine Insurance Report noted that global marine insurance premiums rose 6.4 per cent in 2021 from 2020, totalling US$33 billion in 2021. IUMI attributed the increase in most categories to a combination of increased global trade volumes, a stronger US dollar, increased offshore activity and higher vessel values.
Speaking at IUMI’s recent annual conference, Astrid Seltmann, the vice-chair of its Facts & Figures Committee, commented: “Building on the gains made in 2020, 2021 was another positive year for marine insurers. It was the year when global trade saw a tentative recovery – absolute premiums rose, claims impact was benign, and as a result loss ratios improved. However, this position is tempered by the economic uncertainties the world is facing today. We are reporting this data at a time when several shocks have hit a world economy already weakened by the pandemic. There is no end in sight for the war in Ukraine, soaring global energy costs and inflation, a gloomy outlook for trade and the possibility of further climate and pandemic related disruptions. Marine underwriters are navigating some extremely complex issues.”
Issues may be complex, but the risks seem familiar: onboard fires, particularly on container ships; mis-declared cargoes; worsening severe weather conditions including stronger winds and waves, floods and wildfires. Increased value concentration with ever larger vessels and massive ports raises the risk of large event losses.
Isabelle Therrien, chairperson of IUMI’s Cargo Committee, noted: “The cargo market has shown growth in 2021, partly due to a rise in the volume of cargo shipped globally combined with the pricing corrective measure still prevalent in that underwriting year. The much-needed correction has yielded favourable underwriting performance. However, the industry is still facing headwinds as the global supply chain remains volatile, and is still dealing with the aftershock of the pandemic, while now adding inflationary pressures to the mix.”
She explained that companies are redesigning and diversifying their supply chains with concepts such as near-shoring, reshoring and friendly-shoring gaining in traction. These developments have the potential to change risk profiles in cargo insurers’ portfolios.
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She added: “The pandemic has shown that factors such as stability and reliability, when it comes to supply chains, are key to product availability. Our assureds are now also looking at different logistics, transportation and insurance solutions to manage this constantly evolving risk.”
Rama Chandran, chairman of the Ocean Hull Committee, expressed concern over the long-term sustainability of the hull and machinery insurance sector. “While it is encouraging to see the 2021 premium base growing from the previous year, we face deteriorating loss ratios – albeit from a low 2020 base. Premium base has only recently begun to creep upwards, following a sustained decline since 2012. The increase of 4.1 per cent is lower than the 6 per cent seen last year, and the reducing quantum is a worrying trend. This is likely due to increased market capacity, particularly from London and Latin America, which is a surprise for many.”
He continued: “The first half of this year (2022) has seen an increase in claims primarily caused by increased activities and inflation with higher steel prices, higher cost of spares and labour cost. As shipping activity returns to pre-Covid levels, it is inevitable that we’ll see a rise in claims, and that will dampen the more encouraging loss ratios IUMI reported for the 2021 period. The 2022 outlook is worrying, with increased losses and flattening of rates. Inflation could tip the profitability curve and see more capacity withdrawn.”
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While these risks are familiar to those who have been in shipping for some time, there are novel challenges facing the shipping industry and its insurers. One is decarbonisation. IUMI reports uncertainty and hesitation from both owners and insurers because of a lack of regulation and market-based incentives.
For insurers, the focus is on identifying risks related to the new fuels – how to mitigate them, and engaging with class and regulators to develop necessary rules, standards and guidelines to ensure a safe transition. The recent formation of the International Maritime Organization’s Safe Decarbonisation panel should assist underwriters in understanding the risks and how to mitigate them.
The second new challenge is environmental, social and governance (ESG). Patrizia Kern, the chairperson of IUMI’s Data & Digitalization Forum, asserted: “ESG is here to stay – over 92 per cent of the S&P Global 500 companies now report on their ESG metrics, and marine insurers are catching up fast. But ESG is meaningless unless it is substantiated by verifiable data. We have an opportunity to transform the marine industry and make it more attractive for investors and attract a new generation of socially-conscious marine underwriters.”
To that end, the International Group of Protection and Indemnity Clubs (IGP&I) released its first sustainability report at its 2022 Correspondents Conference in London, United Kingdom. It covers a number of key areas where the international body, in conjunction with its 13 member clubs, believes it can make an impact in the development of a sustainable marine industry. This includes promoting healthier marine environments, creating safer conditions for seafarers, and encouraging the development and uptake of cleaner fuel types for vessels.
While the perils of the sea, tempest and fire remain fundamentally the same, the commercial and political environment in which marine insurers must operate is being transformed to an extent that was unimaginable a decade or two ago.
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