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Marine Underwriting

Hurricanes Sweep Away Soft Marine Market

After a year of heavy losses, marine underwriters are imposing rate hikes despite plentiful market capacity.
By: | February 13, 2018 • 4 min read
Topics: Marine | Underwriting

The marine insurance market might still suffer from overcapacity, but underwriters are adamant that the soft market of recent years has come to an end.

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At February’s winter meeting of The International Union of Marine Insurance, held at the Lloyd’s of London building, IUMI’s president Dieter Berg described 2017 as “an extreme year.” Hurricanes Harvey, Irma and Maria cost the insurance industry an estimated $75 billion to $100 billion and the California wildfires between $10 billion and $13 billion. The latter figure included last October’s losses in the Napa Valley vineyard region, which are part-insured in the marine market.

“These losses have put an end to soft market conditions, although it remains to be seen by just how much rates will now harden,” said Berg.

“We’re seeing moderate increases for even non-loss affected business with more significant rises for Gulf of Mexico windstorm risk, although there is still massive overcapacity in the market.”

More positive news is that the offshore energy market enjoys an improved market environment, with oil prices averaging $70 per barrel last year against $50 in 2016, coupled with the most encouraging global economic outlook for more than a decade. IUMI expects “synchronised growth across all regions this year” and for the marine market to benefit from increased activity.

The potential downside is greater geopolitical risk; particularly the threat of protectionist measures by the U.S. and retaliation from China. “So, overall we’re moderately positive while also recognizing there are massive challenges,” Berg confirmed.

Dieter Berg
President
IUMI

Foremost among the challenges is the growing exposure aggregation on vessels and in ports, with the biggest car carriers proving capacity for up to 8,000 vehicles and the growing evidence that climate change is transforming what were once extreme weather events into “the new normal.”

Asia and Africa

Berg identified three clear near-term strategies for IUMI. First is a greater focus on education.

“We must attract young talent to the industry and invest in new skill sets in response to a rapidly changing environment,” he added.

Second is building IUMI’s presence in the Asian market, following the opening of its Hong Kong office in October 2016. As part of this initiative, IUMI’s inaugural Asia Forum will be held in Singapore on April 24-25 to coincide with the city state’s Maritime Week.

Third is a strategy for Africa. “IUMI wants to be much more active in Africa’s emerging markets,” Berg confirmed. “We’ll deliver more on this on September 16-19, when our annual conference is held in Cape Town for the first time.”

This year’s theme: ‘Managing emerging risk and exposure – think the unthinkable’.

As he noted, South Africa’s second-biggest city faces its own ‘unthinkable’ as water supplies dwindle and the event will consider underwriters’ need to address risks they often haven’t considered before.

James McDonald, chairman of IUMI’s offshore energy committee noted that climate change is an issue demanding attention.

“It’s impacting on our balance sheets as the frequency and severity of hurricanes increases, causing more yacht and cargo losses as well as physical damage and business interruption in oil and gas production.”

The maritime industry is also being looked to in addressing environmental issues, with the BBC’s recent TV series Blue Planet 2 dramatically highlighting the extent of ocean pollution, particularly from plastics.

“Insurance isn’t marketing itself very effectively as it can help mitigate pollution and environmental damage,” he suggested. Innovation was lacking and underwriters could do more to devise new products for meeting new challenges.

Shipping companies had made a start in reducing their carbon footprint and reducing emissions through practices such as ‘cold-ironing’ – enabling berthed vessels to shut down engines and switch to a shore-based electrical supply – and new coatings for propellers and hulls that reduce friction to improve efficiency.

Slow Response

IUMI admits that cyber risk is one area where ship operators and their insurers have been slow to respond.

“It has certainly produced a response, but this has been from the non-marine market,” commented Frédéric Denèfle, IUMI’s legal and liability committee chair. “For a long time the marine community didn’t appreciate how its members might be affected.”

“Insurance isn’t marketing itself very effectively as it can help mitigate pollution and environmental damage.”– James McDonald, chairman of IUMI’s offshore energy committee

Last June’s NotPetya malware attack highlighted the threat. Danish shipping giant Maersk had to reinstall thousands of PCs and servers to restore service at its terminals.

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Berg and colleagues were also asked about the impact of the recent sinking of the Sanchi. On January 6 the Iranian oil tanker, carrying 136,000 tonnes of crude oil, collided with a freighter off the coast of China and sank eight days later after catching fire.

Secretary general Lars Lange offered condolences to the families of the Sanchi’s 32 crew members.

“The collision also created a massive environmental threat from discharged tanker fuel,” he added. “We’re in the early stages of responding to the loss and establishing the insurance position.”

The incident also raises the issue of industry sanctions against Iran, which IUMI supports and the ability of vessels serving embargoed countries to secure insurance cover.

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at riskletters.com.

More from Risk & Insurance

More from Risk & Insurance

2018 Most Dangerous Emerging Risks

Emerging Multipliers

It’s not that these risks are new; it’s that they’re coming at you at a volume and rate you never imagined before.
By: | April 9, 2018 • 3 min read

Underwriters have plenty to worry about, but there is one word that perhaps rattles them more than any other word. That word is aggregation.

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Aggregation, in the transferred or covered risk usage, represents the multiplying potential of a risk. For examples, we can look back to the asbestos claims that did so much damage to Lloyds’ of London names and syndicates in the mid-1990s.

More recently, underwriters expressed fears about the aggregation of risk from lawsuits by football players at various levels of the sport. Players, from Pee Wee on up to the NFL, claim to have suffered irreversible brain damage from hits to the head.

That risk scenario has yet to fully play out — it will be decades in doing so — but it is already producing claims in the billions.

This year’s edition of our national-award winning coverage of the Most Dangerous Emerging Risks focuses on risks that have always existed. The emergent — and more dangerous — piece to the puzzle is that these risks are now super-charged with risk multipliers.

Take reputational risk, for example. Businesses and individuals that were sharply managed have always protected their reputations fiercely. In days past, a lapse in ethics or morals could be extremely damaging to one’s reputation, but it might take days, weeks, even years of work by newspaper reporters, idle gossips or political enemies to dig it out and make it public.

Brand new technologies, brand new commercial covers. It all works well; until it doesn’t.

These days, the speed at which Internet connectedness and social media can spread information makes reputational risk an existential threat. Information that can stop a glittering career dead in its tracks can be shared by millions with a casual, thoughtless tap or swipe on their smartphones.

Aggregation of uninsured risk is another area of focus of our Most Dangerous Emerging Risks (MDER) coverage.

The beauty of the insurance model is that the business expands to cover personal and commercial risks as the world expands. The more cars on the planet, the more car insurance to sell.

The more people, the more life insurance. Brand new technologies, brand new commercial covers. It all works well; until it doesn’t.

As Risk & Insurance® associate editor Michelle Kerr and her sources point out, growing populations and rising property values, combined with an increase in high-severity catastrophes, threaten to push the insurance coverage gap to critical levels.

This aggregation of uninsured value got a recent proof in CAT-filled 2017. The global tally for natural disaster losses in 2017 was $330 billion; 60 percent of it was uninsured.

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This uninsured gap threatens to place unsustainable pressure on public resources and hamstring society’s ability to respond to natural disasters, which show no sign of slowing down or tempering.

A related threat, the combination of a failing infrastructure and increasing storm severity, marks our third MDER. This MDER looks at the largely uninsurable risk of business interruption that results not from damage to your property or your suppliers’ property, but to publicly maintained infrastructure that provides ingress and egress to your property. It’s a danger coming into shape more and more frequently.

As always, our goal in writing about these threats is not to engage in fear mongering. It’s to initiate and expand a dialogue that can hopefully result in better planning and mitigation, saving the lives and limbs of businesses here and around the world.

2018 Most Dangerous Emerging Risks

Critical Coverage Gap

Growing populations and rising property values, combined with an increase in high-severity catastrophes, are pushing the insurance protection gap to a critical level.

Climate Change as a Business Interruption Multiplier

Crumbling roads and bridges isolate companies and trigger business interruption losses.

 

Reputation’s Existential Threat

Social media — the very tool used to connect people in an instant — can threaten a business’s reputation just as quickly.

 

AI as a Risk Multiplier

AI has potential, but it comes with risks. Mitigating these risks helps insurers and insureds alike, enabling advances in almost every field.

 

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]