The marine insurance
markets in 2001
Annus Horribilis
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2001 has been, according to
all market players, the worst year that they have ever known, due to
extreme tension
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| Technical
Results of the marine insurance market
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In May 2001 M'nchener R'ck, the worlds first
re-insurer announced a combined ratio of 129 %, as its technical result
for its 2000 marine underwriting, the worst ratio ever reached by the
Munich giant.
The deterioration of the direct insurers results for 2000 is even more
severe, it is widespread and results from the ending of a turndown cycle
which started in 1995 and ending in 2000. During this cycle the worldwide
marine insurance market turnover was reduced from 16,8 billion $ to 11,6
billion $, decreasing by nearly 31 % due to premium rate cut down only.
The hardening of the market which started smoothly early 2001 did not
allow for a come back to profitable technical results, and the counter
perform
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| Impact
of the 11th of September 2001 events
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In those circumstances the events of the 11th
of September have not only been acting as the release mechanism of the
hardening of the market, but due to their magnitude, the market structure
itself is challenged.
The financial impact for the insurers and re-insurers of 11th of
September events is estimated around 58 billions $.
The reinsurance market, touched on the highest level of the exposures,
is the most affected, and some are expecting a financial deficiency of the
players with the smallest capitalisation.
This claim affects all classes of insurance, life insurance, property
damage, liability insurance, and marine insurance, the latter due to the
aircraft insurance being technically covered through marine insurers.
It is mainly the North American and multinational insurers with U.S.
subsidiaries, who are directly involved in this claim.
However indirectly and by chain-reaction, middle size insurers not
registered in the U.S., fear the consequences of this event; in practice
the possible bankruptcies which could affect the reinsurance market could
have a significant impact on their accounts. Furthermore the cost of the
reinsurance is substantially increased.
Accordingly the reverse of the market trend can only be spectacular.
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| War
Risks Market |
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As a first reaction and eight days following
the events the main war risks markets, Lloyd's, French market, Norwegian
pool, reacted drastically by increasing at least twice the basic rate. For
specific shipping activities considered as risky, such as the cruise
sector, rates were multiplied by 10 to 20 times.
In the meantime, the " trading warranties ", a list of
countries in the territorial waters of which sailing is covered subject to
prior notification and potential additional premium, were reviewed by all
the markets and the countries of the Persian Gulf, Suez Canal and of
course Pakistan.
Additional premiums for those areas were increased substantially.
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| Ordinary Risks
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For the policies coming up for renewal
following the events of the 11th of September, general increases have been
requested.
On the French market, which has undoubtedly been the toughest on
increases, for the risks with good loss records, the minimum increases
were between 10 % to 20 % depending on the insurers.
For the Hull and mainly non-domestic Hull risks, in many cases the
increase reached 20 % to 40 % for " good " cases.
For risks with bad loss records there has been no limit to the
increases, and frequently have been "re-rated" and subject to an
increase of the deductibles, and restrictions in coverage conditions.
For long-term contracts, or extension of long-term contracts in force,
it is quite impossible to find a solution.
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| P&I |
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The P&I Clubs are also affected, losses
experienced have remained relatively stable since 1996, on the other hand
financial profits - which allowed to cover the gap between claims and
premiums (in decline during five years) - have dropped since 20th of
February 2001 thus revealing the lack of necessary premium to cover an
ordinary loss experience.
As a matter of fact, the underwriting year 2000-2001 for all P&I
Clubs, has reached a technical loss of nearly 336 million $ against 116
million $ for 1999-2000. In addition to the technical loss incurred since
1997, today's significant increase in cost of reinsurance programs
(around 35 %) has to be taken into consideration.
The general increase of premium forcasted for 20th of February 2002 is
estimated between 25 % to 30 % (depending on each Club), on top of which
must be added the " supplementary call " for the 2000 and
probably 1999 years, " supplementary calls " will be, for most
of the Club, actually invoiced.
Therefore for a 2000 premium of 100, integrating the "
supplementary call " of 25 %, the total premium for 2002 should be in
the range of 156,25 %, representing an average increase of 56,25 % over
two years.
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| Impact
on the market structure
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The magnitude of the correction harms the
long-term relationship between market players.
On several occasions European shipowners warned the European Commission
about the level of war risks premiums, invoiced in a beautiful unanimity
by the various markets.
More generally speaking for corporate insurance, risk management
associations such as AMRAE in France, have threatened to create their own
insurance structure to avoid the amplitude of cycles known on the
traditional market.
On their side direct insurers recall the absolute need for an
improvement of their results, otherwise the top management of some
insurance companies may decide to stop underwriting corporate insurance
policies to focus on more profitable branches of their activity, such as
life insurance and private insurance.
The hardening of the market is a long going process, which will be
undoubtedly reinforced in the coming months by the withdrawal of some
re-insurers and insurers. Market overcapacity will end soon, and if the
direct insurance market is still adapted for the coverage of corporate
insurance, which has to be proven, three structure modification can be
anticipated:
- The return to co-insurance practices: the trust of insurers towards
their re-insurers has been affected by the 11th of September 2001
events, the former will be inclined to determine their underwriting
liabilities in regards to their net capacities and no longer in
regards to the re-insurance capacity available. Furthermore, the
facultative re-insurance capacity (re-insurance underwritten on a case
by case basis by an insurer for a single policy) is very lean. Thus
one can expect a general decrease of the shares underwritten on each
policy. To cover 100 % of the same risk more insurers will be needed.
- The achievement of market internationalisation: the partnership
between market players has been damaged by the upheaval of the market,
and one can anticipate that the domestic solidarity will disappear and
be replaced by a search for financial optimisation on the worldwide
market. Some transfers from domestic markets to international markets
of significant contracts already occurred during the 1st of January
2002 renewals.
- The search for alternative risk financing tools: the strategies of
alternative risk financing becomes pertinent with a tough market
situation. One can expect that those corporations not yet having
re-insurance or insurance, will pay attention to these alternative
tools. More generally speaking the willingness of the big corporations
to mutualise their risks to escape from an erratic market, should not
be minimise
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Shipping and Shipbuilding Markets in 2001
I N D E X
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- Via Raffaele Paolucci 17r/19r - 16129 Genova - ITALIA
