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29 November 2021 The on-line newspaper devoted to the world of transports 16:12 GMT+1

The marine insurance markets in 2001

Annus Horribilis


War risks market 
Ordinary risks 
Protection & Indemnity (P&I)

Hull insurance
Cargo insurance 
Impact on the market structure
2001 has been, according to all market players, the worst year that they have ever known, due to extreme tension
Technical Results of the marine insurance market
In May 2001 Münchener Rück, 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

Impact of the 11th of September 2001 events
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.

War Risks Market
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.

Ordinary Risks
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.

marine insurance hull market
marine insurance cargo market
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.

Impact on the market structure
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

Shipping and Shipbuilding Markets in 2001


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