The marine insurance markets in 2002

"A series of disasters"

 

The market for marine insurance and transport
Trends in marine and transport insurance in 2002
The French market preserves its financial standing
Owners and other clients

The year 2001 was hit with the biggest single event in the history of insurance, now known as the '9/11', provisionally some $ 32 to $ 50 billion. One of the consequences has been the substantial increase in premiums in 2001 covering all sectors of the market. There was no way of foretelling an event of such dimensions and the premiums, which would have allowed insurers to meet such an eventuality, were far from being collected. Without specific premiums to cover claims, insurers have had to empty their reserves. Substantial resources have been brought into play by insurers to try to handle all claims being made. Very likely, insurers will fulfil their commitments and considerable indemnities have already been paid out.

* - This index is based on 44 out of 55 members of IUMI who have published figures for their countries. It reflects the movements in marine market volumes of these countries but does not constitute an index for renewals. Certain countries do not list out their premiums by category, therefore the total of categories can be inferior to the overall total.
 

- Firstly, a bad series of accidents:

During the months of September and October 2002, some twenty major and particularly dramatic incidents absorbed between them nearly a third of the volume of annual premiums in marine insurance. The fire on the 'Diamond Princess', the attack on the 'Limburg', the running aground of the 'Hual Europe', 'Ocean Lexington' and 'Treasure Bay'' came to more than $900 million in the books of marine insurers and their re-insurers.

Very few insurers have escaped this series of disasters, particularly as the misfortunes continued to carry on throughout the last two months of the year 2002 with notably:

• November 11th 2002: fire on board the containership 'Hanjin Pennsylvania' ' a cost that could reach close to $100 million,
• November 13th and 19th 2002: leak and shipwreck of the tanker 'Prestige' off the Spanish coast ' a cost of some $ 42 million (including P&I),
• December 1st 2002: fire on board the sail schooner 'Wind Song' in Polynesia ' costing $26 million (total loss),
• December 14th 2002: collision in the English Channel between the containership 'Kariba' and the car-carrier 'Tricolor' - a cost which could slightly exceed $100 million.

Even marine insurers, who might have been spared from any of the above catastrophes, are however deeply affected by the increase in re-insurance costs. The hike in re-insurance premiums is the result of disasters affecting the marine sector but also other sectors such as natural disasters where the losses, according to Munich Re, amount to $ 55 billion in 2002 of which $11.5 billion are insured.

Aviation insurance which has had a run of calamities (hull and liabilities) of more than $6 billion in 2001, has turned around quickly in 2002 with total claims estimated at $1.06 billion.

The P&I market is also affected. The P&I Club members of the International Group (IG Group) have not been spared by the losses over the last 3 years despite a relatively stable level of accident claims.

For accounts ending February 20th 2002, it helps to distinguish 3 groups of clubs:

• those more or less close to a balanced position (North, Gard, West),
• the big losers (Swedish, London, UK, Britannia),
• the 'enhanced profit' group, namely American Club / Skuld and Steamship whose profits stem from the inclusion of results of the significant 'excess calls' they made.

Globally the results of the Clubs, members of the IG Group are negative:

The average increase in P&I premiums in 2002 was around 22 %, excluding excess calls imposed by some Clubs. Market analysts predict losses situated between $ 75 and $ 125 million for the underwriting year ending February 20th 2003.

For renewals as from February 20th 2003, the Clubs have announced general increases of 15 to 25 % before re-insurance costs. The cost of the main programme of re-insurance of the IG Group has increased by about 40 %, this hike being differently apportioned according to the type of ship.

- Secondly, the drop in Stock Exchange performances and its repercussions on the marine insurance world:

The period when the financial results subsidised the technical underwriting deficits has definitely come to an end. The Dow Jones Stoxx Insurance index lost 51 % after having dropped by 30.5 % in 2001. The first 10 European insurers (excluding ING) have lost 192.2 billion euros in stock valuation within a year. One has to add together the top eight European stock exchange capitalisation, to be able to match the number one in the world, the American AIG.

The drop in the stock exchange market has continued in 2002, primarily due to a lack of confidence among investors following the shortcomings of big companies particularly in the U.S..

The direct consequence for insurers (including) marine is the absolute necessity to get balanced technical results, without being able to count on hypothetical financial profits.

At the same time, insurers have a tendency to look for additional protection from their reinsurers, whilst similarly, reinsurers have a tendency to reduce their risk exposure, thus their cover capacity, as they are themselves having a hard time to obtain the cover they would like from their retrocessionaires partners.

It is becoming more and more difficult for insurers to balance the need for a return on investment and at the same time to satisfy their shareholders, while keeping sufficiently strong capital reserves as demanded by their clients.

In such an unfavourable context and in an increasingly uncertain climate, especially with the terrorist threats, insurers have come out with what could be called a 'survival guide':

• a more restrictive underwriting policy with as consequence a lack of capacity,
• an increase in retention,
• coverages which are sometimes more restrictive with notably the introduction of new exclusions:
  - Institute Extended Radioactive Contamination Exclusion Clause 01/11/02 (Cl. 356 A),
  - Institute Chemical, Biological, Bio-Chemical, Electromagnetic Weapons and Cyber Attack Exclusion Clause 01/11/02 (Cl. 365).

Despite a fairly depressing year 2002, the main French companies involved in marine insurance have put up a good resistance in the face of exceptional deteriorating conditions.

They have posted solvency ratios above European norms and the French market remains one of the world top markets.

• French insurance market is number 5 within world rankings, 2nd in Europe for life insurance, and 3rd in damage insurance.

• French insurance remains 2nd in the placement of 'International hulls' in the world (excluding Japan which is mainly domestic).

• French credit insurance is number 1 in the world.

French companies in the market have a capacity to adapt and have advantages linked to their size and geographical coverage. Nonetheless they remain cautious as to the future development in their operational performance, given the volatility and uncertainties in the financial markets.

Current difficulties are causing a new change in outlook and are upsetting the classical approach to risk finance. The catastrophes of the last two years have forced insurers to reorganise themselves, to reinforce their capital reserves and improve their management skills.
  

In the particularly dismal context of marine insurance, where many players are fighting for their survival, actors in the shipping sector are also being subjected to their own constraints within the market. Operating ships is becoming more and more costly, as much with international standards, which are raising levels of responsibility of owners as with the reinforced rules of security.

Insurers, who want to be attentive and selective in their commitments, do not directly control either the security or the quality of shipping operations or the qualification of crews.

Due to this situation, insurers are tending to impose technical constraints and supplementary charges to their clients by introducing loss prevention programmes.

Nonetheless an intelligent and practical collaboration between insurers and owners can also make a considerable contribution towards market results. The role of an insurance broker in establishing a better communication between parties and an appreciation of the constraints and susceptibilities of both parties, should make for better competitiveness and an improved quality of services offered