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08 December 2021 The on-line newspaper devoted to the world of transports 02:02 GMT+1


The Marine Insurance Markets in 2004

2004, a mixed year for marine insurers
2005, a year full of dangers!

Hull and machinery
Cargo market
The P&I Clubs
War risks - Political risks
Market organisation
Legal developments

The reduction in the number of major casualties, which characterised 2003, did not repeat itself in 2004, which saw a significant increase in the frequency and the average cost of the latter. The very healthy standing of the freight market and shipping in general led to a considerable increase in shipping activity, but also of the accidents linked to navigation.

A fragile marine insurance market and more and more concentrated

In this market, particularly favourable to the insured parties of the shipping world, the insurers seem forever subject to the erosion of their profit margins. Apparently the marine insurance market seems profit averse, since over the last ten years it has caused a number of large bankruptcies. The number of “run off” companies has become so important that we can now speak of a real “run off market”.

The proportion of companies which have stopped underwriting between 1997 and 2003 are:

  • 42 % of the marine syndicates of Lloyds,
  • 38 % of companies on the London market,
  • 60 % of companies on the European market,
  • 67 % of insurers of the American marine market.

However the capacity of the international market has never been as high as in 2004. Lloyds of London registered for 2004 a record underwriting capacity. Nonetheless it should be emphasised that, in an attempt to help stabilise a maritime and shipping insurance market, still looking for a good balance and in order to “correct” it, Lloyds is proposing to lower the capacity in 2005 by some 9 %.

Hull and Machinery: a steadying of the increases  
In our 2003 report, we mentioned a slowing down at the end of the year of the rate increases that have been prevalent since 2000. In fact, 2004 would probably have only allowed insurers to maintain an upward pressure on their clients who were showing negative statistical results.

In 2004 competition increased considerably, encouraged by the new capacities notably coming from Russia, South Korea, and Poland. A strong flow of new investors, particularly in London and in Scandinavia, combined with these new capacities, helped stabilise the level of premiums.

The insured and their brokers can be pleased with the stabilisation of premiums for performing owners, but it would be dangerous for the quality of the Hull and Machinery market to see it drop again to lower levels, which would discourage some insurers who are still trying to balance their results!

For a lot of insurers who have voiced their opinion in the specialised press, as well as at the IUMI in 2004, the increases of the last 4 years are still considered inadequate and some see the end of the upward cycle as being a critical turning point. The rate increases have been very patchy according to the companies and despite some impressive percentage, the increase in premiums has been restrained and leaves no room for comfort.

The arrival of new capacities could be explained by the desire of certain re-insurers to push the “regional” insurers and/or the less specialised towards underwriting international hulls, in order to avoid a too strong concentration of capital in the hands of the “leading underwriters”, who are becoming stronger and less numerous. Specialised insurer brokers are thus having to question as to which line of action to follow:

- to encourage additional supply by proposing the new capacities to the detriment or in addition to traditional insurers (the current leading underwriters could then get discouraged and abandon this sector which is sometimes considered too cyclical) - to concentrate their placings with the traditional markets or insurers taking the risk of losing their client who naturally is looking for the most competitive option!

With a world Hull and Machinery premium volume in 2003 of around $3 billion, the main markets are the following:

Japan: 377,080
UK (Lloyds): 348,140
Norway: 337,400
France: 333,192
USA: 298,987
Italy: 258,681
UK (IUA): 194,700
Spain: 166,743

Ship’s hulls under construction

In general, newbuilding and repair yards have been heavily penalised as a result of fires, producing severe losses in this sector: the comparison of claims/premiums has resulted in nearly 250 % over the last three years. The ‘Pride of America’ casualty, which occurred on January 13th 2004 while under construction in the Bremenhaven shipyard, has been the most important: the claim is estimated at $ 228 million.

In conjunction with the premium increases, prevention measures are now imposed systematically by insurers.

Cargo market insurance  
Competition has remained fierce on the main domestic markets for the coverage of goods carried for the own account of producers. This is also the case for large industrial projects. Nonetheless this sector produces positive results and the market has kept its tariffs stable.

In this type of risk there has been a diversification in the insurance offered, with on one hand the disappearance of traditional players due to effects of concentration, and on the other hand the arrival of new solid participants proposing top level financial capacities and technical skills.

With the most speculative risks notably that involving trading, the cargo insurance market is becoming more internationalised and some Dutch companies are taking a preponderant part of it.

Protection and Indemnity Clubs  
Taken altogether, results have been in the red over the last 6 years and, as a consequence, renewals on February 20th 2004 have been on the increase. As a whole, Clubs have achieved an average rise of about 10 %.

Only five Clubs (American Club, Britannia, the Japan Club, the Shipowners’ Club, and Skuld) have been able to produce a profit in their technical results (before investments) and none of them were able to achieve anything substantial.

The pressure to increase premiums continues in 2005 but to a lesser extent, especially as a number of insured parties who have posted profits for their Club no longer accept the systematic increases (General Increase), even if this is in line with the basics principles of the P&I Clubs which is to be a “mutual”.

War risks – Political risks  
The shipping industry is having to face a growing threat: piracy. This is developing by 20 % per year and prospers in under-surveyed territorial waters, where both dangerous as well as high added value goods are transported.

However, this threat comes not only from pirates attacking merchant ships, but also from the outcome of a real maritime terrorism whose aims and intentions are far more sinister and whose potential to disrupt and disorganise the flow of international economic trade seems to have been largely underestimated.

Market organisations  
The main market places involved in international risks are organising themselves to increase their productivity.

In this respect Lloyds has launched the BPR (Business Process Reform), in order to optimise its output (delay and quality of issued papers), claims procedures and financial systems.

Through the implementation of “Optiflux”, the French marine insurance market is more modestly seeking to optimise its financial circuits, with the set up of new electronic procedures for co-insurance management.

Legal developments  
The 1996 protocol has come into force in May 2004. Based on this protocol, levels of responsibility have substantially increased, by about 150 %, although for small ships up to 500 tons the figure is close to 500 %. For the moment these limits only apply to the ten states that ratified the protocol in 1996, namely Australia, Denmark, Finland, Germany, Malta, Norway, Russia, Sierra Leone, Tonga and Great Britain.

In June 2004 during the closing session of the Vancouver Conference, the Maritime International Committee (CMI) adopted several amendments to the York and Antwerp Rules concerning General Average: salvage costs, crew wages and maintenance, for the period when the ship is in a port of refuge, will no longer be included under General Average balance.

* * *

With increased liabilities (in value, quantity and in legislation) will 2005 mark a new turning point in the maritime insurance market cycle? This is a great concern and there are already some signs of reducing premiums while specialised marine insurers and P&I Clubs continue to produce weak technical results.


Shipping and Shipbuilding Markets in 2004


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