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

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 %.
 

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:

	($1,000)
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.
 

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.
 

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”.
 

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.
 

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.
 

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.