How to cope with a challenging marine insurance market
Insurers are seeking higher rates to improve business profitability, which came under pressure in recent years as rates fell due to excess capacity in the market, and investment returns fell driven by historically low interest rates. Further, frequency and severity of claims have risen, further squeezing profitability.
According to a report by international P&I insurance broker P.L. Ferrari, P&I Market Review 2019, premiums charged by the 13 member-owned P&I clubs within the International Group have reduced by 13.7%, or more than $370m, since 2016/17 to $2.7bn. At the same time, claims have increased by 14.6%, or $350m, over the same period to $2.4bn, and costs incurred by the clubs have risen by 10.3%, or $344m, to over £3.3bn.
International Group performance (in US$ 000)
Despite the fact that the P&I clubs display free reserves at levels significantly higher than required by regulators, the clubs generally argue that addressing the claims/premium imbalance is necessary to avoid being penalised by rating agencies.
P&I insurers may be able to reduce the need for rate increases by improving their own financial resilience. Moreover, some are likely to show more leniency toward clients than others. For example, one P&I club plans to offset the general rate increase with a partial waiver of premium. Another one has diluted the impact of a general increase with a capital distribution.
Higher insurance rates would burden the shipping industry at a time when it is already weakened by a slowdown in international trade, the introduction of economic sanctions as well as tougher environmental regulations.
World trade shrank 1.3% in the third quarter of 2019 compared to the previous quarter when it had already reduced by 0.3%, according to data from the CPB World Trade Monitor.
In addition, governments are increasingly using economic sanctions to enforce foreign policy, putting ship owners in a difficult position when trying to maintain full regulatory compliance and effectively implementing a ban on some routes.
Requirements and regulations for greener ships such as the so-called Sulphur Cap are also expected to add to the cost of operations.
Against this background, a hardening insurance market is the last thing the shipping industry will welcome. Insurers will need to increase both their product and service offering to retain existing and attract new business. Ultimately, the shipping community needs support: the importance of
quality expertise and attentive service cannot be overstated. The ability for ship operators
to lean on the claims expertise of their broker / insurer and making use of bespoke loss
prevention advice can mean the difference between a good record and a bad record.
Insurers could help reduce claims by providing loss prevention assistance; for example, P&I Loss Prevention Surveys have assisted in identifying and mitigating shipboard hazards, which can help reduce the need for rate increases.
High turnover rates of claims handlers at some clubs have led to disruption in service. From a service standpoint, different clubs have taken different strategies: some have sought to recruit and train claims handlers in-house, whilst others have simply hired more experienced claims handlers and consultants from other clubs, law firms and marine consultants. These strategies each pose advantages and disadvantages to their clientele, but consistency is key. Lockton, P.L. Ferrari and Omni are continuously assessing the Clubs’ actions to ensure each client receives the best possible service.
Preparing well ahead of renewals and comparing terms and conditions from different providers will become even more important to secure the best insurance cover as market rates start hardening.
Lockton, P.L. Ferrari and Omni advise on every aspect of insurance programme design. By carefully considering our clients' demands and needs, we develop tailor made insurance programmes. To place the risk Lockton accesses the global marine insurance markets and an experienced claims team will work to ensure an efficient resolution of a potential claim.
For further information, please contact:
Stephen Hawke, Managing Director Insurance P.L. FERRARI
Tel: +44 (0) 207 933 2512
Alexander Gray, Specialist P&I Insurance Broker P.L. FERRARI
Direct Tel: +44 (0)20 7933 2436