Managing rising rates in marine insurance
Among the topics they discussed was the fact that the insurance industry is pressing for higher rates in the marine market following an increase in frequency of large claims. Consequently, shipping firms should prepare well ahead of renewal negotiations in order to secure a good deal.
Woodard: Our topic is marine risk. Is the marine world becoming a riskier place?
O’Loughlin: Risk is somewhat in the eye of the beholder. If I am a seafarer going to sea, the answer is probably no in terms of personal safety. Safety standards have thankfully increased over the past decades, helped by regulation. Ships are equipped with better technology and navigation systems. The great oceans are becoming a safer place to be. There are still a lot more incidents in our industry than in many other sectors, but that is the nature of the game.
Nevertheless, improvements in technology have added new risks such as cyber. While climate change and regulation have somehow overshadowed this discussion recently, cyber continues to be a big and somewhat unknown risk. I still feel that we are yet to see a major marine casualty that flows specifically from a cyber-attack.
We are living in really interesting times. There is a lot of uncertainty from a political perspective with the use of sanctions as a political tool and the issue of high fines for regulatory breaches. We need to look at each jurisdiction individually for assessing the risk. In addition, IMO 2020 is of course on everybody’s minds.
From a claims perspective, we are seeing less attritional frequency in the smaller marine claims with associated costs declining, but at the same time, we are experiencing massive increases in the kind of fortuitous, one-off incidents. In the P&I world, each individual club retains the first $10 million of the $3 billion that are available per incident, which can add $40 million to a bill in case of 4 unexpected large incidents. Unfortunately, we are seeing more than that.
Woodard: About 17 Lloyd’s syndicates have recently exited the marine hull market as well as liability markets in an effort to improve profitability. Reduced capacity is likely to push up rates. What are P&I clubs doing in response to the increase in severe losses?
O’Loughlin: P&I clubs usually buy reinsurance so we are affected by what is happening in the Lloyd’s market. P&I clubs have had three years without rate increases. The International Group, which is made up of the 13 P&I clubs in the world, has experienced its first loss in a decade just this past year to the tune of $330 million deficit in underwriting. Whilst we as P&I clubs do not underwrite for profit we do underwrite to break even, and we’ve been falling far short of that in recent years. Unfortunately, rates will need to rise if we want to maintain our S&P ratings. All the clubs need to maintain an underwriting discipline.
Woodard: Many clubs hold a lot of surplus and reserves in excess of regulatory requirements…
O’Loughlin: We always come under scrutiny because the numbers are big if you look at the clubs’ “free” reserves, but a lot of it is not free but reserved for capital adequacy requirements. The closer you get down to that the minimum capital requirement, the more scrutiny you come under both from the regulator and the rating agencies you subscribe to. The top tier clubs operate to an S&P “A” rating either stable or positive and it is important to our members that we retain that rating. The capital reserves volumes may seem large, but so are the numbers on the claims side.
Woodard: What level of rate increases can we expect from P&I clubs?
O’Loughlin: P&I clubs have to pass on the increases in reinsurance premium to their members, and more generally, rates need to reflect claims levels, our operating costs and the general deficits in premium. Announcements made so far are guiding towards an increase of around 7.5%.
Question from the audience: How should vessel owners react to the changes in the marine insurance market?
Woodard: Allianz US is withdrawing from the US hull and marine liabilities market. I was in London Monday and Tuesday meeting with several syndicates and London-based insurance companies and this space absolutely bears watching. I would encourage each of you to get in touch with your brokers and get a good feel of what your individual insurers are doing, what steps can be taken to manage communications and address concerns and try to distinguish yourself from the pack.
Ideally, insurance is a solution for a risk that needs to be managed and you will want to make sure that what you are bringing to the market is what we would call residual risk. Particularly in this environment you need to show that you are a prudent ship owner.
I would recommend taking a very proactive communication approach ideally in the context of a long-term trading relationship. There are no doubt highs and lows in insurance placement and you want to ideally be trading with the same people year over year so that highs and lows get lopped off. Having this flexibility in the relationship is very important.
Further, you need creativity to manage a hardening market. Solutions can include a restructuring of the insurance programmes, adding an annual aggregate deductible or structuring a separate insurance programme around high priced assets. The good news in a hardening insurance market is that creative brokers will be rewarded. Many people have looked really smart for the last 6 to 8 years and were able to achieve rate decreases through general circumstances as opposed to merit.
For more information, please contact:
Tim Woodard, Head of Office Lockton Louisiana
Tel: +1 713 458 5288