Market: Marine and Cargo

The green shoots of economic recovery that have begun to appear on land are still submerged at sea, writes Lauren MacGillivray.

In a recent statement, president of the International Union of Marine Insurance (IUMI) Deirdre Littlefield says that the overriding concern for marine insurers is how to cope with “the economic storm that has devastated shipping operations”.

She says: “Although we have seen some recovery in the financial markets and in the value of certain bulk commodities, thanks to renewed Chinese demand, the world is still in a deep recession and ship owners face the deepest slump they have ever experienced. “Economic indicators seem to fluctuate almost daily, and there is widespread scepticism about whether any turnaround can be sustained or when world trade will bounce back.”

Littlefield says that, of all the world industries grappling with over-capacity, none is in such dire trouble as shipping. There are simply too many ships chasing too little cargo, and there is a huge amount of new tonnage still on order, despite cancellations.

Flat rates

Rates have remained relatively flat but, at the same time, premium income has been reducing.

“Rates have been relatively stable in the past 12 months, with some areas such as hull having seen some hardening with modest rate rises,” says Caroline Koczerzat, cargo and specie underwriter for Mitsui Sumitomo Insurance Syndicate 3210 at Lloyd’s. “We believe that rating will remain stable for the time being, although premium revenue will be reduced.”

Premium income has dropped owing to policyholders’ reduced sales turnovers and activity. Koczerzat says: “There has been a marked decrease in shipbuilding activity, and many vessels have been laid up because of the crash in charter rates.

“Vessel values have reduced because their commercial earnings potential has plummeted, with less cargo being moved around the world and over-capacity in the shipping markets.”

Aon Marine’s UK chief executive officer, Mark Cracknell, agrees that the supply of market capacity still exceeds demand, and that rates are flat. But he adds: “Underwriters feel that uncertain investment income and loss of premium volume through ship disposals and lay-ups (affecting hull protection and indemnity insurance) reduced insured values in all areas, and the general slow-down in trade means they need to concentrate more on pure underwriting profit.”

Claims threat

Koczerzat expects the economic conditions to trigger a rise in claims. “We have already seen increased incidences of misappropriation of stocks held by third parties,” she says. “The global economic downturn has put pressure on balance sheets and there has been an increase in companies that hold stock belonging to others processing or selling that stock and promising to pay later, but do not.

“There is an increased trend in hijackings and criminal activity in general and, judging from past experience in recessions less serious than this, we can expect to see a significant increase in fraudulent claim activity and a more aggressive approach in claims pursuance from our clients.”

The latest statistics on total losses are promising, however. The IUMI said in March that marine insurers were “cautiously optimistic” the recession would lead to a reduction in casualty experience.

Statistics reveal that, in 2007, there was an increase in total losses of ships of 500 gross tons and over: 106 against 92 in 2006.

However, chairman of IUMI’s facts and figures committee, Cédric Charpentier, said that the number of total losses for 2008 is currently just 74, a significant reduction from last year; though Charpentier added that the final figure would likely be higher.

“We might expect an ultimate figure of around 95 if we apply the normal deterioration factor because of late reporting, which is roughly comparable to the 2006 and 2005 years,” he explained.

More accurate data is expected at the IUMI’s annual conference in September.

Crime prevention

On top of recession concerns, pirate attacks are on the increase. Piracy has always been an issue for shipping, with hot spots including the West Coast of Africa and the Malacca Straits. But the rise in piracy off the coast of Somalia, through the Gulf of Aden, has come to the fore.

The decline of fish stocks due to illegal fishing, coupled with the decline in Somalia’s economy, has meant the fishermen have lost their income. With no government in place following the civil war, some fishermen were lured to piracy.

Koczerzat says: “As the pirates became wealthy, and with the lack of a government to control their activities or the economy to provide an alternative income, the attraction of piracy has grown drawing in gangs to become pirates who have become more sophisticated and ambitious in their attacks on shipping.

“International measures, with the provision of warships to protect shipping, have had an effect during 2009, but the problem has not been eradicated.”

As previously reported by Insurance Times, marine insurance brokers said insurers were charging between 0.05% to 0.175% of the value of a ship per voyage in the Gulf of Aden, versus zero to 0.05% in May 2008.

“The cost of keeping global trade routes open could result in a growing ‘piracy tax’ that will be felt by a wider range of businesses and consumers, already battered by the effects of recession,” a Lloyd’s report states.

Some insurers have responded by demanding increased loss prevention, such as sailing in convoys under naval protection, armed guards on board vessels, training drills for crew, and instructions to maintain certain speeds.

Cracknell says marine insurance underwriters are attempting to establish a market standard in which piracy falls under war cover. When it falls under war cover, reinstatement rates for transits through areas like the Gulf of Aden have skyrocketed. However, he says, this hasn’t impacted marine rates in general.

What next?

There’s plenty else to keep a marine broker or underwriter up at night. In addition to the problems already mentioned, there’s also the continuing threat of global warming, as well as changes in international convention and maritime law, which can increase ship owners’ liability to third parties.

Lloyd’s and non-Lloyd’s insurers, particularly RSA and Allianz, dominate the UK marine insurance market, which is the largest international market of its kind in the world.

“The Japanese market may be bigger, if marine cargo is included – which it should be – but the Japanese market concentrates on domestic risks and accepts very little overseas business,” Cracknell says. “Specialist international marine insurance is an important feature of the UK insurance industry and so the financial services sector.”

With this in mind, the UK could certainly do with seeing some green shoots springing up at sea. IT