Marine Insurance Premiums Rise Amid Market Uncertainty
The International Union of Marine Insurance (IUMI) has released data showing that marine underwriting premiums for 2018 were $28.9 billion, a one percent increase on 2017.
With significant challenges facing the market, the modest increase is not significant to herald an upturn in the fortunes of the marine insurance sector, says Vice-Chair of IUMI's Facts & Figures Committee, Astrid Seltmann. “Changes to frame conditions are the most likely reason for the modest increase in premiums as opposed to any real market development. A continuing growth in world trade will have driven cargo premiums up by 2.5 percent, and the fluctuating oil price will be pressurizing premiums from the offshore energy sector which dropped by three percent in 2018.”
Seltmann says ongoing global uncertainties, including the current tensions in trade, will continue to impact all sectors but specifically cargo and offshore energy. The continued downward adjusting of global trade growth is not helpful for marine cargo underwriting going forward.
High levels of technical losses continue in all sectors, particularly hull and cargo. “A normalization of major losses after several relatively benign years is likely to offset any rise in premiums achieved this year,” says Seltmann. “Premiums had already plummeted to truly unsustainable levels in 2017, and so any increase begins from a very low base. Only when the 2019 statistics become available will we understand to what degree marine underwriting might have returned to profitability.”
A particular concern is the increase in the frequency of fires on container ships, particularly those starting in the cargo area of vessels such as the Mærsk Honam or the Grande America. This trend has been observed for some years, and the newest statistics show a clear further increase in 2019. “These fires pose a threat to the crew and cause severe damage to both vessel and cargo. IUMI is working with a range of industry bodies to improve the prevention of such events as well as fire-fighting capabilities onboard,” she said.
The $28.9 billion global income was split between regions: Europe 46.4 percent, Asia/Pacific 30.7 percent, Latin America 10.4 percent, North America 6.2 percent and Other 6.3 percent.
2018 saw Europe's global share reduce from 49.2 percent (2017) to 46.4 percent and Asia's share increase from 29.2 percent (2017) to 30.7 percent.
For global marine premium by line of business, cargo continued to represent the largest share with 57.4 percent in 2018, hull 24.4 percent, offshore energy 11.4 percent and marine liability (excluding than IGP&I) 6.7 percent.
Premium income for marine cargo insurance was reported to be $16.6 billion for 2018, representing a 2.5 percent increase on the 2017 result. The modest increase is largely attributable to continued growth in world trade coupled with exchange rate fluctuations which tend to affect cargo premiums more strongly than other sectors.
Trade growth continues (albeit less optimistically) which should impact positively on this sector, macro-economic uncertainties such as national and regional trade restrictions as well as changes to economic and political frame conditions are likely to have a negative effect.
Covered risks are increasingly representing stock rather than transit exposure and accumulation risks continue to grow. The risk of large event losses, both nat-cat and man-made, is substantially increasing both on single sites and single assets. The 2017/18 underwriting years saw a relatively high nat-cat impact from hurricanes, earthquakes and flooding; and 2018 was heavily impacted by the cargo loss from Maersk Honam (15,000-TEUs capacity). Technical loss ratios are relatively stable at around 70 percent in Europe. Asia is still a developing account and loss ratios are beginning to rise in that region, now approaching 60 percent.
Sean Dalton, Chair of IUMI's Cargo Committee, characterized the marine cargo market as being in a state of "accelerating change" driven by underwriters taking action to address unprofitable results and to improve performance. “On a global basis, the cargo line is unprofitable and has been for a number of years. Premiums have not been technically adequate to cover losses and expenses and, as such, have not delivered an acceptable return for capital providers. A significant reason for this ongoing situation is the commoditization of this specialty line of business which has lowered entry barriers and attracted new entrants, some of whom are now exiting.
“As result, underwriters are addressing their portfolios with urgency and reviewing technical rate adequacy, expenses, terms and conditions, deductible levels, and capacity/limit deployment. A greater focus has been placed on commitment to business, stability and capabilities to ensure underwriters deliver a stable offering that can be robustly delivered.”
World trade global growth is expected to achieve 2.6 percent in 2019 and three percent in 2020. This, coupled with governments in emerging markets investing in infrastructure and promoting domestic manufacturing, gives a positive outlook for cargo insurance. However, weaker economic projections and concerns over trade wars may dampen expected growth and are of concern.
Already, 2019 has been impacted by nine major cargo vessel fires which have resulted in loss of life, injury and environmental damage. Misdeclaration of cargo appears to be the main culprit and is driving some shipping companies to take the unprecedented step of announcing significant fines to those responsible.
Ashore, there have been cargo storage losses in 2017 and 2018 from nat-cat incidents as well as a number of significant fire losses over the past 12 months. The marine cargo market insures a significant amount of property contents storage under Warehouse/Storage Endorsements and "Stock Thru Put" policies. The current soft market has increased this risk profile as underwriters have been offering broader terms, higher nat-cat limits, lower deductibles and more competitive prices than their property counterparts would provide.
Dalton says: “In addressing these issues, cargo insurers are encountering old and new challenges. These include compliance, sanctions, War and SR&CC, emerging risks and new coverage requirements. With each cargo insured loss there are related uninsured losses. These might include business interruption due to supply chain issues, trade disruption, or loss of market. Emerging technologies may provide tools and capabilities to enable the development of new products. To meet these needs cargo underwriters must get the basics right if they are to be in a position to capitalize on future opportunities. It is certain that exposures will continue to increase in size and complexity for the cargo underwriter and this will require a sustainable approach to the business to meet the demands of the present and the future.”
In 2018, global underwriting premiums for the hull sector achieved $7 billion, no change from 2017. A lack of change in premiums is a concern when set against a continually increasing global fleet and higher single risk exposure (and the related risk of unprecedented major claims) resulting from the trend for ever-larger vessels, says the IUMI.
On a more positive note, claims frequency and cost per vessel is stable at a moderate level; and the long-term trend for total losses has also stabilized with a fluctuation below 0.1 percent. However, the incidence of major losses appears to have returned in 2019 after unusually low numbers during the period 2016-2018. This is likely to impact on the 2018 and 2019 underwriting years. In addition, the 2018 fire at a major yard in Germany represented a new dimension of claims impacting the builder's risk portfolio. Although (due to long-term policies) it severely deteriorated the 2014 underwriting year results it may, nonetheless, add further pressure on the necessary recovery of the hull insurance market.
Throughout the period 2016-2018, the hull sector suffered few major losses with attritional losses accounting for an increasing share of the total claims costs. Income achieved during that period was not sufficient to cover these losses, and there was no buffer to cover the major losses. In 2019, the IUMI expects to see premiums increase, albeit from a very low base. This should (marginally) alleviate the pressure on profitability but the return of major losses has the potential to offset this.
With results under pressure, the trend towards using more advanced methods of technical underwriting and better risk estimation continues. One of several means to estimate the future claims potential of a given portfolio is the use of detention data. Based on recent analysis by the Nordic Association of Marine Insurers (Cefor), Seltmann demonstrated a close correlation (on a vessel-by-vessel basis) between the frequency and cost of claims and the level of related detentions.
Global premiums for the offshore energy sector were reported at USD 3.4 billion in 2018 representing a three percent reduction from 2017. The 2017 number was a five percent reduction from 2016, and the 2016 number was a 21 percent reduction from 2015. The majority of business in this sector is transacted in U.S. dollars, and so exchange rate fluctuations have very little impact. The drop in premium income has followed the slide in oil price but, fortunately, this appears to be flattening out, says Seltmann. That said, ongoing trade tensions make any sort of price rally less certain. High profile losses in this sector and nat-cat events (mainly hurricanes) have had little impact on the market.
The prolonged downturn in activity has begun to reverse, albeit slowly, as the sector rebalances itself to operate within a lower oil price environment. Historically, there is an 18 month lag between improved oil prices and authorization for downstream expenditure. Reactivation will increase the risk of more claims.
Philip Graham, Chair of IUMI's Facts & Figures Committee summed up: "Since the 2018 IUMI conference, we've seen around 20 entities cease or severely restrict their hull or cargo underwriting activities. Whilst the modest growth in 2018 global marine underwriting premiums recorded this year is, of course, welcome it does not demonstrate any significant uplift to the current market and is more likely to have been driven by economic factors.
“That said, I am hopeful that 2019 will bring more positivity. The hull and cargo markets appear to have bottomed-out, and we are beginning to see a modest uplift, albeit from a low base. Profitability is likely to be pressured by the recent return of major losses, however. More activity in the offshore energy markets is also good news, but reactivation of units adds to the overall risk profile.
“In short, the marine underwriting sector is characterized by uncertainty. At a macro-level this is created by political, economic and environmental factors; and at an industry level it is due to accumulations, a worrying and increasing incidence of major losses; and through a reactivation of the offshore sector.”