P&I: Stormy Weather

“Building Resilience – Defining for a Sustainable Future” is the theme of the annual conference of the International Union of Marine Insurance (IUMI) when it meets in London in September. The focus will be the severe losses that hit several lines of the marine insurance business in 2012 and what to do about them. “Although the claim frequency and cost are beyond our control, we’re going to do our part to turn it for the better in 2013,” said IUMI’s President Ole Wikborg in announcing the organization’s annual spring statistics. He’s got a big challenge on his hands.

A String of Calamities

Besides the capsizing of the Italian cruise liner Costa Concordia off the coast of Tuscany in January 2012 and the grounding and breaking apart of the Greek cargo ship MV Rena last October off New Zealand, protection and indemnity (P&I) clubs were hit hard by Superstorm Sandy, which slammed the U.S. northeast coast in October. The cost of Sandy to the global marine market has been put at $2.5 billion to $3 billion. That effectively wipes out total U.S. marine premiums for last year, said the IUMI, which covers the hull, machinery and cargo markets.

Statistics for the cargo, ocean hull and offshore energy sectors remain a litmus test for the marine insurance market. “The impact of Sandy will define 2012 in the eyes of the underwriters,” the IUMI declared in its spring statement. In the ocean hull class, the loss of the Costa Concordia was the biggest event in a year in which the level of losses “remained at concerning levels.” The Costa Concordia capsizing has led to the largest and most expensive wreck-removal operation ever undertaken.

For shipowners, 2012 “proved to be another very challenging year with very few vessel sectors unaffected by the continuing global recession in the shipping industry,” said Grantley Berkeley, Chairman of the International Group of P&I Clubs (IG) in its 2012-13 annual report. He called it “realistic to expect that 2013 will be another tough and challenging year for the shipping industry.” The IG, based in London, provides P&I coverage for approximately 90 percent of the world’s ocean-going tonnage.

On the bright side, 2012 saw a continued overall decline in the number of pirate attacks and the number of vessels and crew held by pirates. Hostage-takings were down by 70 percent in the East Africa/Gulf of Aden/Arabian Gulf region, and there were fewer pirate attacks there generally. But, cautioned Nigel Carden, Chairman of IG’s Security Subcommittee, the International Maritime Bureau reported rising levels of piracy in the Gulf of Guinea and Nigeria.

Higher Rates & Tougher Negotiations

For the overall marine insurance business, the number of individual claims has remained relatively stable, but their cost has gone up, driving claims’ inflation. “What we’re seeing is the cost of individual claims rising quite substantially, not necessarily the number of claims,” said Ben Abraham, the global P&I practice leader for The Willis Group in London.

Abraham notes that in the run-up to this year’s renewal season, which ended in late February, the average announced general increase was 8.5 percent, with increases in IG reinsurance added on top of that. “We expect the market actually achieved increases somewhere between six and seven percent overall, including changes in deductibles, but without taking reinsurance into consideration,” Abraham said.

The loss of the Costa Concordia was among the factors that set the stage for some of the toughest negotiations since the turn of the century. “The two main conflicting factors that led to the confrontational renewal were ship operators not making money in the current depressed market and clubs being under huge pressure to correct their underwriting losses. Both sides being desperate to get results opposite to the other led to many incredibly hard-fought negotiations.”

Superstorm Sandy had an impact on the marine reinsurance market generally, but the direct impact on P&I specifically was difficult to quantify, Abraham noted. “Of greater direct impact were the Costa Concordia and Rena losses, which were, respectively, the largest and third largest claims in the history of the IG,” he added. “In a recessionary environment for shipping, shipowners are generally not making money, so every ship operator in the world is concerned about costs and fighting hard to reduce or maintain them as far as possible.”

Marine liability rates “absolutely” will rise this year to offset the P&I clubs’ losses last year, agreed Captain Edward Wilmot, Vice President of the Ocean Marine Division of Great American Insurance in New York. “For the P&I clubs in general, their insurance rates went up quite a bit, and typically that’s how it all starts,” he explained. “Reinsurance rates go up and that drives the primary market, so there will be rate increases across the board.”

The market has been soft for a long time, according to Wilmot, probably the longest soft market he’s seen in years, and there’s been a lot of overcapacity. Wilmot’s reference to “soft” applies to all areas of hull and liability coverage. “‘Soft’ means that pricing was lower than average, terms and conditions were easier, and there was always someone willing to do it,” Wilmot stated. “Even if Great American was to hold the line, there was always someone out there willing to undercut the market in order to gain the business.”

That’s all changed now as the Costa Concordia, Rena and Sandy incidents hit reinsurers, which, in response, are socking primary companies with significant price increases that will trickle down to the insureds.

Among companies that have had losses for several consecutive years are some smaller operations that have folded or been acquired. Larger companies are beginning to hold the line and insist on rate increases. Acquisitions of smaller carriers that can’t sustain the losses are likely to continue. “I know of several that are up for sale right now,” Wilmot said.

The blue water hull market has lost money for the past 15 years, and in London the talk is about getting the rates up. “The P&I clubs have had losses in marine liabilities for several years. I know because we own a syndicate in London,” said Wilmot. “The passenger vessel market has seen significant increases in rates, and the property market is always ahead of the marine market. It’s seen 10 and 15 percent rate increases.”

Stick With Quality

Given the current environment, what’s a shipowner to do? “I would encourage people to find a quality insurance company and stick with it,” Wilmot advised. “You’re always better off. If you continually shop the market, you don’t build any confidence with your insurer. Look for good claim service. Look for somebody that’s got a quality claims staff because that’s what you really need with insurance, somebody who’s going to take care of you when you really need it. If you haven’t gotten good service, that’s a reason to look around. Look for a Standard & Poor’s or an A.M. Best A-rated company. You want somebody with financial strength.”

Marine liability rates are rising not just to offset the 2012 losses but also the P&I clubs’ higher reinsurance expenses and the overall increase in lawsuits the clubs saw. “So there’s definitely going to be an increase in rates to correlate with that,” says Virginia Cameron, Senior Vice President of Inland and Ocean Marine at XL Group, an insurance and marine reinsurance company based in Bermuda.

She points to Superstorm Sandy as a major factor: “What’s interesting about Sandy is it impacted all levels of the P&I business, from the smallest boat owners up to the largest fleets, containerships, cargo, autos in the ports, tug and barge fleets. It impacted all levels of the ocean marine industry. Something across the board like that is much more likely to have an effect on rates than even the Costa Concordia, which was an isolated incident.”

Cameron says that, in an effort to retain leverage, many shipowners try to differentiate themselves from some of the high-profile losses and big lawsuits. “They want to say, ‘My fleet is well run, I have good management in place and good safety procedures.’ They’re trying not to be hit by a broad-brush approach to reinsurance costs.” But those costs are going up, so each negotiation gets tougher and tougher. One thing is certain: The days of rate reductions by P&I clubs are gone, and that’s bad news for clients. – MarEx

Art Garcia is a frequent contributor to the magazine.