By Lars Lange, Secretary General of the International Union of Marine Insurance
The size of the marine insurance market, valued in terms of global premium income, was 29.8 billion U.S. dollars in 2018 representing only a very modest 1 percent increase on the previous year. Premiums from hull underwriting were unchanged from 2017, cargo premiums rose by 2.5 percent while those from offshore energy slumped by 3 percent. Overall, the single percentage point rise can be attributed to the performance of the cargo sector, but when set against a similar growth in global trade, it is clear that marine insurance is not performing well. Recent years have been characterised by a run of technical losses (where claims costs exceed 60 percent-70 percent of premium) and current indicators, including the uncertainty surrounding COVID-19, predict no obvious improvement.
In the hull market there continues to be a divergence between growth in tonnage and the premium base. In effect, this means the amount of premium per tonne is falling which leaves the sector exposed. Fortunately and until relatively recently, shipping had suffered few major losses although attritional losses were beginning to creep up. But the months from the end of 2018 and into 2019 delivered a significant number of sizeable claims and, in particular, fires onboard large container vessels. This will severely impact the 2019 and 2020 underwriting performance. Coupled with this, ships are getting bigger and this presents a much higher single risk exposure, a growing feature of the overall risk profile.
On a more positive note, the frequency of total losses continues to fall and now appears to have stabilized at a historically low level. Similarly, there is a long-term downward trend in the frequency of claims which also appears to be stabilising. In general, vessel earnings and sale and purchase prices are rising and this should have a positive effect, but the impact of COVID-19 together with the current oil price squeeze is having a mixed impact on the sector as a whole.
The cargo line was the only marine insurance sector to record any growth in 2018 and this was largely attributable to a general increase in global trade and cargo volumes. Therefore, it was unlikely that any real market development was seen. Going forward, national and regional trade restrictions are likely to make themselves felt in terms of future cargo volumes but even this will be over-shadowed by COVID-19. The virus has put the brakes on trade in many sectors, particularly for containerised cargoes, and this will make itself known when the performance of cargo underwriters is reported for 2019 and 2020.
Cargo insurance is also coming under increasing threat from accumulation risk. Sizeable amounts of cargo stowed on ever larger vessels presents a significant risk which is exacerbated when similar vessels are berthed together in ports where onshore storage facilities are also located. The risk can become catastrophic in some cases. The years 2017 and 2018 saw a large number of cargo losses resulting from natural catastrophes (nat-cats) such as hurricanes, earthquakes and flooding.
Recently, the cargo market has been severely affected by a number of outlier incidents. The Amos 6 satellite, the Maersk Honam and a number of other large containership fires also had a significant impact on underwriting results. Overall, premiums collected in this sector have not been technically adequate to cover losses and expenses in recent years.
The offshore energy insurance sector has been hit extremely hard. Annual premium income has reduced by 21 percent, 5 percent and 3 percent each year since 2015, largely as result of the slump in oil prices. The modest price rally seen in 2018/2019 was beginning to reverse the fortunes of this sector even though the risk profile, caused by re-activating dormant assets, was causing concern. Optimism was short-lived, however. Oil prices fell drastically in early 2020 driven by global tensions and a lack of output control by OPEC . As a result, offshore activity has slowed considerably and this will have a devastating impact for offshore energy underwriters going forward.
Global marine insurance in many regions and many sectors is struggling to maintain profitability. Sadly, the impact of COVID-19 is likely to make matters worse in both the short and longer term. In the short-term, COVID-19 related client procedures and specific regulations will give rise to an increased claims potential that marine insurers have to deal with. In the mid and long-term, the macroeconomic impacts and lessons-learned may cause the marine insurance industry to adapt to a new way of working; less business and less premium volume may be a consequence; there may also be requests for new or adapted wordings and coverage.
In addition, potential claims scenarios might arise in a number of areas including:
•For hull, there are likely to be delays, and problems with availability of personnel, both on-board vessels and in ports, either through illness or regulation. The availability of spare parts may also cause problems. Vessel lay-ups may occur and will have to be taken into account.
•For cargo, a decline in trade and transportation volumes generally means less business. Uncertainty and interruptions in the supply chain may lead to delay and business interruption. Warehouse overflow and congestion in port areas may cause additional losses.
•In many businesses such as the cruise industry, special business interruption policies or clauses may be affected.
•In some countries such as the U.S. and the UK, policy makers have seemingly focused on business interruption claims and the fact that many of those insurance policies either contain pandemic exclusions and/or have not been specifically extended to provide COVID-19 related cover. There are some initial calls for mandatory retroactive cover despite specific exclusions. Such an approach would cause severe solvency issues and be potentially ruinous to the insurance market.
Marine insurance continues to deliver a vital service to global trade but recent years have hit the sector extremely hard. Until the outbreak of COVID-19, the market as whole was beginning to feel more optimism, particularly as oil prices were recovering and excess underwriting capacity was reducing. However, COVID-19 combined with the crash in oil price has introduced a new level of uncertainty to all corners of global business which marine underwriters, together with all maritime and shipping companies, will need to overcome. Marine insurance is one of the oldest industries in the world and it has survived challenging times in the past and these current difficulties, whilst uncertain, will not be insurmountable.
The International Union of Marine Insurance (IUMI) collects premium income data from all relevant marine insurance markets which are released as global market averages. The most recent data given in this article are from the 2018 underwriting year. 2018 numbers will be adjusted and 2019 numbers published in September 2020 at IUMI's annual conference which, this year, will be held online.
Headquartered in Hamburg, IUMI represents 44 national and marine market insurance and reinsurance associations. Operating at the forefront of marine risk, it gives a unified voice to the global marine insurance market through effective representation and lobbying activities. As a forum for the exchange of ideas and best practice, IUMI works to raise standards across the industry and provides opportunities for education and the collection and publication of industry statistics.
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