Thursday, December 04, 2008
Will the cost of hull insurance increase as freight rates fall?
Thursday, 04 December 2008
For some time, the marine hull market has been displaying mixed signals. Overall, underwriters claim that the class is losing money, but this average hides a significant variation between the best and the worst performers. In addition, the assessment of profitability tends to be coloured by whether war risks or other classes, such as increased value and loss of hire, are included At the Tradewinds Marine Risk Forum in Singapore in May this year, most insurance market speakers either called for or predicted a hardening of the hull insurance market. At that time, the principal concern was the inflation in claims costs, mainly due to a significant increase in the cost of steel and some increase in the cost of labour.
Concern was also raised about the shortage of experienced seafarers leading to increased number of claims connected to navigational or other operational errors. There were signs in November that the hull market is indeed hardening in most markets, if partly for different reasons. The first market to show signs of hardening was the Norwegian market at the start of this year. Bluewater is withdrawing from marine and the remaining hull insurers in Norway are seeking at times significant rate increases.
As we enter the popular Jan 1 renewal date, most other markets are displaying a greater desire to differentiate risks and quality operations and a greater determination towards pushing through rate increases and also at times to increase deductibles. However, overcapacity of insurance and competition will continue to reduce the effect.
Owners will no doubt review which insurers they are using in order to ensure that their existing panel is giving them the best value. As the capacity, appetite and reputation of hull insurers in Singapore are growing, there has been an increase in inquiries for participation by Singapore hull insurers.
Some of these new inquiries have come from foreign-controlled fleets that have established a presence in Singapore in recent years and some from fleets with no Singapore presence. The former is a feature of the maritime cluster - if a company has a presence in Singapore, they will be more likely to want to source services locally in Singapore, provided that those services are good value. The latter is a feature of the Singapore insurance market growing into a mature wholesale market, in the manner of London.
There are a number of current issues facing hull insurers - some positive, some negative.
Until the recent downturn in the world economy and the shipping market, insurers were particularly concerned about claims cost inflation and shortage of adequate repair facilities. It may well be that recent economic events will have lessened this concern as the price of steel drops and shipyards preoccupied with building ships turn to offering repair services once more.
Shortage of trained crew remains a worry, but presumably will become less of an issue if there is significant scrapping of old vessels and the laying up of a number of vessels currently trading. Having said this, it should be noted that there are still a large number of new buildings to be delivered over the next three years which will maintain a demand for experienced crew.
Vessel valuations have become an issue. The sudden reduction in the market values of certain vessels is being addressed by underwriters with many insisting on reviewing insured values. The perception is that insuring significantly above the market values is not to the advantage of insurers, although a significant reduction in the insured value will affect insurers' premium volume. This concern may not become apparent in all cases, but where it does, owners need to be mindful of the requirements of any mortgage or other finance arrangements, especially where new vessels carry a high proportion of financing risk.
Insurers will be aware of the potential of a claims bulge occurring. This happens if, following a downward turn in the freight market, owners put their vessels into dry dock, and damages are discovered relating to incidents that occurred sometime before. This prompts an increase of reported incidents and resultant claims activity.
Insurers' profitability will be affected by the collapse in investment returns and the expected increase in the cost of reinsurance. The impact of reduced or negative investment returns has been illustrated by the announcements by P&I Clubs of their high general increases for next year.
In summary, the market is changing rapidly with underwriters responding to the perceived changes in the shipping environment that the current economic climate is driving. No doubt, this will be a topic at the forthcoming Sea Asia Conference to be held in Singapore from April 21-23.
If the current economic climate was not sufficient problem, hull and war-risk insurers have also to face the exposure to attacks on shipping in and around the Gulf of Aden. This has, of course, been given greater prominence by the high-profile seizure of the VLCC Sirus Star on Nov 15.
At present, normally piracy is insured under the hull policy if the English Institute Time Hull Clauses are used, but under the war policy if Norwegian or American hull clauses are used. These attacks are clearly causing considerable concern, and while additional premiums, if any, by war-risk insurers for the area are relatively modest at present, there is no guarantee that this will continue.
There has also been considerable debate on the precise definition of piracy as opposed to terrorism or other similar peril, with the Gulf of Aden incidents being variously described as piracy or terrorism.
For some underwriters, their advisers seem to suggest that the motive behind the attacks is to raise funds for the purposes of furthering terrorist causes. Whether the courts would view this as piracy or terrorism is a matter of conjecture.
However, it is likely that for each renewal, piracy as a peril will be deleted from hull policies and will be added to war-risk policies. This would have two main benefits for the assured. It avoids the issue of the assured having to differentiate between piracy and terrorism when presenting a claim.
Unless agreed otherwise, it also removes the deductible for the piracy peril as war-risk policies do not normally have deductibles whereas hull policies have.
On the other hand, it would give war-risk insurers greater justification for charging an additional premium for areas where the exposure is more likely to be piracy than terrorism.
Adapted from Business Times Singapore
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