Marine: A stormy start to 2012 and choppy waters ahead

On Friday 13 January, the now infamous Costa Concordia capsized after running into a reef off the Tuscan island of Giglio and was thrust into the public's consciousness.

While the public tuned in to media coverage following the tireless rescue efforts - which could not prevent the loss of 30 lives - the insurance industry wallowed in the aftermath of a marine event the like of which had not been seen for some time, and which, ironically, had struck in the Titanic's centenary year.

Indeed, a marine market review from Willis in April revealed that, after an inauspicious start with the Costa Concordia tragedy - which it said had left the hull market in a "state of flux" - 2012 is set to be another difficult and uncertain year for the maritime industry.

These difficulties, Willis said, also include problems in the eurozone, pirate attacks and increased sanctions. According to the report, ripples from Costa Concordia are already being felt in the market, and some underwriters in London - which will bear the majority of the estimated $500m (£310m) hull claim - are adamantly refusing premium reductions, or even flat renewals.

The full impact
Rahul Khanna, a senior risk consultant at Allianz Global Corporate & Specialty, who is well placed to comment with a background of working on ships for 14 years, says that the full effects of the Costa Concordia disaster are yet to be felt.

"It is going to have a huge impact," he says. "We just don't know how big that is going to be yet."

Nigel Russell, director of marine at broker RFIB, agrees that the Costa Concordia could have major ramifications, and adds that certain underwriters have been trying to use this to steer the market - but have been unsuccessful.

"The market is fairly soft at the moment and underwriters are trying to get rate increases, but there is a lot of capacity out there," he says.

"The dynamic of the underwriters trying to drive rates up because of the claims situation, versus the excess capacity in the market, is playing out presently. But the market has not hugely changed, and there is no sign of it changing despite the Costa Concordia."

Russell concedes that a few more major losses could turn the market, but it would require some insurers to pull out of the hull sector. "As long as the excess capacity remains, there will be a problem," he adds.

Changing the market
Chris Bhatt, sales director for global marine at Willis, agrees that another disaster, or significant claim such that of the Costa Concordia, could change the market, but this is difficult when there is still so much capacity.

"The Costa Concordia was a potential game-changing event, but we haven't really seen that translating into higher premiums. There was a little bit of a reaction but that hasn't really manifested itself in a hardening of the entire hull market," he adds.

"If you were renewing a fleet of cruise liners three weeks after the Costa Concordia went down, then obviously you were probably going to be looking at an increased premium but, as yet, it doesn't seem to have flowed through the whole market."

Bhatt continues: "I don't know whether this is going to continue, but it doesn't seem to show any sign of changing. So, at the moment there is enough capacity around to suggest that the soft market will continue."

Cargo concerns
Clearly the market is not where the hull underwriters want it to be but, looking at the Willis report, the cargo underwriters are not faring too well either, with the impact of piracy continuing to blight the shipping industry with no clear resolution in sight.

According to Willis, security measures taken by ship owners are increasingly effective, and less than 20% of attacks by pirates were successful in 2011. However, this has served only to increase the demands and expectations of successful attackers, and total ransoms have increased 77% from 2010.

Bhatt believes that piracy has entered what he considers to be a "second generation". He says: "It sounds a bit daft, but some of the early pirates are now rich and retired. If you think about it, since 2008 almost $200m was paid out in ransoms. The average wage in Somalia is $2000 a year.

"So, you can imagine that there are some pirates who have been doing it for a few years and, if they have been relatively successful, they probably don't need to do it anymore."

Bhatt adds that this second generation of pirates is locked in battle with a new generation of ship owners, which increasingly includes armed guards.

"This is thwarting some of the attempts by pirates, who are not necessarily finding it easy to get on board, but it does come with other potentials," Bhatt says.

"If there are armed guards and the pirates are also armed, then the potential for a fire fight is greater. Obviously insurers hate that because the last thing they want to do is damage the cargo or the vessel, but it makes the pirates a bit more desperate. And when people are desperate they do desperate things."

Russell agrees that piracy continues to be a serious threat and that ships with armed guards on board do not get taken as frequently, but adds that not all flag states allow armed guards on board.

The blight of pirates
The unrelenting blight of pirates appears to be something that ship owners can do little to avoid, but surely there are actions that can be put in place to help prevent events such as the Costa Concordia from happening again?

Khanna says that insurers can certainly help improve elements within shipping, and highlights the fact that Allianz is putting more emphasis on understanding the risk it underwrites.

He continues: "We are trying to get as much information as possible from the client to understand the operations they are conducting, the kind of ships they own, how they operate them, the safety standards and management systems and whether they are exceeding the statutory regulations or just following the basic principles.

"This helps us to gauge the level of risk that is going to be involved and the level of exposure we are going to have."

Khanna adds that Allianz also conducts client visits to collect information from around the claims that have been happening in the industry as a whole.

He says: "This is a valuable resource. We can use it to learn what has happened in the industry and what has gone wrong. We can identify trends, learn lessons from the industry and pass them back to our clients. Allianz shares knowledge in this way, so that clients can improve their operations and become safer.

"The idea is to work together to share the knowledge they might have and we obtain during the course of our interaction with other clients. This information flow is critical and if we can improve this throughout the industry we can make it safer out there."

Stress on safety
Having been involved in the shipping industry for many years, Khanna admits there is a lot more stress on safety and risk management today than there used to be.

"Over the years, both from my time on the ships and working with the insurance industry, there has been a slow mind shift, and today people realise that risk management is one of the key areas that needs focus," he says.

"The fact that people like me are working with insurers in the risk management department of a large insurance company is testimony to the fact that insurers realise this is an important area.

"It is great to see insurers bringing in people from the industry that know the business, have been there and had a hands-on approach and know where the risk lies. This knowledge can be shared with the underwriters and provide a more complete picture of the risk that we are involved with."

Khanna concedes that there is still room for improvement, however, as incidents continue to occur despite these advances. And, as with the Costa Concordia, statistics show that human error is the cause of most of the accidents.

"This is one area we seriously need to focus on," he says. "That could involve training of crews, selection in the first place and regular assessment. We can never do enough work in this area."

Fritz Stabinger, secretary of the International Union of Marine Insurance, agrees and adds that today it takes more to analyse a risk: the job is not done by simply "glancing through five-year statistics".

He says: "Each and every underwriter ought to look at risks as if there were no existing quotes on the slip. Underwriting departments ought to prepare extensive checklists containing questions that must be asked. And underwriters ought to set in motion a system of internal audits which check the checks."

Stabinger believes that the large loss trend in the future will be reversed by a contraction of the number of ship owners.

"We will see takeovers with less owners and larger fleets. This means that we should see more ship owners in stable financial conditions," he adds.

"In turn, that may mean more consideration given to crew quality, more consideration of safety issues, more shoulders which bear the increasing administrative burden that ships' officers are subjected to, and that will decrease the number of losses due to human failure.

"We have a quote in the shipping industry between risk managers: ‘If you think safety is expensive, try an accident.' It clearly does get the message across: if you spend a penny today on safety, you are definitely going to iron out a lot of bumps later on by reducing accidents."

Proactive not reactive
Khanna concludes: "That is something that ship owners really need to take on. A lot of them already do that, but there are clearly some that don't, considering the number of incidents still occurring.

"We need to work together as an industry and focus on safety and risk management from the start and try to be proactive rather than being reactive after an accident has occurred.

"The focus going ahead should be that we simply can't afford more incidents like the Costa Concordia and need to put measures in place to avoid the next Costa Concordia or Titanic."

100 years of facts and figures
Key facts and figures from the Allianz Global Corporate & Specialty report, Safety and Shipping 1912-2012: From Titanic to Costa Concordia, based on research from Cardiff University's Seafarers' International Research Centre

• Since 1910, world fleet tonnage has increased by a factor of 23 and now approaches one billion gross tons (2010)

• World seaborne trade has trebled since 1970 to more than 8.4 billion tons of cargo loaded per annum

• Cruise passenger numbers have shown significant growth in recent years, and are forecast to grow by 7.4% year on year from 1990 to 2015. It is estimated that in 2015, more than 22 million passengers will be carried on cruise vessels worldwide (2011: 19.2 million)

• Marine transport is one of the safest means of passenger transport overall with far lower fatal accident rates than car, motorcycle, bicycle or walking in Europe

• Professional seafarer fatality rates have fallen in many countries. For example, in the UK in 1919 it was estimated that there would be 358 fatal accidents for every 100 000 seafarer years spent ‘at risk', a rate that had fallen to 11 by the period 1996 to 2005. However, this fatality rate is still 12 times higher than in the general workforce

• Accident ‘black spots' include South China, Indo-China, Indonesia and Philippines with 17% of losses in 2001 to 2011, followed by the East Mediterranean and Black Sea (13%), and Japan, Korea and North China (12%). The seas around the British Isles also show relatively high loss concentrations (8%)

• Technical innovations over the past 100 years include improved construction techniques, echo-sounding, radar, VHF radios, automatic radar plotting aids, satellite communications, GPS positioning, and electronic chart display and information systems - all of which have supported marine safety