With the annual International Union of Marine Insurance conference recently concluded, Eric Alexander reports on the hard-hitting messages that delegates in Tokyo were faced with after they arrived
Marine underwriters came together at last month's International Union of Marine Insurance conference against a backdrop of rapidly mounting hull, energy and cargo claims - and there could be worse to come if ships and offshore energy platforms continue to be worked as hard as they are now. This was the core message of IUMI president Patrick de La Morinerie, who is deputy chief executive officer of Axa Corporate Solutions and head of its marine and aviation operations.
Addressing delegates in Tokyo, he said: "As ships have grown in size and complexity, even to the point of unmanned engine rooms in some cases, so has the nature of risk changed for us as insurers, making life much more difficult." Profound change, he added, is also not limited to on-board ships. "It can be seen in shipbuilding techniques and the equipping and operation of shore-side plants and terminals, especially those handling containers and gas cargoes. Therefore, international marine and energy underwriters must undertake a dramatic reappraisal of risks across a broad spectrum."
Underlining this view, Tore Fosmo of Norway's Central Union of Marine Underwriters and chairman of IUMI's facts and figures committee, reported that growth for the market's shipowner clients is continuing, whether that is measured by dead weight tons, gross tonnage or numbers of ships. Rather importantly, he told the underwriters present: "The global carrying capacity (dead weight tons) has increased by 45% since 1995, whereas the number of ships has only increased by 13%. That means bigger ships and more exposure for underwriters."
In the past five years, total dead weight tonnage of the world's merchant fleet has grown by 24% but some individual sectors have shown much stronger growth rates. For example, bulk carriers, the second largest tonnage category, have grown by 30%, while liquified gas carriers show growth of 41.4% and container ships an astonishing 76%.
Referring to this reality, Mr de La Morinerie commented: "One of the most important and urgent issues for marine insurers centres on container ships, where accidents are bringing the most appalling losses. Global and national economies are increasingly reliant on the millions of containers moving around the world and the numbers keep rising. The result is a highly competitive market where operators and owners must strive to achieve the economies and benefits of scale."
To do that, they must offer modal flexibility and maintain tight sailing schedules on liner services, he said. "Just recently, we have seen the biggest container ship to date commissioned, also the fastest. The relentless pursuit of ever bigger and faster ships is just one factor of acute concern when the aggregation and accumulation of risks and values to hull and cargo underwriters is as never before."
Such concern is epitomised by the newest generation of large container ships; for example, the Danish-owned Emma Maersk, capable of carrying 11,000 20ft boxes, which has just come into service.
Although marine insurers recognise the huge accumulation, especially of the cargo, they are less sure just how much it amounts to or what their involvement might be, according to Matthias Kirchner, manager of marine and aviation of Axa Corporate Solutions in Germany.
He told delegates that while an underwriter might limit its exposure per vessel for each policy issued, it cannot limit and monitor the aggregate of all its clients on one vessel because it does not know how many clients have cargo on-board the same vessel or to what extent. This problem is due to the system of turnover policies that came into vogue about 20 years ago, which does not provide sufficient information to insurers - unlike the declaration policies that this system superseded.
Mr Kirchner also noted that the forthcoming Solvency II regulations should force European insurers to reveal their unknown accumulations, which will lead to more transparency. Nevertheless, he warned: "More transparency will not solve the accumulation problem regarding container vessels. The real problem for cargo insurers is the lack of sustained profitability, the main reason for which is the empirical underwriting approach - targeting attritional loss ratios. The solution is to have an adequate large-loss margin, either on the whole portfolio or individual large-loss margins per individual policy." He added that this is easy to implement, as well as pragmatic and promising.
Quite naturally, reinsurers are more concerned at the accumulations aboard the new breed of container ships. Matthew O'Sullivan, Munich Re's underwriter and account manager for Japan and Korea, told delegates that if there was a total loss of ship and cargo, a cautious estimate of the potential loss could exceed $1bn (£531.9m). In fact, he suggested that these ultra-large container ships could well produce the "ultra-large claim scenario".
Energy underwriters are currently dealing with two major issues, according to Lloyd's underwriter Dominick Hoare of Watkins Syndicate. The first is the 2004 and 2005 hurricanes, which devastated the account, producing claims to the market in excess of $8bn and pushing loss ratios beyond 350%. However, he stressed that the major issue going forward is that underwriters must not lose sight of the enhanced operational risk stemming from greater rig utilisation, which is currently being driven by the increased price of oil and gas.
As chairman of IUMI's energy and offshore committee, Mr Hoare reported that, following the hurricanes, the market had radically redesigned its Gulf of Mexico product by introducing limitations of coverage, significant rate increases and the imposition of meaningful retentions. Reinsurance plays a critical part in providing the necessary capacity, and Mr Hoare told delegates: "The reinsurance market took a heavy hit on these hurricanes. They rose to the challenge and, in partnership with insurers, created a product we could deliver to our clients. I fully support the strong rhetoric coming from reinsurers about renewal pricing for 2007."
Meanwhile, the high commodity price of oil and gas is driving activity in the industry. "Rig utilisation is at a historic high. This fuels increased drilling costs, which have doubled in the past 18 months. In addition, we have increased costs of repair resulting from the cost of steel and labour and competition for yard availability. We are currently in a period of unprecedented claims inflation in our industry, as high as 35% per year."
Furthermore, in this high-price environment, oil companies are looking to drill wherever they can and with as many wells as possible to maximise their income. Such is the demand that there is a shortage of drilling rigs and experienced crew to man them. Wells are also being drilled in new areas, providing new technological and geological challenges, and with them increased risks and hazards, which underwriters need to understand.
In order to meet demand, construction activity is also high with as many as 100 new rigs due to begin operating within the next 18 months - although there are few signs of sufficiently trained crew being available to operate them. "Against this background, there are signs of a disproportionate increase in attritional claims and underwriters need to recognise, understand and react to these trends within the industry they support," warned Mr Hoare. "Capital providers will not tolerate underwriting losses within the sector following the performance of the 2004 and 2005 accounts. Proactive underwriting will be required by all insurers within the sector to ensure these lessons are learnt."
Shortages of trained crew are concerning hull insurers as well. Ole Wikborg of the Norwegian Hull Club, and chairman of IUMI's ocean hull committee, told those at the conference that the importance of attracting and retaining good crew will only increase. For example, there are 145 new LNG ships under construction, which will need 3500 experienced crew to operate them, and Mr Wikborg said it was also worrying that the CEO of the Norwegian classification society Det Norske Veritas had reported that 50% of the training schools failed to reach required standards.
Looking at the state of this market overall, Mr Wikborg said: "Hull insurers continue to face their own challenges linked to the highly competitive nature of the business in which they operate. Although on a global basis there has been a contraction in the overall number of operations offering hull and machinery cover, the booming shipping market continues to feed an appetite for new players to emerge.
"This, linked with the ease with which placing brokers can utilise the global capacity available, makes the role of hull insurers even more challenging in trying to obtain an adequate return on capital. While most sectors of the insurance industry are reporting increased income and profits, hull insurers, on average, are unable to achieve the necessary balance between exposure and actual claims costs on one side and risk remuneration on the other."
In Tokyo, there was also an open forum session held by IUMI's legal and liability committee, which heard from Anthony Archibald, senior vice-president of marine and energy practice at Marsh Marine, on the growing liability burden for shipowners. "Shipowners' profitability levels are under attack from a softening freight market and higher fuel costs but tonnage demand continues to grow," he said. "It is this increased activity that has produced a growth in high value claims affecting all sectors within the marine insurance market - the blame culture now affects the shipping industry more than ever before. Political responses to shipping incidents heap more pressure onto an industry that is already one of the most highly regulated in the world."
He said a good example of this is the three packages of measures introduced by the European Commission following the Erika incident, one of which concerns limitation of liability. In his view, legislators are determined to restrict, as much as possible, a shipowner's right to limit their liability. He pointed out that the commission has said: "Liability regimes in the maritime sector, whether general or sectoral, are all based on the principle of limitation of liability. The commission considers that this privilege for the maritime industry may lead to an erosion of the sense of responsibility of operators and that justification for such a privilege should be reconsidered."
Mr Archibald told delegates to note the use of the word 'privilege': "Most shipowners would consider limitation as a centuries-old fundamental right. For protection and indemnity clubs, and their reinsurers, limitation underpins the whole rating structure." He added that the threat to stability from the commission will remain so for the foreseeable future.
Of more immediate concern are the increased shipowner liabilities already in force, or those that are imminent. Mr Archibald explains: "We have seen existing international conventions amended to increase limits of liability, such as the 1996 Protocol (an increase of around 140%); the 1992 Civil Liability Convention and 1992 Fund Convention (a 50% increase); and the Supplementary Fund, which raises the total limit for oil pollution damage to $1.125bn.
"We have seen new voluntary schemes, the Small Tanker Oil Pollution Indemnification Agreement and the Tanker Oil Pollution Indemnification Agreement, which increase - substantially in the case of Topia - the shipowners' liability for oil pollution. We have also not yet seen the strict liability regimes of the Hazardous and Noxious Substances Convention, the 2002 Athens Protocol and the Bunker Convention. All of these are a serious concern for the insurance industry and are guaranteed to increase claims levels."
Mr Archibald said limitation has become something of a political issue, particularly in Europe, and that the priority of governments is that, in the event of a high-profile incident, limitation can be used or abused so that the industry can pick up the whole compensation bill rather than any of it falling on governments.
He concluded: "An important principle of the limitation concept is to give shipowners a reasonable level of protection from the financial consequences of a catastrophe. The erosion of that protection in recent years by the introduction of very high limits - and the determination of politicians to make shipowners strictly liable for virtually all consequences - threatens shipowners and their insurers with financial ruin and must ultimately stifle trade that limitation was designed to promote and protect."
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