China offers marine draw

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The flow of business into the Asian marine reinsurance market has remained strong and steady. But the developing markets could prove complex for the unprepared

The world's major marine (re)insurers and brokers, including the Lloyd's syndicates, have long enjoyed a significant presence in Asian markets, particularly in Hong Kong and Singapore - so much so that much of the volume of marine reinsurance is retained in the region, often with non-Asian underwriters.

But by contrast to many other markets, China so far remains an attractive but elusive target for the multinational underwriters. In the words of Hans Terje Anonsen, chairman of the global marine practice at Aon Group: "Asia has always been a magnet for trade but the boom in the Chinese economy offers a fantastic window of opportunity."

Over the last decade, a huge proportion of the world's manufacturing base has shifted to China and is expected to remain there. Exports are rocketing and generating enormous demand for cargo insurance.

However, direct cargo underwriting is heavily concentrated among the three largest and long established local non-life insurance companies of which PICC, Pingan and China Pacific together represent more than 95% of market premiums, of which a small proportion is reinsured mainly for excess of loss also with Chinese reinsurance companies.

PICC is China's oldest insurer dating back to 1948. The company, which accounts for around three quarters of all non-life premiums, became the first of China's insurance giants to sell shares to the public, raising $693.5m from its initial public offering in November 2003.

Thanks to their strong distribution franchise and sales network throughout the mainland, the big three should continue to enjoy a competitive advantage over the new players for at least ten years and beyond.

John Tan, head of marine, division Asia at Swiss Re, says: "The accumulated exposure for each of these insurers is likely to continue to rise in direct proportion to the growth in trade locally, regionally and internationally.

"Despite all three of them being expected to increase their capitalisation through public listings, the ability to absorb all their exposures will remain limited nor will it be economically efficient to retain it fully.

"Given the exposures to natural hazards including earthquake, windstorm and flood, as well as the increasingly larger vessels used for cargo transportation, best practice and good corporate governance would dictate that these companies would be seeking more reinsurance as the transparency becomes more obvious.

"Therefore, I do envisage an increase in reinsurance by Chinese direct underwriters being placed both on the international as well as the local market over the next two to three years as they embrace the critical analysis and benchmarking of rating agencies, fund managers and regulators. I believe that these companies would also seek a mixture of both traditional and non-traditional solutions."

Under Chinese financial regulations, other than for foreign joint venture projects all (re)insurance transactions for business originating in China must be done in local currency (yuan), which may be regarded as a major disincentive for the multinationals to get involved in this market.

But Mr Tan does not think current restrictions are likely to continue in perpetuity. In fact, over the last year the authorities have allowed some experimentation with yuan transactions in Hong Kong, as well as increasing flexibility in the currency exchange rate including a widening of the band against the dollar.

In addition to cargo, the enormous expansion in China's port infrastructure may open new doors to outsiders. Mr Anonsen highlights the huge growth in port facilities concentrated on Shenzhen and Guangzhou in southern China. "Chinese underwriters mostly work with the local market but we believe there are prospects for us there," he says.

Aon's prospects have been considerably enhanced by becoming the first broker to be granted an operating license in China following the Chinese government's authorisation of Aon's joint venture with COFCO. Aon-COFCO now has a 30-strong head office in Shanghai with a licence to carry both retail and reinsurance broking activities.

Expanding capacity

As well as the ports, the Chinese shipbuilding is also expanding capacity to build high-end vessels to the extent of challenging the industry powerhouses of Japan and Korea. Many of China's largest shipping companies are also broadening the range of services to become full logistics suppliers of things such as trucking and warehousing. Swiss Re's Mr Tan believes providing trade credit (re)insurance can aid this expansion process.

"In the area of trade credit, it is highly probable that as the local financial systems are put on a better footing and supported by various financial linkages with banks and other financial institutions, debt market fundings are expected to replace government funding to a large extent. This would create a greater need for credit risk coverage.

"In addition, the business models of trade financing are also expected to change as a result of integration in logistics and transportation activities as well as the development of e-business. Therefore insurers and reinsurers have to ensure that products and policies are tailor-made to these changes and cover gaps to increase efficiencies in risk financing and capital utility."

Outside of China, in South-east Asia and Korea, most Asian insurers have always reinsured a certain proportion of their domestic risks internationally, either under treaties or on a facultative basis.

Marine (re)insurance broker Heath Lambert provides cover for all the main marine classes but the company primarily concentrates on hull, machinery, loss of hire and ship repairers liability, working closely with local players in the direct market.

Richard Walker, chief executive based in Hong Kong, has experienced a steady rise in demand for hull cover from Hong Kong, Taiwan, Korea, Singapore and Indonesia.

"A lot of business comes out as reinsured especially for hull reinsurance on the international market; local clients wanting to place facultative reinsurance in Asia and in Europe," says Mr Walker. "London is probably still the main reinsurance supporter of the region's underwriters. However, other risks can absorb themselves; there is sufficient capacity and a higher proportion of risk retained in the local market. Even certain specialised risks, such as in the energy field and project cargoes, can now be covered up to reasonable limits within Asia. Consequently, the level of marine reinsurance overall is not so large."

Mr Walker says freight rates soaring to record levels has led to some underwriters seeking reinsurance to protect their freight. Yet, in spite of the overall rise in the value of the business, Asian ship owners have been reluctant to take our cover for loss of hire.

"Many of the big shipping companies while extremely dynamic in terms of diversification, also tend to be traditional, family owned businesses and are quite conservative in their approach. Therefore you won't be seeing them making dramatic changes to existing insurance arrangements."

Leaders of the mutual The Strike Club, which specialises in cover for all forms of maritime trade delays, have been marketing their services at smaller Western-owned shipping companies that are enjoying the China freight rate boom, warning to check that their insurance cover includes disruption provisions.

So far, trade with China is understood to have been generally free of problems that crop up elsewhere, such as industrial disputes and port obstructions. Sources say there have been several instances of commercial claims for delay or demurrage, but all have been within normal charter contracts. The worry is that an unusual event such as a typhoon that blocks a port channel could disrupt the profit flow.

Shipping giants can often cope with problems by rescheduling their calls, but for owners with only a handful of ships a logistics breakdown could be disastrous. Therefore, the club is especially concerned that smaller owners should protect themselves against problems that could lead to them missing out on record earnings opportunities.

A relatively recent development has seen certain Taiwanese and Korean underwriters willing to consider taking shares on incoming international marine hull business, rather than just concentrating on their own market.

This is, however, generally offered to them on a direct basis by brokers and not as a reinsurance of another insurer. Previously in the region, it was principally only underwriters in Hong Kong, Japan and Korea who would entertain incoming international business.

In Korea, Samsung Fire and Marine's move into the hull business in late 2003 sparked serious concern among established underwriters. This is because the Korean insurer was known to be quoting very low rates for less attractive Greek fleets making it more difficult to push rate increases through.

Other leading Korean insurers that are typically affiliated with the big industrial groups are also getting involved in hull, albeit on a smaller scale. Samsung appears to have had some success, taking share of between 10- 20% in the hull reinsurance of some Greek fleets but at rates that rival underwriters feel will harm the market.

Areas of concern

Another area of concern is the attacks on ships in South-east Asian waters, which are rising sharply and are becoming more violent. Marine hull underwriters in London and Singapore have expressed concern that they may have to start charging additional premiums on ships transiting the region, given the high incidence of piracy attacks on merchant tonnage, although as yet underwriters have held off increasing premium payments to owners.

According to one marine underwriter: "It has not quite reached crisis levels, but we are very concerned about the ferocity and frequency of the attacks. There is no doubt that if they continue at this level, then we shall see increases in premiums."

Many of the attacks are focused on the Malacca Straits separating Indonesia and Singapore, which is the world's busiest waterway. In November and December 2003, at least eight vessels, including two container ships, were attacked off Indonesia and the International Maritime Bureau, an industry watchdog, has warned of a "potential human and environmental catastrophe" if the attacks continue.

Indonesian navy chief Admiral Bernard Sondakh has pledged the navy would boost patrols in the Malacca Straits to fight the pirates.

Japan, which imports most of its crude oil via the pirate-infested Malacca Straits, promised late last year to help Indonesia fight sea piracy, saying keeping sea-lanes safe was vital for regional development.

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