Bevy of black swans beset marine insurance

Black Swans

For a marine insurance conference there was an unprecedented amount of discussion of an avian nature at the 4th Marine Insurance Conference in Hong Kong on 24-25 October.

In light of the Tianjin explosions in 2015, and the Hanjin Shipping collapse this year, black swans can no longer be unexpected events if the marine insurance industry is to avoid its own catastrophe.

Faced with overcapacity because of high levels of institutional investment and private equity rating levels are under pressure in the marine insurance sector. Meanwhile, according to International Union of Marine Insurers president Dieter Berg, geopolitical and financial risks are giving insurers a headache.

Mr Berg said that growing threats were arising out a lack of political solutions to the sluggish economies which were leading to a growing polarisation and the emergence of extreme political stands from the left and right. There were signs of a rejection of globalisation and free trade.

Meanwhile, in the financial sector Mr Berg pointed to historically low interest rates that were “having a massive, negative impact on savings and insurance returns.” To add to these, within the industry the burden of regulations were making products ever more expensive. Equally damaging was the reduction in premiums as a result of the fall in price shipping’s floating assets.

And then there are the swans. Just how damaging the Hanjin collapse will be to marine insurers is yet to be known even as some guess at an exposure of US$2.5bn to US$3.5bn. But looking to the long-term consequences, Generali Hong Kong Global head of Marine, Alvin Chan speculated that cargo underwriters may find themselves underwriting credit risk for carriers with clients requesting changes in policy wording following the Hanjin bankruptcy.

“The implications are far reaching, we don’t know what we’re getting into and if Hanjin is not the last major carrier to go down what will happen then. As cargo underwriters I don’t think we think enough about this kind of exposure,” he asserted.

Mr Berg added: “Increasing values of transported goods combined with a higher quantity of goods being moved is really an accumulation problem we are facing.”

Marine Hull & Machinery underwriting has long been a loss leader and premium levels dropped dramatically in 2015, down 8.4% to US$7.5bn. Although the world fleet continues to grow, the average insured vessel value has been reducing, which has had a correspondingly negative effect on premium income, IUMI noted in its latest market report. Fortunately Claims frequency continues a downward trend as does total loss frequency despite a minor spike in 2015.

Premium income in the cargo sector topped 15.8bn in 2015, equal to a 9.1% reduction on 2014. However, the strong US dollar masked the real income number, which made it difficult to identify any real market development. As mentioned, the Tianjin disaster is the largest cargo loss ever recorded and its full effects on the 2014 and 2015 underwriting years are still unclear. The risks of costly cargo claims are expected to increase in the future with the increasing accumulation of values in ports and on single vessels, and a higher probability for claims caused by natural catastrophes. The 2015 underwriting year began with a cargo loss ratio that was higher than in 2014, IUMI concluded.

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