Marine insurance is inextricably tied to the state of the global economy and to world trade, so there will be a challenging marine environment going forward.
According to Deirdre Littlefield, president of the International Union of Marine Insurance (IUMI), "While the insurance industry may be more insulated from failure than others in the financial sector, it will not entirely escape the damage done by the current crisis, and it will see winners and losers over the next 24 months." Her address, to members of the International Underwriting Association of London, also indicated that marine insurance is inextricably tied to the state of the global economy and to world trade, so there will be a challenging marine environment going forward.
The IUMI bulletin explained: "Over the last several years, shipowners, cargo interests and offshore energy operators have enjoyed marine insurance protection often at bargain prices. This occurred during a period of record growth in global trade, the rapid expansion of the world fleet, and unfortunately a rise in claims as vessels and their crews were worked hard to keep pace with growing demand."
Littlefield noted: "Not surprisingly, even in boom times, this combination of escalating exposures, increased claims and flat or decreasing premium rates has resulted in a technical loss for marine underwriting globally.
"Strong investment returns in the past were able to shore up results for most of the major players, but with the results of the last several months my colleagues throughout the industry will now have to rely on pure underwriting results to demonstrate their ability to survive and thrive in the period of economic uncertainty that lies ahead."
The IUMI president went on to note that the slump in trade volumes is coinciding with a sharp increase in capacity. As much as 1.5 million teus* will be delivered this year. Another 1.25 million teus are expected to be delivered in 2010. These orders, placed in 2007 and largely earmarked for the Asia-Europe trade, never contemplated the financial upheaval the market now faces.
Littlefield explained that, while cargo volumes will be off around the world, some trade routes are likely to fare better than others according to the following published results:
-- In the trans-Pacific trade, imports into the US will be flat to slightly down, while US exports to Asia should remain strong but will not match the 15 percent growth recorded over the last two years.
-- Trans-Atlantic trade export growth will slow as the dollar strengthens and the European recession deepens. Imports to the US from Europe, which dropped by 4.5 percent last year, are expected to fall by a much smaller 1 percent in 2009.
-- Asia-Europe trade, the main driver of profits in 2007 and 2008, will be the hardest hit in 2009. Annual cargo growth on westbound routes from Asia plummeted from 20 percent in 2007 to 3 percent by the third quarter of 2008. The most optimistic growth forecast for 2009 is just 1 percent.
The months ahead will be very challenging
She added that the months ahead will be very challenging for marine underwriters and their clients.
"Top-line growth will be challenging as consumer and corporate spending continues to slow, factories which sprung up in the boom times scale back production or close, newbuild order books shrink, and global trade and shipping struggle to adjust to a new global economy," Littlefield continued.
"With less ability to control top-line growth, underwriters will be far more focused on the bottom line - their technical underwriting results. This means more focus on risk selection, policy wordings, deductible levels and risk pricing.
"It will also require underwriters to review their internal and external cost of doing business and reducing expenses where appropriate. Loss prevention and claims management are proven methods of positively impacting the bottom line, and companies with strong claims and loss control service teams will have a competitive advantage in the market."
Littlefield concluded that the marine reinsurance market appears to be leading the way to achieving stronger bottom-line results. As of January first renewals rose by between 10 percent and 15 percent on average (risk adjusted) for marine covers, and offshore energy pricing (particularly in the Gulf of Mexico) saw substantially higher rates, according to a report by broker Guy Carpenter.
Littlefield is senior vice president and director of business development & field office management with Starr Marine Agency Inc., New York.