Marine Market Overview - Willis Groupwillis.com/.../documents/Marine_Market_Overview.pdfWillis...

Willis Airline Insurance Insight August 2009

MARINEREVIEWRIDING THE WAVES

October 2009


CONTENTS

FOREWORD ...................................................................... 2

INTRODUCTION - MARINE MARKET SUMMARY ....... 3

HULL AND MACHINERY ................................................ 4

PROTECTION AND INDEMNITY .................................... 6

MARINE SHORESIDE ...................................................... 8

CARGO ............................................................................ 10

LETTER FROM SINGAPORE ......................................... 13

PIRACY ............................................................................ 14

Willis Marine Review October 2009 1


This time last year Lehman Brothers had just collapsed, AIG had been rescued, and the banking crisis was in full swing, but had yet to seriously impact on the marine industries.

Shortly afterwards, in the closing months of 2009, the shipping boom came to an abrupt halt as freight markets and commodity prices collapsed. Today, sadly, once again we find marine underwriters hoping to put up prices just at the time their customers need to cut costs.

At Willis we have ridden these waves before and are well prepared for the challenging negotiations ahead. Meanwhile, my colleagues and I are pleased to offer you this latest Willis Marine Market Review.

Alistair RiversSeptember 2009

FOREWORD

2 Willis Marine Review October 2009


The marine insurance market is inevitably linked to the fortunes of its clients and there are few, if any, who have not suffered due to the dramatic economic downturn in the last year.

Prior to the financial crash last autumn, shipping had enjoyed a super boom for several years. However, the onslaught of the global recession significantly reduced international trade. The sudden slowdown and drop in demand meant the shipping industry suffered massive losses. Many ship-owners facing losses also had new buildings on order. In fact, there was a record order book equivalent to over 50% of the existing world fleet. The combination of these factors has led to cancelled or deferred orders, lay-ups of the existing fleet, and other cost cutting measures.

Insurers have also suffered. Their problems include stalled capital markets and a fall in investment returns. This has led to Underwriters being far more cautious in their approach to underwriting. This caution has not however, had a dramatic impact on rates. Although the reinsurance market hardened, the direct market did not follow suit. Actually, in most marine classes the increase in rates has been minimal for those with a good loss record. This is partly because there has not been a significant contraction in the direct marine underwriting capacity. While there is still surplus capacity in the market, rates are unlikely to rise dramatically.

The exception has been the P&I market where the mutual clubs managed to achieve a second year of rate increases following underwriting losses.

In early 2009 it was anticipated by many that the marine market would shift and that the economic crisis would mark the end of the soft market. These attempts to talk up prices failed because of the simple economics of supply and demand.

At the time of writing, although demand for marine insurance has contracted the remaining over supply in the market means that no dramatic price rises are imminent. This is just as well as the shipping industry is still suffering and struggling to cut costs.

MARINE MARKET

" THE MARINE INSURANCE MARKET IS INEVITABLY LINKED TO THE FORTUNES OF ITS CLIENTS AND THERE ARE FEW, IF ANY, WHO HAVE NOT SUFFERED DUE TO THE DRAMATIC ECONOMIC DOWNTURN IN THE LAST YEAR."



It has been a fairly mixed year for the hull market. Initially, the London market adopted a tough approach with renewal increases being demanded by insurers on all lines of business. As the year progressed, the firmer trend faltered due to the surplus capacity in the market and the threat of competition both internationally and from other London underwriters.

We have seen a marked distinction between renewal requirements for business producing underwriting profits and those that do not. Modest increases of around 2.5-5% have been universally applied to good performing accounts and far heavier penalties have been applied to poorer performers.

A further complication has been the effect of the slump in world trade on vessel values and earnings. During the boom years ship values increased and although some additional premium was generated, technical rating levels generally fell.

As we write, ships have been laid up to an extent not seen since the 1970s and understandably owners expect to enjoy reduced insurance premiums in respect of a vessel no longer trading. Unfortunately for many there is little scope for return of premium as technical rates are already less than the level underwriters require for laid up tonnage.

We anticipate that the increase in the laid up fleet may also see a spate of outstanding claims being presented by ship operators who may previously have preferred to defer them in the boom market.

In spite of this, capacity in London has remained relatively stable, though there have been some personnel changes. Swiss Re recently lost almost their entire marine team to Montpelier Re. Swiss Re in turn brought in Aon’s Peter Townsend and Lee Bright. Ian Henstridge, the senior Hull underwriter at the Catlin syndicate, is moving to the Amlin syndicate. David Vale departed Allianz for the Brit Syndicate and was replaced by Brian Cheney from Gard. Potentially, these moves may result in changes to the underwriting philosophy of these insurers.

Of all the international markets, the USA seems the least enthusiastic about international blue water business. The American Hull Syndicate continues to review their strategy. Navigators have shown an interest in being the lead on some business but only when it fits in with their independent underwriting philosophy. Other insurers, notably AIG and CV Starr have been prepared to consider shares, following markets such as London.

HULL AND MACHINERY



The Scandinavian market has experienced major changes this year, losing both Bluewater and Nemi. The Norwegian Hull Club has had a firm approach to renewals and consequently they have lost business. Although Gard have also adopted this approach, they have proved more flexible, especially when offered the position of claims leader. Swedish Club have analysed their existing business and undergone a process of rationalisation in an attempt to improve their financial results. Gerling continue to accept and write business that fits their individual underwriting approach.

Surprisingly, following the recent demise of Bluewater and Nemi, it appears new capacity is emerging in Scandinavia. WR Berkley is opening a new marine operation, taking on many of the personnel from Nemi. Additionally, Amlin have begun to provide some underwriting capacity to Vega, who had previously failed to attract sufficient capital to start underwriting themselves.

The rest of Northern Europe has remained relatively stable. AXA are capable of writing significant shares of business when they so choose. They maintain tight control of their operations however, with all business referred to their head office in Paris for prior approval. Other significant European players are Generali, Groupama and Allianz. All of these underwriters can provide substantial capacity through their multi-centred underwriting operations.

In contrast, some hull markets, such as Italy, tend to focus primarily on the local business that they were formed to serve. Italy, however, has long held ambitions to grow internationally, especially as their domestic business is declining.

Perhaps the most interesting development in the international market has been Amlin group’s acquisition of Fortis Corporate Insurance. Fortis have grown their international book substantially in recent years but have remained focused on specific classes such as shipbuilding, general marine construction and tug and barge type business. Fortis have built a formidable position in some of these specialised sectors. Thus, it will be interesting to see how Amlin Corporate Insurance, as they are to be known, intend to build on this.

The Singapore market, which serves many Asian ship-owners, has continued to grow and remains competitive. Some underwriters however, have now rapidly expanded and more moderate rates may result. Asia is still seen by insurers as an area of opportunity. To this end, underwriters’ operations continue to be bolstered by additional personnel: Richard Young is the most recent, he has moved from Atrium’s Lloyd’s syndicate to their Singapore office.

Also worthy of mention is Marine Shipping Mutual (MSMI), one of the few truly ‘mutual’ providers of hull insurance, they too have had to take tough decisions on rating levels. Previously, they provided a very stable alternative to the more traditional markets. Thus, MSMI developed a loyal following but as a mono line insurer it will be a challenge for them to maintain adequate premium levels in the face of global competition. Lastly, we should mention British Marine, who are no longer a mutual, but continue to provide a valuable alternative for smaller vessel owners and operators.

Overall, it seems that despite a firm stand from some underwriters, for those with a good record, rates have only marginally increased. Unless there is a significant reduction in capacity, we expect this to continue in 2010.

" AS WE WRITE, SHIPS HAVE BEEN LAID UP TO AN EXTENT NOT SEEN SINCE THE 1970s AND UNDERSTANDABLY OWNERS EXPECT TO ENJOY REDUCED INSURANCE PREMIUMS IN RESPECT OF A VESSEL NO LONGER TRADING. UNFORTUNATELY FOR MANY THERE IS LITTLE SCOPE FOR RETURN OF PREMIUM AS TECHNICAL RATES ARE ALREADY LESS THAN THE LEVEL UNDERWRITERS REQUIRE FOR LAID UP TONNAGE."



PROTECTION AND INDEMNITY (P&I)

RENEWAL AT 20 FEBRUARY 2009 – OVERVIEW

The build up to the 2009 renewal season was overshadowed by the substantial unbudgeted calls forced on almost half the market. Faced with sizeable investment losses, six of the 13 Clubs saw no other option but to recapitalise at the expense of their Members.

The majority of Clubs announced general increases between +12.5% and +17.5%. The market average was +16.5%. Although the announced general increases did not vary significantly, the actual final results did.

Generally, those Clubs that had maintained their budgeted deferred calls tended to be firmer at renewal. By contrast, the Clubs that had requested unbudgeted calls from their Members were considerably softer in their renewal negotiations. Consequently, the stronger Clubs were much more effective in achieving their announced general increases, whereas, the weaker Clubs almost certainly fell well short of their targets.

Renewal discussions tended to be much more confrontational than usual and often agreements were not reached until the last moment. The combination of these factors led to the widest range of results seen for a decade. Across the market, we estimated that the average actual increase achieved was close to 11% on mutual P&I. However, the range of actual increases applied to individual accounts was extensive.

Considering the background and tone of the renewal, there was less movement between Clubs than might have been expected. Despite anger and annoyance at the unbudgeted calls, ship-operators largely resisted moving Clubs. There were a number of individual reasons for this, but two relatively common themes behind ship owners’ rationale became apparent. The first was the

barrier to movement represented by the penal levels of release calls set by a number of Clubs. The second factor was the continuing uncertainty about the market as a whole. Naturally ship-owners were concerned that after recapitalising one Club, if they moved they might have to do the same with the new Club the following year. Consequently, most movements as usual were only of partial fleets, rather than wholesale shifts. As would be expected the underlying trend was that ship-operators generally favoured Clubs with greater financial security.

The Clubs which gained the greatest number of winning movements in the market were the Standard Club and North of England. Steamship and Skuld also fared well. Net losers of tonnage included the UK Club, West of England and the American Club.

FINANCIAL RESULTS FOR 2008/09 It was expected that investment losses for 2008/09 would be substantial; unfortunately the final figures are even worse than originally feared. The combination of the equity market losses, exchange losses, and little assistance from the bond market led to a combined ‘Non-Technical’ loss to the International Group (IG) market of just over USD 840 million.

In contrast to this, the market actually recorded the first underwriting surplus since 1994/95. The reported combined underwriting surplus, of just over USD 612 million, is misleading however as this figure includes nearly USD 540 million of unbudgeted calls debited or accrued in the 2008/2009 financial year. Despite this, the underlying figure, excluding the unbudgeted calls, is still a significant USD 74 million positive result for the market.

The unexpected feature of this underwriting result was the extent to which the incurred claims result improved. The combination of an overall reduction in paid claims (-5%) with several Clubs appearing to have reduced their estimated outstanding claims materially, led to nearly an -11% reduction in incurred claims across the market.

Even including the unbudgeted calls, the underwriting surplus only partially offset the huge investments losses; consequently the final 2008/09 result showed an overall market deficit of just over USD 230 million.

The great irony of the results is that because the weaker Clubs were forced to balance their individual results with unbudgeted calls, the market deficit is shared only by the stronger Clubs. The stronger Clubs therefore became slightly financially weaker over the last reporting period, while the historically weaker Clubs were largely unchanged.

" GENERALLY, THOSE CLUBS THAT HAD MAINTAINED THEIR BUDGETED DEFERRED CALLS TENDED TO BE FIRMER AT RENEWAL.BY CONTRAST, THE CLUBS THAT HAD REQUESTED UNBUDGETED CALLS FROM THEIR MEMBERS WERE CONSIDERABLY SOFTER IN THEIR RENEWAL NEGOTIATIONS."



CURRENT YEAR AND EARLY EXPECTATIONS FOR FEBRUARY 2010

At the time of writing, we are just over half way through the 2009/10 policy year. At this mid point, the majority of Clubs are reporting that claims levels are progressing positively. However, even if the current claims trend continues throughout the autumn and leading to renewal 2010, we expect two main messages from the Clubs. Firstly, the claims performance of a single year, in a recession, will not be a clear indicator for the future when the shipping market begins to recover. Secondly, Clubs will be anxious to rebuild reserves following the investment losses of 2008/09. As touched on above, this second argument will only really have any validity for Clubs that did not charge unbudgeted calls.

Thus, assuming no dramatic change in the claims trend, we would expect general increases announced at renewal 2010 to be substantially lower than we have seen in the last two years. 2010 may well represent the turning point from a hard to a softer market, but we would expect most Clubs to publish general increases in the range of +5% to +10%.

A full analysis of the market will follow in our P&I Review 2009 to be published later this autumn.

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Generally referred to as ‘Marine Liabilities’, this area specializes in those marine activities that are essentially shore based. Such risks are often unique and require bespoke policies that address the potential losses faced. These include:

� Terminal and Port Operators including stevedores and wharfingers

� Ship Repairers and Constructors� Non-Crew employees that work on or around vessels� Marine Construction companies� Vessel Charterers

The market has evolved to provide insurance and risk management services that cover not only the clients’ third party liabilities but also physical damage to their owned property.

In the case of a Port Operator or Port Landlord, the owned property can often be worth hundreds of millions of dollars. Consequential loss of income must also be taken into account. This can be as a result of blocked approach ways, navigable waterways or damaged buildings. These liabilities significantly increase the potential losses.

This is a highly specialized class in which European-based markets are strong. This type of cover combines both third party liabilities and first party property damage. Underwriters approach the two types of risks very differently.

MARINE SHORESIDE

" THE MARKET HAS EVOLVED TO PROVIDE INSURANCE AND RISK MANAGEMENT SERVICES THAT COVER NOT ONLY THE CLIENTS’ THIRD PARTY LIABILITIES BUT ALSO PHYSICAL DAMAGE TO THEIR OWNED PROPERTY."



THIRD PARTY LIABILITIESRates remain relatively stable for the primary exposures, which range from simple care, custody and control of cargo to complex ship repairs. In recent years there has been an influx of capacity into the market which has meant that premiums have remained relatively stable and underwriters have been able to grant small reductions to those with good records. This trend is unlikely to change in 2009 and may well continue through the first half of 2010.

EXCESS THIRD PARTY LIABILITIESIn contrast, rates have hardened for the higher Excess/Umbrella market. Few capacity risks, requiring limits of up to USD 500 million or more, are renewing at expiring terms. This shift was obvious in the first quarter of 2009, although it has softened in recent months. Clearly underwriters no longer wish to offer massive limits of liability at minimal premiums.

PROPERTY/ BUSINESS INTERRUPTION COVERAGEThese risks are separated into two distinct groups: risks in areas that suffer catastrophic perils such as Quake, Wind and Flood and risks in areas that do not. Those that do not suffer such perils are termed Non Catastrophic areas. Non Catastrophic areas have enjoyed a flat market with stable premiums. There is still a relatively high level of capacity in the market which means that despite the carriers’ loss of investment income, rates have not hardened.

The opposite is true of areas that are prone to Catastrophic Perils. Ports, Shipyards and Terminals are, by their very nature, on the waters edge and first to suffer in a catastrophe in areas such as the US Gulf Coast. The capacity for such risks has certainly diminished this year. A number of London based insurers have already committed their capacity and are no longer able to provide any additional cover.

Another factor pushing up premiums was the alleged lack of capacity in the non-marine market. This led to an increase in premiums for Property and Business Interruption risks in the first half of this year. It seems that the perception of the market’s capacity was not the reality. In other words, there was more capacity available than originally thought. Earlier this year, insurers took a hard-line on rates but in the latter half of the year their approach has slightly relaxed.

PERSONNELWithin the London market there have been some recent moves: the Marine Liability underwriter at Catlin moved to Ascot and the underwriter at Allianz left to join an underwriter who has moved back to the UK from Singapore and is likely to focus on Ports and Terminals.

We have also seen the departure of the whole underwriting team from ITMU who are moving to the Kiln Syndicate in Lloyds. As a result of this departure ITMU closed its doors for new business on the 31st August. They will continue to service accounts they currently write until natural expiry.

CONCLUSIONMarine Liabilities is a specialized area within marine. On some risks such as Ports and Terminals, non-marine underwriters will compete for the business. If not handled by a specialist broker, this can often lead to gaps in cover such as Vessel Impact and Blockage of Channels etc. Unfortunately, such gaps are often only discovered at the time of a claim.

In summary, the market attempted to increase premiums in the first half of 2009, particularly for high level capacity and Catastrophe prone property coverage. Now, it seems such increases have stabilized. Although there is a chance that 2010 may bring further increases, the market is currently stable.

" ANOTHER FACTOR PUSHING UP PREMIUMS WAS THE ALLEGED LACK OF CAPACITY IN THE NON-MARINE MARKET. THIS LED TO AN INCREASE IN PREMIUMS FOR PROPERTY AND BUSINESS INTERRUPTION RISKS IN THE FIRST HALF OF THIS YEAR. "



CARGO

IT’S STILL A BUYER'S MARKETWe are deep into a global recession with huge reductions in trade volumes, low commodity values, companies consolidating or closing down - yet there has never been a better time for those purchasing cargo insurance.

The increase in global cargo underwriting capacity and the perceived profitability of the sector has created a competitive market place. Not only is the market very competitive on price but insurers are willing to negotiate and provide wider coverage, deductible buy-downs and long term deals. Insurers hope that this will differentiate them from competitors and grow their business.

BUYER BEWAREIt should be noted however that such a competitive environment can create its own problems. The pursuit of low priced deals can lead to a compromise on the quality of security, not only financially but also in terms of service and approach to claims.

The pressure on brokers and agents to deliver on budgets, can lead to those less attentive to regulation and compliance cutting corners and compromising standards.

Market confidence has been boosted by the lack of any single major catastrophe in recent years. However, the last 12 months has seen a noticeable increase in the number of reported losses, not an unexpected development in a recession.

The increase in attritional losses will undoubtedly have an impact but initially the effect will be account specific, especially on those policies where the risk has been transferred from the balance sheet to low priced insurance.

A noticeable development has also been that manufacturers and distributors have attempted to transfer more risk into the supply chain by way of specific contracts with forwarders and carriers.

Over the last 12 months we have witnessed an extremely volatile commodity market with prices peaking in August 2008 and then dropping off dramatically by the end of the year. The demand for cargo insurance, however, has achieved a greater profile as financial institutions become more risk adverse.

The above chart represents a Commodity Price Index of 100 in 2005: the index dropped by almost 100 points between August 2008 and February 2009.

COMMODITY PRICE INDEX 2005 = 100(Includes Fuel and Non-Fuel price indices)

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COMMODITIESOILThere has been a significant drop in trading activity which has led to lower premiums and difficult renewals. In 2008 oil peaked at an unprecedented USD 147 and a few months later hit a low of USD 38. The price is likely to remain around USD 60 to USD 80 for the foreseeable future, resulting in lower shipment and storage values.

METALSThe metals market has also suffered a downturn but it has not been as volatile as oil. For some metals, tin, lead and nickel, the prices have actually been higher in 2009. Overall premium levels have been relatively stable because although shipments and sales are down, companies are increasingly storing metals as they wait for an upturn.

SOFT COMMODITIESCertain major crops such as grain and coffee have dropped in price, whereas cocoa and sugar have seen their price increase in the last 12 months. The price of soft commodities is determined not only by demand, but also weather conditions and the resulting crop.

The placing and pricing of cargo insurance for commodities is largely unaffected by the economic downturn. The cargo market is specialized due to the varied nature of the products covered and also because claims tend to be frequent and often protracted.

MAJOR LOSSESThe cargo market has enjoyed a relatively quiet claims period during the past 12 months.

The automotive sector has been the exception with a large hail loss in the United Arab Emirates. The claim is currently estimated to be in excess of USD 70m; the risk was largely reinsured in the London Market. There have been further million dollar losses in France, Germany and Holland due to windstorm and hail.

CARGO CLAUSESIn January 2009 new Institute Cargo Clauses were released, although the 1982 clauses are still available and in widespread use. The only clauses revised to date are the general cargo clauses, (ICC(A),(B), (C)) and relevant War and Strikes Clauses. Specialist Clauses (Frozen Food, Frozen Meat, etc.) are to be reviewed over the coming months.

There have been many improvements to the clauses enhancing cover, updating outmoded phraseology and correcting anomalies. None of these changes should be detrimental to the assured. Full details of the changes are available on request.

ROTTERDAM RULESThis UN Convention is to be signed in Rotterdam on 23rd September 2009. It will not take immediate effect. Once 20 countries have ratified the convention it will officially come into force.

The essence of the Rotterdam rules is to provide a consistent door to door liability standard, in contrast to the current variety of contractual terms. The scope of this convention is wider and will therefore include operators such as stevedores and road carriers. It is not clear how it will work with other international conventions (CMR).

The underlying financial liability is higher than Hague Visby at 875 SDR per package or 3 SDR per kilo as compared to 666.67 SDR per package and 2 SDR per kilo.

The Convention is complex and offers fewer defences to the carrier. Lawyers will need to be involved in providing advice, guidance and eventually claims litigation.

The most important single element of this convention is contained within article 80 “volume contracts” which will allow freedom to contract on a more restricted basis of liability. The implication of article 80 is expected to be profound.

It is anticipated that when the new convention is enforced there will be a considerable impact on shippers, forwarders, NVOCCs, terminal operators, stevedores, and carriers.

" THE MOST IMPORTANT SINGLE ELEMENT OF THIS CONVENTION IS CONTAINED WITHIN ARTICLE 80 “VOLUME CONTRACTS” WHICH WILL ALLOW FREEDOM TO CONTRACT ON A MORE RESTRICTED BASIS OF LIABILITY. THE IMPLICATION OF ARTICLE 80 IS EXPECTED TO BE PROFOUND."

Willis Airline Insurance Insight August 2009 11


UK/EUROPE: In the UK the market continues to grow and Catlin headed by Ryan Godfrey and his team formerly from Allianz are the latest entrants. In a tactical move, AXA have relocated senior underwriter Mathieu Daubin from their Paris Head Office to London.

Zurich has announced its intention to strengthen its market presence starting with the employment of Lee Meyrick as Global Marine Practice Leader. They have also just secured the services of Darren King, John Gibson and Rod O'Malley from Allianz.

Montpelier Re has entered the Cargo market headed up by Gordon Fry previously of Swiss Re. Marketform has followed suit, led by Nick Holding formerly of Factory Mutual.

In Europe the acquisition of Fortis by Amlin has provided some welcome stability to the market. RSA continue to expand their marine specific operations in Europe; they are already established in Belgium, France, Germany, Holland and Spain.

AMERICAS:Despite the issues surrounding AIG (now rebranded Chartis) the North American market is undeniably stable. Marine Cargo remains profitable. Most of the traditional carriers such as Allianz, Firemans Fund (now rebranded Allianz), XL, ACE, Travelers, Navigators and Starr Marine are expanding by aggressively seeking to retain and regain their domestic accounts and by extending coverage to include risks such as stock and processing and retail locations.

In Brazil the liberalisation of the market is presenting its own challenges. The opportunity to access overseas markets is proving very attractive to a growing economy and the influx of investment by overseas capacity has begun in earnest.

ASIA:Underwriting results continue to prove favourable for most cargo underwriters and according to the monetary authority of Singapore the gross loss ratio for domestic business in 2008 was 50%.

Premium income has been affected dramatically by the falling commodity prices, the global demand for consumer goods and competitive pricing which has had the effect that the newer and more opportunistic underwriting operations are reviewing their strategy in the market.

There is regulatory legislation in the pipeline to offer some protection to local insurers against competition from overseas markets. MIDDLE EAST:The Middle East continues to be an important marine hub for shipping movements between Asia and Europe. There is however an inevitable slow down in the development of

the regions cargo markets due to the substantial drop in cargo premiums and reduced commodity prices. In recent years many insurers have selected Dubai as a location of opportunity but there is also an increasing awareness of cultural issues. Examples of this include the first dedicated retakaful company, Takaful Re, and Creechurch Underwriting forming the first Lloyds syndicate to be managed in accordance with Islamic Shari’ah principles.

PERSONNELIn addition to the personnel changes already mentioned, the following show that the movement of staff in global cargo arena continues at a rapid pace:

IN SINGAPORE:Judith Finlay of QBE transfers from London, Scott Sykes of Argenta transfers from London, Colin Robinson moves from Marsh to Watkins, Said Kahn leaves Watkins for Amlin, Phil Webster returns to Singapore with Allianz, David Burns leaves Alba for AXA and Ian Pettican leaves Allianz for Willis.

IN LONDON:Penny Gray leaves Marsh to take up an underwriting position at CV Starr, Richard Costain leaves CV Starr for Liberty, Glyn Caley left Markel and is now with Swiss Re, Geoff Wilkinson to Swiss Re from Novae.

OUTLOOKThe increase in premiums generated by the commodity sector last year provided a buffer to underwriters from the underlying downward trend in rating levels, however in recent months following the reduced commodity prices and trading activity the position has changed with underwriters now seeing a significant shortfall on their 2009 budgets.

This has resulted in underwriters focusing attention on profitability and their non-commodity portfolio and a recognition that cargo rates need to stabilise going forward, although at the time of writing there seems little evidence to support this.

In an ironic twist we have a climate where stock levels are generally dropping (with a reduction in the demand for capacity) and a world cargo market capacity that is increasing, a by-product of this is the accelerating trend towards domestic placements where the levels of capacity offered are now more than sufficient. Although it is believed that many of these risks are being written at an unsustainable level and we expect that these risks will once again return to the Specialist Global markets in Continental Europe, London the United States and the regional hubs of Asia and the Middle East.

To summarise the Cargo market continues to offer cover and capacity at historically low rates and is predicted to continue this way (catastrophes permitting) at least in the short term.

CARGO — THE MARKETPLACE



LETTER FROM SINGAPORE

In Asia there seems to be a growing divide between owners who are confidently “gearing up” for the future and those who are simply struggling to tread water. Media reports of new venture capital here are equally matched by ones of asset seizures - and certainly several high profile operations unable to fulfill their financial obligations have been caught short. However, several new Asian bulker operations have been set up and there has been considerable sale and purchase activity in the smaller containerized sector over the summer months. Specialist “Lay Up Managers” have emerged and the old insurance ITC Port Risk Clauses have been dusted off for those who are either cost cutting or taking advantage of the current low vessel values ahead of the future upswing.

The mid summer rally in the dry markets had looked promising but lay up locations in South East Asia are still in high demand. The southern Singapore coastline is inundated with record tonnage of all types awaiting charter. Such laid up vessels mean one thing to insurance underwriters: less premium. Low vessel values continue to do nothing to rally investment income and although there is much talk of increased claims the annual IUMI rally for substantial premium is likely to go unfulfilled again. The results of this are obvious to all, but continued competition and capacity in the insurance markets means brokers continue to achieve preferential terms despite some owners’ poor results.

Mathew Cannock of Catlin, and Chairman of the newly formed Lloyd’s Asia Marine Committee, suggests that Lloyd’s Syndicates here have become more realistic about their written premium expectations over the past twelve months. In 2009 there has been a notable reduction in the number of new start ups. Despite this, Catlin are further increasing their hull operation in Singapore with another underwriter joining shortly. Many of the syndicates prefer writing Cargo business. As a result, the Asian market has seen some competitive decision making but this year the larger cargo programmes have been rated as competitively, if not cheaper, in London.

Market leader Mike Davis, CEO of AXA Corporate Solutions in Asia now runs three marine hub offices in Asia. He says, “It is true that increased competition in the region has negatively affected the profitability of the (cargo) segment to the extent that some of the newer and or more opportunistic operations are reviewing their strategy,

I truly believe this is a natural process a maturing market must face…underwriters who commit resources and capacity over the long term to the region will benefit hugely as the Asian markets recover.”

This faith in the Asian market is also held by many other underwriters. As a result, more underwriters are entering the market and increasing the market capacity, such as Atrium entering Lloyd’s Singapore with Richard Young. Following the resignation of Richard Yeo from the Argenta managed syndicate AMS 1965, Paul Hunt was installed as Active Underwriter. Also, Argenta 2121 set up their own syndicate with Scott Sykes moving from London as Head of Underwriting. Other moves to note include the departure of Mark Trevitt from Travellers; Said Khan moved from Watkins to Amlin, to be joined by Colin Robinson who moved from broking to Amlin to become the new cargo Underwriter. Nick Sansom returns to P&I underwriting, replacing Robert Drummond at the Standard Club, who moves back to London.

Of the top ten insurers in Singapore (by Gross premium written) there are four who major in marine: ACR, First Capital, AXA and now Lloyds Asia. First Capital are by far the largest hull underwriters and AXA by far the largest cargo underwriters. It is difficult to judge the overall market facultative capacity, especially given that some underwriters are now far more cautious with line sizes. However, capacity is such that it would now be possible to place a USD 80,000,000 hull and a USD 400,000,000 cargo risk in the Asian market.

Willis Marine has strengthened its teams in both Singapore and Hong Kong: Ian Pettican (ex Allianz) and Cheryl Tan (ex Marsh) have joined the Cargo team. Darren Rowland moved from London to Hong Kong.

In such a challenging market it is difficult to provide an interim forecast: underwriters say they need more money and owners, looking for support in troubled times, simply don’t have it. Hull leaders are likely to quote single digit rises for owners with marginal results but will demand substantially more from those with poor records. Cargo is more flexible: the largest reduction in the cargo market this summer was 30% on good figures. So, a good broker is essential in order to take advantage of the available underwriting capacity in Asia.



PIRACY

In the last 12 months there has been a well publicised surge in the number of pirate attacks in the Gulf of Aden. In 2009 alone, there have been over 130 reported pirate attacks off the coast of Somalia and 28 ships have been seized. Although there was a lull due to bad weather, since the southwest monsoon ended there has been a resurgence in the number of pirate attacks. Furthermore, as many vessels have recently been ransomed and released, it would seem likely that the pirates will attempt more attacks to replace these vessels.

Piracy is not confined to the Gulf of Aden. As a result of the extensive press coverage of the Somali pirates, there has been an increase in reports of pirate attacks in Brazil, Nigeria, Malacca Straits, Thailand, Vietnam and the South China Sea. Notably, the number of reported attacks is far less than the number of actual attempted attacks. Clearly, the success of the Somali pirates has inspired criminal elements globally.

Nigeria is another African piracy hotspot. In the Niger Delta attacks are often led by the group MEND (Movement for the Emancipation of the Niger Delta). The groups are very well armed and well-connected: it is suspected that they have contacts within the oil and shipping industry. Yet the situation in Nigeria is more stable because there is a semi-functioning state. The Nigerian navy work together with private security to protect vessels. Although the types of attacks in Nigeria are very different from Somalia, they are still a form of piracy and are further evidence of this global phenomenon.

Piracy is constantly evolving. Somali pirates have now adapted to the safety measures taken by ship-owners, the introduction of the Internationally Recommended Transit Corridor (IRTC), and the fact that the crew are often worth more than the cargo. Also, modern pirates have taken advantage of modern technology. Pirates communicate with radios and mobile phones, they use modern weapons, and they can even use the internet to evaluate the worth of their ‘booty’.

Since the adoption of the IRTC pirates have attacked vessels further out at sea, over 800 nautical miles off the coast of Somalia and East Africa, as well as in the Red Sea, the Straits of Bab El Mandeb and off Oman. By attacking in a variety of locations and at extreme ranges, pirates avoid the Combined Maritime Forces (CMF). Also, at these distances the Masters of the vessels are lulled into a false sense of security and reduced alertness and readiness.



Most attacks occur in the early morning or evening. Small fast boats (skiffs) approach a vessel and then attempt to board the ship with ladders, grappling irons or poles. The pirates are armed with assault rifles (AK47s) and rocket propelled grenades. Skiffs are capable of speeds of between 20 and 40 knots. When not being used the skiffs are often towed behind mother ships. Often the mother ships look like fishing vessels and the pirates use designated fishing areas as cover. Thus, it is often difficult to tell the difference between fishermen and pirates. Alternatively, the skiffs can be launched from the beach

The pirates have been most successful against vessels that are travelling at a slow speed and have a low freeboard. Other factors that make crews and vessels vulnerable are where there has been inadequate planning and procedures; where the vessel is in a visibly low state of alert and where a slow response by the ship is evident. In situations where the crew have responded rapidly and have prevented the pirates from boarding, the pirates have often given up quickly, and attempted to find an easier target.

Since the NATO and EU counter-piracy missions were launched in the Gulf of Aden, there have been several foiled pirate attacks thanks to the presence of the navies. If the navies arrive in time, then the mere presence of a helicopter can deter the pirates, but there is not always a navy vessel close enough to respond. The area off the coast of Somalia and Kenya combined with the waters of the Gulf of Aden equals more than 1.1 million square miles. Thus, a navy vessel will not always arrive in time and once the pirates have seized a vessel there is no easy way to regain it. In such situations, the crew of the vessel are the first line of defence.

There are multiple examples where the crews’ actions have foiled an attack. In May 2009 the DUBAI PRINCESS managed to hold off pirates with water cannons until the nearest navy vessel arrived. Such incidents demonstrate that with basic preparation and training it is possible to significantly reduce the chance of a successful attack.

Some have argued that such anti-piracy training should be considered standard for the crew prior to a Gulf of Aden transit, so that the vessel be considered ‘seaworthy’. In The Marine Insurance Act (1906), Section 39 provides the following definition: “A ship is deemed to be seaworthy when she is reasonably fit in all respects to encounter the ordinary perils of the seas of the adventure insured.” Thus, it could be claimed that anti-piracy training is required for the vessel and crew so that they are ‘deemed fit’ to meet the perils of the Gulf of Aden. Such training motivates the master and crew and has proved to be the best defence against pirates. Training and drills, as highlighted in the “Best Management Practices to Deter Piracy in the Gulf of Aden and off the Coast of Somalia Feb 09” mean that the crew are ready to respond. As highlighted earlier, such responses mean that the pirates often withdraw their attack in search of an easier target.

Simple physical measures can also deter pirates. Options include: water cannons, barbed wire, and greasing or electrifying handrails. The crew can be provided with equipment such as Kevlar jackets and simple detection equipment. Minor adjustments can help dramatically. For example, most attacks are from aft, yet this is where radars often have a ‘blind spot’. Such vessel hardening is not excessively expensive and can prove to be a very economical investment, especially when the worst case scenario is considered.

Another measure that many ship-owners have considered is armed guards on board. However, most Underwriters warn against using armed guards and it may in fact prejudice ship-owners’ insurance cover. There is a risk that armed guards will fire upon innocent fishermen. Apart from the unnecessary loss of life, this would cause complications for the ship-owners and raise serious legal issues. Moreover, there is also a risk that by using arms, the level of violence will escalate and the pirates will use ever more potent weapons. There are also several legal issues with carrying arms on board: Flag State and Port State restrictions and licensing requirements.

" PIRACY IS NOT CONFINED TO THE GULF OF ADEN. AS A RESULT OF THE EXTENSIVE PRESS COVERAGE OF THE SOMALI PIRATES, THERE HAS BEEN AN INCREASE IN REPORTS OF PIRATE ATTACKS IN BRAZIL, NIGERIA, MALACCA STRAITS, THAILAND, VIETNAM AND THE SOUTH CHINA SEA. NOTABLY, THE NUMBER OF REPORTED ATTACKS IS FAR LESS THAN THE NUMBER OF ACTUAL ATTEMPTED ATTACKS. CLEARLY, THE SUCCESS OF THE SOMALI PIRATES HAS INSPIRED CRIMINAL ELEMENTS GLOBALLY."



Once a vessel is taken, there are various costs incurred, among them: consultant fees, transport of ransom, lawyers and counselling for the crew. Obviously, the ransom is the most publicised cost. Recently, negotiations with pirates have been drawn out for longer. In the example of the HANSA STAVANGER, the pirates held the vessel for four months and changed their negotiator several times, often reneging on agreements and increasing their demands. Ransoms have tended to range from USD 500,000 to USD 2 million. However, with high profile vessels such as the SIRIUS STAR, the pirates have demanded more. Reports suggest that USD 3 million was paid for this Saudi oil tanker in 2008.

Another cost that should be considered is the Loss of Hire or Earnings. A normal Loss of Hire insurance policy only covers a Loss of Hire due to physical damage. Therefore, piracy is unlikely to be covered.

Most costs are usually covered under a ship-owners’ Hull and Machinery, War, or Protection and Indemnity policy. Previously ship-owners have recovered money as a ‘General Average’ expense from cargo, though the case of the MALASPINA CASTLE has now challenged this assumption. In this recent case, the Hangzhou Cogeneration Import and Export Co, China had engaged Navalmar’s vessel MALASPINA CASTLE to ship a cargo of iron ore to China. The vessel was hijacked by Somali pirates while en route to China and was released after payment of a USD 1.8 million ransom. The ship-owner faces an additional cost of USD 2 million for negotiating, delivering and insuring the ransom in transit as well as potential claims from the vessel’s crew. Ship-owners generally pay the ransom and additional costs upfront and then seek pro rata reimbursement from all parties involved under the law of General Average. This principle equitably apportions costs resulting from voluntary losses incurred to save a vessel in distress. In the

case illustrated above, Hangzhou is disputing its share of the total costs. Even when there is cover, there have been cases where there is a significant delay and it has taken longer than a year for underwriters to reimburse the insured.

In order to avoid such conflicts and ensure cover, many ship-owners have chosen to take out specific coverage for the risk. This additional cover not only brings peace of mind but also ensures that there are no gaps in cover. Willis has worked with Special Contingency Risks Limited (SCR) and Maritime & Underwater Security Consultants (MUSC) to provide a product called Vessel Shield™. This product not only covers ship-owners for the ransom payment and all additional related costs, but it also seeks to mitigate the physical security risk as well, putting in place wide-ranging measures to train the crew, protect the vessel and plot the safest possible route through areas of pirate activity.

Although Vessel Shield™ counters many of the problems that ship-owners and their vessels face due to the threat of piracy, it does not solve the problem of piracy itself. Piracy in the Gulf of Aden is inextricably linked to the problems of Somalia. The failed history of the US and UN peacekeeping missions in Somalia and the lack of political will means there is no impetus for intervention. Nor is there any urgency for action: as the pirates in the region are proving to be commercial opportunists and are predominantly peaceful. However, in September 2009 off the Somali coast, there was an incident where the captain was shot dead because he refused to change his course. It is likely that this will remain an isolated incident and that pirates will refrain from violence because they are well aware that executing hostages makes payment of ransom far more difficult to secure. Therefore, the saga of piracy and the instability in Somalia is likely to continue.

" VESSEL SHIELD™ COUNTERS MANY OF THE PROBLEMS THAT SHIP-OWNERS AND THEIR VESSELS FACE DUE TO THE THREAT OF PIRACY"


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