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MARINE MARKET WHERE NEXT? November 2010

ii Willis Marine Review November 2010

Foreword 1IntroductIon 3ProtectIon&IndeMnItY(P&I) 4VIewFroMHouSton 6HullAndMAcHInerY 9ourAdJuSter’SVIew 10SuPerYAcHtS 12VIewFroMcHInA 14lIABIlItIeS&SPecIAlrISKS 16VIewFroMoSlo 19cArGo 20coMModItYtrAdInG 22tHeroleoFAnAlYtIcS 24VIewFroMSInGAPore 28

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ForewordWelcome to the 2010 Willis Marine Market Review.

This year we have seen further challenges in all parts of the maritime and insurance industries, including the recession, underwriting markets and the extended sanctions policies of the United Nations, the U.S.A. and the E.U.

Although some of our clients trade within areas unaffected by these new requirements, it is clear that the industry, as a whole, needs to recognise the momentum behind these issues and work collectively to find solutions.

We have grown our business to nearly 300 marine Associates across the globe, all working together in support of our clients. This means we are ideally placed to understand how these challenges may affect your business.

I hope you enjoy reading this review – we believe it provides an interesting insight into our business and current market conditions.

Alistair RiversChief Executive Officer - Global Marine

Willis Marine Review November 2010 �

� Willis Marine Review November 2010

Whilst the world fearfully debates whether there will be a double-dip recession, our shipping clients and the underwriting markets are both suffering from the same problem – surplus capacity. As we write, rates are softening yet fresh capacity is queuing up to join in, particularly in Lloyd’s, almost in defiance of logic.

The industry, although still facing a very difficult situation, has shown tentative signs of recovery. A year ago, we were reporting on a deeply depressed shipping market and a relatively stable marine insurance market. Since then the number of laid up vessels has reduced, the majority of freight rates are slowly increasing and ship values are no longer plummeting.

When the world economy collapsed in late 2008, the order book for shipping was at an unprecedented level. Many of these new build contracts have since been cancelled or renegotiated. While some new tonnage will be delivered in 2011, in shipping there is inevitably a time lag before supply can adjust to demand. In the meantime, the price of steel has hardly encouraged scrapping or ‘green recycling’.

Marine underwriters’ business plans for 2011 should make interesting reading as even the most optimistic capital providers are unlikely to be impressed by a promise to ‘lose less money than their competitors’.

IntroductIon


Piracy continues to be a huge concern, spreading from the Gulf of Aden into the Indian Ocean. Claims arising from piracy have exceeded $300 million and it is hard to see any solution in the short term. Meanwhile, the additional cover and support provided by a kidnap and ransom (K&R) policy has been invaluable to those who have elected to purchase such policies.

The increase in sanctions against countries such as Iran has brought new challenges in 2010. Underwriters and brokers are constantly working to ensure they remain ‘compliant’ within the various different sanction regimes.

The European Union’s latest sanctions directive is due to be ratified and while its impact on insurers is not yet clear, anyone even considering ways in which sanctions could be avoided may be prosecuted under the Anti-Avoidance Clause.

As profit margins continue to be squeezed, we foresee increased divergence between those underwriters who are looking to build or expand their accounts and those who may become increasingly defensive or selective. This means a market place where it will be essential to employ a sound broker!

In the following articles, we offer you a mixture of market reviews and ‘letters’ from our Willis Marine colleagues around the globe.

We hope you will find them both explanatory and interesting.

2009/2010FInAncIAlreSultSOn the whole, the 2009/10 financial year results for the P&I market were very positive. With underwriting almost breaking even and significant investment income, market free reserves were pushed to record levels.

However, as consistently highlighted in previous Willis publications, the overall market results continue to mask the significant differences between the strongest and weakest Clubs in the International Group (IG).

(AlMoSt)BreAKeVenunderwrItInGAcross the market the reported underwriting deficit was only 1%.

While the 2009/10 result is marginally worse than the previous year’s surplus of 2.4% (excluding the impact of that year’s unbudgeted calls), it still represents the second best underwriting result for the market in over 15 years.

Within this generally positive underwriting picture the variance between the best and worst Clubs is enormous: the largest individual Club underwriting surplus was 7% and the worst deficit was 23%.

HuGeInVeStMentBounceBAcKThe most significant factor influencing Clubs’ reserves was the resurgence in investment income. In 2008/09 the combined market investment loss approached $840 million. 2009/10 saw the position reversed, with investment revenue approaching $680 million. Not quite a complete bounce back, but nevertheless a hugely positive swing.

Again, even within this very positive overall investment position the divergence between the returns of individual Clubs was marked. Broadly speaking, those Clubs which retained significant equity portfolios reported returns on investment of between 10% and 19%.

ProtectIon&IndeMnItY(P&I)

The Clubs that had previously de-risked by disposing of their equity portfolios reported much more modest returns. However, even for these Clubs the commercial bond market performed well and returns were between 2% and 8%.

The graph below shows the progression of underwriting, investment and overall result for the market over the last 12 years. The solid line shows the results as reported, the broken line strips out the unbudgeted calls included in the two most recent reporting periods to show the ‘as-if’ underlying result.

IGMArKetoVerAllreSult–IncludInGInVeStMentIncoMe(loSS).AlSoSHowInGunderlYInGPIcture–‘ASIF’nounBudGetedcAllS

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-150-250-350-450-550-650-750-850

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Overall Surplus – ExcludingUnbudgeted Calls

Technical Surplus – ExcludingUnbudgeted Calls

MAterIAllYStrenGtHenedMArKet–newrecordleVelAs the graph demonstrates, the enormous contribution of investment income allowed an overall market surplus of over $640 million in 2009/10. In context, this single year surplus represents almost a 29% increase in free reserves across the market.

The overall result will mean a new high point in combined reserves for the market, some 20% stronger than the previous record level (in 2007/08).



– Ever-increasing liability under limitation regimes

– The continuing challenges of rating erosion, with extremely competitive newbuildings replacing highly rated older ships

In addition, individual Clubs will face their own particular challenges. As mentioned earlier in this section, underwriting results vary widely between Clubs. Two-thirds of the market already achieved around break even underwriting results in 2009/10. However, a third of the market has some way to go to get close to this goal. In theory therefore, three or four Clubs should be looking for significant double digit increases, while the remainder of the market should be seeking only inflationary increases, if any.

There should therefore be a relatively wide range of increases, but in reality we expect general increase targets to be set around an average level of between 0% and 5%.

A more comprehensive financial analysis and Club comparison will be included in the 2010 Willis P&I Review to be published later in the autumn. The P&I Review will also provide an update on the key market issues at that stage.

looKInGForwArd–2011renewAlSeASonWe are only two-thirds of the way through the 2010/11 policy year but thoughts inevitably turn towards the coming renewal season.

In the wake of the positive results outlined above there is a reasonable expectation of a more flexible renewal in 2011.

As ever it will not quite be that straightforward and a number of factors may well be raised by Clubs as the autumn progresses. These are likely to include:

– Clubs will inevitably point towards the uncertainty of future investment income. Investment levels of 2009/10 are unlikely to be repeated and with a number of major developed economies barely registering any growth there is the possibility of a double dip recession

– There was a 4.8% increase in net paid claims between 2008/09 and 2009/10, which suggests that inflationary pressures on claims levels continue, even if not at headline-making levels

– Continued pressure from regulators/uncertainty of eventual solvency requirements

2010 started without much fanfare. The worst of the economic downturn appeared to be behind us, the insurance market was still offering around 10% reductions on most premiums and businesses in the Gulf region seemed to be showing some signs of recovery.

This rather placid start to the year was then rudely interrupted by an event that is likely to change the face of both personal and business life in the Gulf Region and across the country.

The disaster in the Gulf of Mexico on April 20, was more than a wake up call. I doubt if there are many people reading this who are not aware of the basic details, so I’ll focus on the ramifications rather than the events themselves.

Following the Exxon Valdez spill in Alaskan waters, the Oil Pollution Act of 1990 (OPA90) had set various levels of liability. For many firms this was capped at $75 million. These companies were required to provide certificated proof of financial responsibility (COFR’s) which varied from 35 milllion up to $150 million depending on the nature of business being conducted.

There is legislation in the pipeline that may remove the liability cap completely, thereby making it unlimited. At the same time COFR requirements of somewhere between $300 million and $10 billion are being mooted.

There are many arguments and counter arguments. If these levels are set too high, some of the smaller oil/energy related companies will be pushed out, leaving the U.S.A. offshore oil business in the hands of only a few giant companies. Make the levels too low and there may be no clear deterrent.

The capacity of the insurance market varies depending on the nature of the business operations and whether it falls into the marine or energy sector. For ocean-going vessels there are P&I mutual clubs, but the energy sector capacity is somewhere around $1.25 billion. For higher levels there will need to be some new form of mutual, or other industry association, providing a pooling arrangement.

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It doesn’t stop there though. A new House Bill called Securing Protections for the Injured from Limitations on Liability Act, rather aptly known by its acronym, the SPILL Act, has been filed. This deals more with the legal recourse available wto victims and their families to obtain fair compensation rather than the specific maximum dollar levels.

The two main acts that will be amended or changed by this proposed Bill are the Death on the High Seas Act and the rather more widely known Jones Act. Both Acts are currently limited to providing compensation for direct economic loss. However, the SPILL Act would broaden this legislation to allow compensation for loss of care, comfort and companionship to surviving family members.

In 1990 you may remember the posturing of the insurance markets when OPA90 was enacted. Mutual P&I Clubs stood their ground and various new insurance facilities were created to fill the void. We wait to see what finally clears the President’s desk and becomes law in this latest scenario. We hope the reaction is swift and reasonable.

The legislative changes emanating from Washington are really just the tip of the iceberg. The legal system will be bogged down for years to come with claims and counter-claims. There is already a raft of claims from those people who helped with the clean-up. These are mainly inhalation claims both from the oil and the dispersal chemicals used.

The outcome of these court decisions will not only have a significant impact on risk management from our client’s point of view but will no doubt have a severe impact on the pricing models used by insurers.

Latest insured loss estimates put this disaster at somewhere between $3 billion and $5 billion which, in global terms, is not a huge financial loss. However, the impact will be felt for many years as we deal with the legal outcomes and changes in financial responsibility.

IMAGInArYreSIlIenceorInSAnItY?Is disciplined underwriting an art form that has been lost? Has increased capacity simply undermined the rules to such an extent that the fundamentals of supply and demand are no longer effective?

The assumption that new capital providers would bring discipline and require ever greater returns on their money does not appear to hold true within marine insurance.

However, within the larger composite insurers this does appear to be the case. Perhaps marine insurance itself is such a small part of their total turnover it is seen merely as a service to be provided to brokers and customers alike. Perhaps the loss of specialist insurers and syndicates whose fortunes relied solely on their marine underwriting results is another?

Throughout 2010, concerns continued to be expressed around the issues of crewing, the cost of repairs and good operational awareness. However, ship operating standards are a great deal better than a decade ago. The world fleet remains at record levels and perhaps this alone is responsible for premium volumes appearing to have increased, when the opposite is actually true at an individual vessel rating level.

The London market contributes to the view that profit can consistently be made from their ocean going hull ‘all risk’ book at the premium levels we see today. There has been a spate of large vessel losses since the downturn in the freight market late last year but the momentum of the marine insurance market has not changed. There is good profit in the writing of the ancillary insurances, most notably war risks, but it is at times hard to understand why new capacity continues to be added to an already saturated marketplace.

By the end of this year we are anticipating that at least four new Lloyd’s syndicates will open. The list of those with a fresh interest in hull underwriting therefore now includes Dutch Marine, Berkley, Barbican, Canopius, Liberty, SCOR U.K. and Skuld. As a broker we always welcome alternative underwriting security, but whether the market actually needs new capacity is arguable. It will certainly be hard for a newcomer in a buyer’s market.

HullAndMAcHInerY


In this situation, many of our shipowning clients are able to minimise the cost of their insurances. It is therefore understandable that we have seen a greater reluctance on their part to switch markets when the incumbent insurer can largely offer what they would like to achieve. From a client perspective the outlook is good: pricing is competitive, capacity for all but the largest risks is freely available and choice is greater than ever.

However, there is a worrying under-trend: we are seeing examples of claims being subjected to increasing scrutiny. Is this a return to the dark days of the early 1980s when underwriters turned to their lawyers to dispute or delay payments? This has been most noticeable amongst those underwriters with, arguably, the poorest results. A cynic could suspect that this may be an act of desperation by those whose results have become so dire their only salvation may be to adopt a more aggressive stance towards the settlement of claims rather than address the underwriting issues. We have even seen examples of some London underwriters challenging the leaders on a subscription placing when a claim is under consideration.

This is a very disagreeable situation and one that the market as a whole should be looking to redress as quickly as possible. A few underwriters operating this way in a significant market like London will quickly tarnish the reputation for all who operate within it. We should emphasise that our experience with the London company market tends to be better and they generally continue to adopt a more proactive and constructive approach to their claims negotiations.

So the warning signs are there: it is important to evaluate all aspects of a quotation and not to simply focus on cost. Equally vital is an insurer’s willingness to pay claims when they occur and to enter into constructive open dialogue when matters may be less clear. A carriers’ rating from S&P or A.M. Best is one aspect but so is our considerable practical knowledge and experience of how promptly they respond to our regular dealings. The Willis Quality Index® is founded upon this knowledge bank and reflects the actual experience of several thousand of our associates globally. It provides our clients with a valuable alternate insight to choosing their carriers at this challenging time.

AddInGVAluetotHeclAIMSProceSSThe economic downturn affected average adjusting towards the end of 2009. However, since then there has been a steady increase in instructions. The longer term trend continues to be fewer ‘routine’ claims suggesting a combination of better maintenance flowing from ISM procedures and higher deductibles. The difficult trading conditions also lead to longer periods between drydockings.

We continue to see a steady increase in the use of technology and insurers are adopting electronic systems in order to facilitate claims handling, approval and settlement. The advantages are clear: savings in overheads, improved control of their claim reserves and more accurate financial reporting to their shareholders.

Willis Average Adjusting has embraced the electronic age and all our average adjustments are now produced electronically. This speeds up insurers’ approval process and funds are moved along to the assured with minimal delay. Indeed, it is some time since an underwriter requested an old fashion ‘book adjustment’.

There is no doubt that electronic claims systems should improve the claims experience for insured and insurers alike; however marine insurance claims rarely fit an electronic, standard format. This has resulted in the need for average adjusters to play an even more critical day-to-day role in the management of claims and in particular complicated casualties.

ourAdJuSter’SVIew

�0 Willis Marine Review November 2010

The early involvement of the average adjuster ensures that all parties are represented and that underwriters can agree that the proper steps are being taken on a claim and prompt payments on account can be made to assist the shipowner. To increase awareness for vessel owners’ staff we have also arranged seminars so that policy coverage and the claims settlement process become clearer and less mysterious.

We have dealt with many interesting claims during the past 12 months. Piracy has been the topic of much discussion in the market and reminds the marine community that there is still a place for General Average in the 21st century. It remains the method for ship and cargo interest to contribute to expenses and losses incurred for the common benefit. Other recent claims have included those for machinery and salvage which also involved pollution prevention and mitigation expenses. The adjustments have included presentations to the P&I Clubs which reflect the fact that pollution prevention measures in grounding cases often overlap several policies. This is becoming more common in the market.

Looking ahead, we anticipate more complicated claims as global shipping activity continues to increase. Willis Average Adjusting stands ready to assist the maritime community by virtue of our expertise and forward thinking.

Willis Marine Review November 2010 ��

The economic downturn began to affect the yacht industry at the end of 2008 and into 2009. Newbuild orders reduced dramatically and chartering became almost non-existent. In an industry which previously seemed to know no bounds, euphoria gave way to concern as buyers left the market or held out for price reductions as they continued to fall.

Some owners stopped using their vessels and crew numbers were reduced. This generated a new marketing approach to owners for ‘reduced use’ programmes. Reduced use by owners was driven not so much by economic factors but more the fear of conspicuous consumption!

In the good times, yacht crews could almost name their price such was the shortage of experienced, qualified people. However, during 2009 and early 2010, only 10% of redundant crews could find a new job. Boat shows were full of yachts for sale and charter with prices being driven further down by more brokers chasing fewer deals.

From an insurance perspective, the industry-wide loss ratio remains good. The number of insurers wanting to underwrite superyachts remains steady, despite pressure on income resulting from declining hull values and a highly competitive environment (it is generally accepted that the impact of the financial crisis on the yacht industry is that values declined by around 30%). By late 2009, rates were lower than they had been for 10 years.

2010 has been a good time to be a yacht insurance buyer as there are more financially sound insurers than ever before. Competition drives soft rates, wide coverages and low deductibles. Capacity has become even more available as various insurers see yachts as a safer bet, especially when compared to their traditional hull books.

SuPerYAcHtS

�� Willis Marine Review November 2010

We see London and European insurers remaining as the market leaders with U.S.A. insurers generally more expensive and less flexible. Even though U.S.A. insurance buyers are now considering overseas insurers, the American market is still influential, particularly Chartis, Chubb, Ace and Travelers.

We are seeing greater use of ‘No Claims/Continuity’ bonus clauses. These were almost unheard of three years ago but are now more commonplace as insurers look to protect their business against increasing competition.

Buyers have slowly come back to the market and charter activity is steadily increasing. New orders are being placed, though at a much slower pace. Owners from the Europe, U.S.A., the Middle East and Russia continue to dominate the superyacht market. As the industry looks to grow, it seeks ways to find new buyers amongst the emerging wealth in China and India. These two nations have not traditionally had yachting cultures but that could change.

Looking forward into 2011, there are no signs of rate increases because, despite a number of reasonably large claims during 2010, the market remains profitable for insurers. Competition across all disciplines remains keen – particularly when a number of owners are simply looking for a price driven deal. Specialist brokers (of which Willis is at the forefront) are also striving to maintain their portfolio and revenues against this backdrop of lowering prices and competition.

The signs are that the yacht market is into a recovery of sorts but it will be a long time before the extravagance of the past decade returns. Not only is financial prudence much more in evidence but the conspicuous demonstration of wealth is seen as inadvisable.

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Is the Dragon no longer breathing fire? Has it turned inward, attempting to shield itself from the bloodshed that has occurred following the world economic derailment?

China is dependent on foreign trade. 50% of its gross domestic product (GDP) is dependent on shipping. Any event that affects shipping will therefore have a noticeable effect on the Chinese economy and a major impact on its economic future.

However Asia, whilst suffering a little, has managed to show great resilience to the downturn which plagued Europe and the U.S.A. China and India were the only economies to escape the economic meltdown and show growth in GDP against this disastrous backdrop.

We see tremendous opportunities in marine insurance as the global economy begins to stabilise. The ever-increasing need for raw materials required to feed the growth of China, in particular iron ore and coal, has led to many new shipowning companies being formed as investors take advantage of the demand for capesize bulk carriers.

Following the rise in the Korean shipbuilding industry over the last few years, it is believed that China will now also grow substantially in this sector. Many Korean shipyards have invested heavily in shipyards in China, both financially and technologically, in fear of being overshadowed by its future dominance.

Orders in Chinese shipyards have increased by about 40% compared with the same period last year. This, coupled with the tighter credit controls put in place by the financial institutions, means we expect to see continued growth throughout 2011.

Yards are also diversifying. Some, including COSCO Shipyard, Dalian Shipbuilding Industry Corporation (DSIC) and SWC are turning to offshore construction whilst others, notably China International Marine Containers (CIMC) now controls Yantai Raffles shipyard. China Communications Construction Company (CCCC) is purchasing Friede & Goldman, an offshore design company, and Oil companies such as China National Offshore Oil Corporation (CNOOC) are also establishing their own offshore construction companies.

We expect to see the China Insurance Regulatory Commission (CIRC) relax the requirements to foreign insurers which should see an influx of overseas insurers entering the market. However, we do not believe this will make a significant difference, as the market share of domestic insurers such as PICC/CPIC and Ping An accounts for 65% to 70%. Any such influx of overseas investment will bring both challenges and opportunities to the domestic market but the search to find the lost paradise of Shangri-la may never be fulfilled.

Despite the eagerness to penetrate the Chinese market, the reality is that the local terms and rating levels are generally described as ‘insufficient’ by international insurers and reinsurers when compared with similar risks from other areas of the globe.


You may ask how the domestic market can continue to sustain such levels, when presumably the portfolio is unprofitable? The answer is simple: the continued support of treaty reinsurers with plentiful capacity. In short, foreign insurers will need to take a long-term view!

As we have seen, Chinese insurers have weathered the financial storm and have become stronger as a result. Prior to 2009 no Chinese insurer carried a financial security rating by any of the international rating agencies. However, 2009 and 2010 saw PICC, Ping An and China Re all receive strong ratings of A1 (Moody’s), A (S&P) and A excellent (A.M. Best) respectively.

For P&I, although insurers such as PICC do offer such cover as part of a package, this is generally only granted to smaller inland and domestic tonnage. However, China does have a rival to the IG Clubs in the China Shipowners Mutual Assurance Association (CPI). The Club’s entered tonnage currently exceeds 26 million GT, which is greater than a number of IG group clubs.

Elsewhere, Lloyd’s has obtained a direct insurance license in China and XL is opening an office in Shanghai. There have been no significant personnel changes during the year which is perhaps an indication of the stability of the market?

So all indications would seem to suggest that we will see the Dragon grow from strength to strength.

Marine LiabilitiesIncluding Pollution and Environmental Liability

Ship Builders’ and Repairers’Including Products Liability

Ports, Terminals and ShipyardsIncluding Packages for Property, Equipment and Business Interruption

Professional IndemnityIncluding Classification Societies

Charterers’ LiabilityIncluding Piracy

Contractual LiabilitiesIncluding Consequential Loss

Excess Liabilities and Umbrella PoliciesIncluding Social Responsibility and Frustrated Legal Liability Insurance

Since the beginning of 2010 there have been a number of large claims, the most high profile of these being the catastrophe in the Gulf of Mexico. Underwriters are therefore likely to be asked to meet an increase in the cost of their reinsurance at the next renewal.

They are under growing pressure to increase income/profitability and so, in an ideal world, would like to be able to increase premiums/rates on their inwards business. However, there is surplus capacity in the market and so any attempt to apply premium increases on profitable business may well result in the loss of that business to competitors.

lIABIlItIeS&SPecIAlrISKS


At present, the market is only able to apply rating increases selectively and is still soft in certain respects. This situation may change towards the end of 2010 once reinsurance renewal costs have been established.

There have also been a number of significant losses that have occurred in the marine property sector, mainly due to several well-documented earthquakes including those in Chile and Haiti.

This is beginning to affect marine packages that include cover for property, not only from a pricing aspect, but also in respect of capacity. Accordingly, insurers are looking to reduce their aggregate exposures in potential earthquake zones.

Completing a package programme may require the participation of more insurers, as the level of earthquake activity around the globe is leading to much closer scrutiny of property coverage within a marine programme.

nortHAMerIcAWith Swiss Re estimating insured losses of up to $3.5 billion, the Gulf of Mexico disaster could become the largest loss the energy market has witnessed since the Piper Alpha explosion in 1988.

Whilst the final costs are not yet known, what is clear is that the clean-up will continue for a long time. There are an estimated 25,000 people engaged in this operation, either on shore or over water. The ecological impact will no doubt take a long time to manifest itself fully but London still has markets prepared to offer coverage to many of those involved in the ongoing clean-up.

Following the disaster, many clients have revisited their insurance programmes to review the adequacy of coverage purchased. Whilst capacity is price driven, London has been able to work alongside these clients to offer what may now seem to be more appropriate limits.

What is not known at this point is just how reinsurance markets are going to react. Most believe that the cost for all sectors of the market will rise.

SHIPYArdSWillis Marine provides a dedicated team specialising in shipyard insurance. We understand our clients’ business, whether their speciality is ship construction, ship repair or, as is frequently the case, a combination of both.

Shipyard operations encompass both onshore and offshore activities and Willis Marine provides bespoke insurance solutions tailored to reflect these diverse exposures.

We specialise in putting together, where appropriate, a package of insurances which can include: Builders’ Risks, Ship repairers’ Liability, Stevedores’ Liability, Public Liability, Marine General Liability, Property and other specialisms as required.

Whilst shipyards conduct much of their business under their own standard terms and conditions, there are occasions when their customers demand changes or that their own terms and conditions should apply. We have a dedicated team who, working in partnership with the shipyard, review the contractual liabilities and provide guidance and insurance solutions for any insurable risks and exposures.

This detailed knowledge of our clients’ operations means we can ensure that the relevant exposures are identified and appropriate coverage is arranged.


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The Scandinavian market remains financially strong with new entrants providing increased capacity.

In Norway, Amlin stands behind Vega writing marine, energy and cargo. In addition, the Standard P&I Club is working with Vega in their efforts to grow their Scandinavian portfolio. They have written a number of accounts during 2010 and are keen to establish themselves for the future.

We have also seen Beazley, IGI, Chaucer and Catlin setting up in Norway, primarily writing energy business. All this capacity has excellent rating and we expect several to expand into other marine classes.

Berkley has set up a large office in Norway handling marine, cargo, industrial and employee benefits. Many of the employees previously worked for NEMI. Berkley is becoming an active underwriter on marine. They have excellent security and deliver first class service to clients. Given their appetite, we believe they may have ambitions to become an alternative to Gard and Norwegian Hull Club as future claims leaders.

Alandia remains an active underwriter in Aaland but is concentrating on Scandinavian business.

In Sweden the market is stable and the three main underwriters are the Swedish Club, Inter-Hanover and Markel.

In the Norwegian market, despite the new capacity, we see Gard and Norwegian Hull Club maintaining most of their positions as claims leaders, but both Gerling and Codan have ambitions in that regard.

Gard is growing with recent organisational changes reflecting their attempt to encourage their underwriters to handle both Hull and P&I.

In Copenhagen, Codan has taken over the marine portfolio of Tryg Vesta. They have also undertaken significant organisational changes in Bergen. They are recruiting for both underwriting and claims personnel and may become an alternative for some clients as claims leader. Lloyd’s agency Chaucer has also commenced trading in Copenhagen.

In general the Scandinavian market is well-positioned and growing. Indications are that the market will remain flat over the next 12 months, with the possibility of performance-related bonuses for profitable clients.


In 2009 our message was simple: it’s a buyer’s market but beware of letting the low prices draw you into making compromises on quality, service and financial security.

This has not changed in 2010. The economic outlook has seen a return to growth, greater profitability and increased cargo shipments. There is some optimism in the market but the recovery looks to be tentative.

Competition in the global cargo insurance market remains fierce. The same activity which has dominated the market for the past couple of years remains: increased capacity, greater competition and reduced rates. There were two new Lloyd’s syndicates, Argo and Arch, writing cargo business in 2010. This was mirrored around the world with Hardy Syndicate opening in Singapore and Aspen Insurance in the U.S.A., where Bob Gallozzi is the new underwriter. This new global capacity means further appetite for underwriting new business at competitive levels.

PeoPleWe have seen the following personnel changes across the market:

Nick Derrick from Chubb to ArgoGerard Quinn from RSA to ArchAndrew Whitehouse from RSA to AllianzIan Everley RSA to XLMike Doherty from Willis to AonNick Holding from Factory Mutual back to MarketformPaul Ashworth from Gallagher to Axis In Singapore, Mike Davis from AXA to ZurichIn Hong Kong, Joanne Chan from AXA to Zurich

We have also seen Marsh acquire the insurance brokerage of HSBC in the largest broker consolidation since the Willis Group purchase of HRH in October 2008.

CLAIMSSo far this year there have been no significant claims; good news for buyers of cargo insurance. At the time of writing, the hurricane season has not had a direct hit, with Hurricane Earl only causing minor damage along the eastern seaboard of the U.S.A. We did however see a major catastrophe in the Gulf of Mexico, which may have

cArGo

clAuSeSAfter the introduction of the new cargo clauses in January 2009, the Joint Cargo Committee (JCC) has been working on updating the specialised clauses (Frozen Food, Frozen Meat, Coal, Commodities, Bulk Oil etc.). We expect to see the first draft of these at the beginning of 2011. The changes will replicate the general cargo clauses and will clarify the wording and coverage. Revised Incoterms are also expected to be released shortly. However, it appears that a year after their introduction the Rotterdam Rules are still some way from achieving the 20 signatures required for implementation.

In summary, it remains a buyer’s market for global marine cargo insurance. With no major cargo-related catastrophe this year and capacity increasing a downward pressure on prices will continue.


a long-term impact. This could become apparent with 2011 reinsurance renewals, however the current thinking is that limited change is expected.

electronIcInFluenceSBuyers of cargo insurance continue to look for greater operational efficiencies through the use of technology. At Willis, the RADAR system is one such solution.

RADAR provides a platform for the electronic creation of insurance certificates, online declarations, risk management analysis, claims notification, claims management and automated premium processing. Lloyd’s, through Xchanging, are also streamlining claims processes to speed up settlements from syndicates. This is being piloted in the Marine hull and energy markets, with planned introduction (if successful) to the cargo market in 2011.

The latter half of 2009 and first half of this year have confirmed that commodity prices are not solely governed by the simple elasticity of supply and demand.

Perhaps more than usual in an average year, we have seen a number of factors, including good old fashioned harvesting results, combining to create a volatile market place. This contradicts the underlying fundamentals of speculative interest, seasonal impact, environmental upheaval and political motivation. As a result of the global economic downturn, we saw the prices for many commodities fall dramatically. The relatively modest exposure in Asia has certainly been a factor for the revival for certain commodities. Even with China trying to avert an overheated economy, its impact on the world’s raw material’s markets remain undeniably strong.

Climate continues to have a far-reaching impact, causing sudden price hikes and unforeseeable volatility as the recent Russian wheat export bans and the impact on cotton prices following the flood in Pakistan amply demonstrate. Aside from the niche companies, many smaller-sized firms have ceased trading during the financial crisis. This has left the larger trading companies to buy up competitors, and diversify into the ownership of fixed assets such as refineries and mines. This provides them with a consistent supply of product without having to trade through the usual markets. The banks have an increasing influence, many of whom are now entering the commodity fields by providing cash for goods using the monetisation model.

Companies seeking to gain the competitive edge are looking to more sophisticated financing options. Further interest is from hedge funds, seeking to move away from higher risk financial instruments to counteract the impact of reduced margins. Slack consumer demand for oil in the western economies means prices have not risen above the $80/barrel mark for any sustainable period.

In insurance terms, we have seen a shift away from temporary FPSO storages towards more regular trading volumes, and in spite of the relatively depressed price levels compared to the peaks registered in 2008, this class of insurance still attracts insurers attention: high insured limits are maintained but the perceived good loss experience in this class has resulted in a highly competitive market for this commodity.

coMModItYtrAdInG


MetAlS(HArdcoMModItIeS)The economic recovery has resulted in an overall increase in demand for metals, particularly from China. This has meant an inevitable increase in prices, especially for non-ferrous London Metal Exchange (LME) traded metals and certain minor metals.

The emphasis for insurance remains on the high limits and capacity required for storage and the danger of misappropriation. However there is a strong market for these products and in the absence of any recent major losses, rates are likely to remain low.

AGrIculturAlProductS(SoFtcoMModItIeSor‘SoFtS’)Prices are fluctuating; sugar prices rose steeply in 2009 and have fallen back during 2010. Similarly soybean prices have fallen due to oversupply. Grain prices are rising to their highest level for two years following the Russian ban on exports, a position replicated in the coffee and cocoa markets. The price for coffee, cocoa and other softs are likely to increase in the longer term due to escalating demand for foodstuffs, especially in India and China. Due to the diverse nature of these commodities, underwriting these risks requires a good technical knowledge and specialist loss-handling skills.

Unlike oil, loss patterns for this class are typically far more attritional, with the cumulative effect representing the greatest risk to underwriters, Successful recovery and very detailed underwriting information is therefore essential. With the world slowly moving out of recession, the insurance markets continue to view commodities as an attractive opportunity. These types of risk call for specialised broking, dedicated servicing and experienced claims handling all of which we demonstrate within the Willis Commodities Practice Group.


‘tHeScIenceBeHIndtHedecISIon’If insurance were free, capacity unlimited and insurer solvency was never an issue, all maritime companies would insure every one of their risks.

Clearly this is not the case and so companies need to consider what risks they should retain and at which point buying insurance represents the preferred risk financing solution.

For many maritime companies, corporate governance requirements are becoming more commonplace. Chief Financial Officers and risk managers are being asked to explain and justify their risk financing decisions; “why has this risk been retained and this risk insured? What alternatives were considered? What methods were used to compare the various options?”

The requirement for a risk audit trail is where the use of analytics is able to help.

wHAtAreAnAlYtIcS?Analytics mean different things to different people. Traditional loss analysis meant reviewing historical losses and using them as the basis for predicting future losses.

tHeroleoFAnAlYtIcS


Analysts believe that past losses are not necessarily a reliable indicator of future losses for the following reasons:

– Businesses grow, decline, merge, acquire or are acquired

– Repair and rebuild costs may fluctuate, due to inflation, specific factors such as the price of steel or oil or new construction techniques and processes

– The number, type and value of shipments can vary from year to year

– Liability payments may change from year to year and across differing legislation

– Advances in technology, safety standards, and risk management techniques

Whilst historical losses are a valuable source of information, they are of limited value for risk management purposes unless the points noted above are also considered.

Actuarial analysis goes much further. The table highlights some of the differences between an actuarial and traditional style of analysis.


Actuarialriskreview traditionallossanalysis

Robust forecast of future frequency and severity of losses

Reflects changes in client’s assets, revenues, and operational processes

Where applicable, Actuarial reference to the loss experience of similar companies in order to provide additional modelling insight

�(only traditional benchmarking)

Optimal retentions and sums insured are determined to protect client whilst reducing the comprehensive cost of risk

Detailed description of potential loss outcomes to which client is exposed. E.g. ‘4 years in 5 there will be less than 10 losses exceeding the policy deductible’, or ‘there is a 1% probability that next years’ aggregated losses will exceed 100 million’

Actuarial premiums calculated for all sums insured and retentions under consideration, and compared with market premiums

Analysis can be used with insurers and their actuaries to help reduce insurance premiums

Analysis supports client’s enterprise risk management process and corporate governance requirements

The actuarial process involves reviewing the client’s historical loss frequency, severity data and where applicable, combining the client’s loss data with the loss data of other clients in the same sector.

This data is revalued so it reflects the client’s current operations. The actuaries model mathematical loss frequency andseverity loss distributions. These models accurately represent both the client’s historical and future frequency and severityof losses. The model is run at least 10,000 times, in effect forecasting the client’s losses for the next year 10,000 times, to capture all likely loss scenarios.

Gross Losses (without insurance)

Example Programme

$�00K Each and Every LossReturn Period (Years)

Percentile Total Loss USD Total Number Retained USD Number Ceded

Amount Ceded USD

1 in 2 50% 1,548,934 5 947,645 1 307,9901 in 4 75% 4,354,089 7 1,627,356 2 2,597,5941 in 10 90% 11,006,554 9 2,386,987 2 8,881,5331 in 20 95% 17,634,253 11 2,863,250 3 15,262,6861 in 50 98.0% 32,715,046 13 3,487,169 4 30,815,8511 in 100 99.0% 52,606,849 14 3,912,668 4 51,021,7641 in 200 99.5% 81,012,691 16 4,353,879 5 78,764,7641 in 500 99.8% 118,351,580 18 4,915,864 5 115,972,4071 in 1000 99.9% 162,198,999 20 5,603,463 6 159,208,489

Mean �,��,�� .0� �,��,�0� 0.�� ,�0�,��Std Dev 14,195,995 3.16 917,632 1.09 13,927,155


The table shows typical loss modelling results which enable the client to answer the following questions;

1. What are my expected losses next year?2. How much risk should I retain?3. What each and every loss and aggregate limits

of insurance should I buy?4. What is the actuarial premium for my

exposures and loss profile?

Losses may vary from the average in accordance with the standard deviation. Insurers will build in a percentage of this volatility into their required insurance premium, with the percentage varying according to market conditions.

In addition to answering these questions the analysis is equally valid for the consideration of alternative deductible structures and where applicable, for captive insurance company analysis.

wHowIllBeneFItMoStFroMtHISAnAlYSIS?For shipowners with large fleets, low deductibles, fully insured values and soft market conditions, insurance will be the preferred risk financing solution in most cases. However, there are still benefits to be derived from actuarial analysis:

– Corporate governance requirements can be met by objectively demonstrating that insurance is the most cost effective solution to the risks faced by the company

– An understanding of the forecast frequency and severity of losses may be used to plan for uninsured risks – e.g. Business Interruption

– Loss forecasts may be used to support discussions with lenders and investors

– The analysis can be used as a negotiation tool where premiums required by insurers are excessive relative to the losses forecast by the model


For shipping/logistics companies and commodity traders, significant each and every loss deductibles and aggregate annual deductibles are already a regular feature. There may also be vigorous negotiations with insurers based on the company’s loss experience. This provides them with the means to demonstrate positive differentiation from their peers based on their own exposures and forecast loss profile.

Willis Analytics is working with many marine clients and our experience demonstrates that once major marine companies have seen the benefits of actuarial loss analysis, they require it as a standard service.

We encourage you to ask for more details of how analytics can be used to the benefit of your business.

It’s hot! 30 degrees and humid with the possibility of some rain.

It is the same every day in Singapore. The weather forecaster (if there is one) has an easy job. Marine underwriting is not that simple to predict. Whilst we are looking toward the end of a mundane 2010, it may be the beginning of a silly season.

The traditional hard and soft markets in south east Asia have become a bit like Tofu – bland and squidgy – with underwriters not really sure what to do. Recently, a marine underwriter at Lloyd’s Asia (who would rather not be named) said ‘we strictly are not giving any reductions’ and followed this with ‘we have, however, written a couple of negative increases!’ Clearly an industry anomaly you may think, however it is commonplace to give larger continuity credits and other returns in order to outweigh increases.

Another comment was used by a Hong Kong broker who proclaimed as part of his broke – ‘a reduction’ is the new ‘as before’.

This year we have once again seen a soft cargo market in Singapore due to the amount of capacity available and favourable results for Underwriters.

VIewFroMSInGAPore


Whilst prices for general cargo business have remained steady, we have seen, in the project cargo market, the entry of several new players attempting to make their mark as leaders of this class of business. This has led to both reduced and sometimes unpredictable pricing methodology. World trade volumes are slowly increasing with Asia seemingly leading the way in terms of recovery. This is obviously good news for insurers and provides another reason for underwriters to justify their pricing rationale. There have been a few prominent changes in personnel during 2010; one of the most interesting was Mike Davies leaving AXA to join Zurich. This clearly demonstrates their intention to increase market share in the Asia region. Roman Reut, who left RSA earlier in the year, has joined Kiln to start writing Hull and Machinery business. In what is a hard fought sector, this could benefit the buyer as brokers and underwriters jostle for share.

One interesting piece of company news is that Boustead in Kuala Lumpur are in the process of defining their marine divisions with new owners AXA.

It has been a conservative year in the Asian hull and machinery market. Increases have been applied to poor performers but these have been lower than expected, especially when compared to previous years. There is a combination of reasons; Underwriters’ specific focus on implementing outsourced risk management programmes, the current claims environment could be described as benign and vast numbers of lay ups remain. So whilst profits are not high in the sector the rates have been holding up.

In recent months we have seen London and European markets become far more aggressive on Asian business. Brokers are clearly the masters of spin here; some Malaysian and Indonesian fleets have found favourable terms and better prices at the old coffee shop in Lime Street and its surrounds. According to Mathew Cannock, Underwriting Manager at Catlin Singapore, London is ahead of Norway and Asia especially in the offshore supply and accommodation sector – one particular instance was a 30% differential.


We have seen increased activity in the amount of German, Italian, Turkish and Norwegian accounts now being underwritten in Asia. As Jon Ranger of Watkins points out, “underwriters should be weary of unfamiliar older tonnage with shiny new figures, whichever market they operate in”.

So are we at the start of the silly Season? Are rates about to plunge? Whilst this would be exciting, we would anticipate that this is not going to happen in 2011 although perhaps one or two may have their fingers burned by the glittering lights of far flung accounts from the west.

We believe that the established Hull and Machinery/Construction underwriters will not be used as a market of last resort but will continue to be competitive. As a broker, 2011 should be anything but mundane for renewals. Whilst every market should be investigated for each owner, we are certain that recent activity in London and Europe will not precede a genuine fall in prices.


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Willis Limited, Registered number: 181116 England and Wales.Registered address: 51 Lime Street, London, EC3M 7DQ.A Lloyd’s Broker. Authorised and regulated by the Financial Services Authority.

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MARINE MARKET - Willis - Global Risk Advisor, Insurance ... · Welcome to the 2010 Willis Marine...

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