ond Bey he T h orizon - Willis Group · 2013-03-16 · reinsurers, the potential for profitability...

Beyond The horizon Marine MarkeT reviewapril 2012

Contents

MARINE MARKET REVIEW 2012

Foreword 1

Introduction 2 - 3

Hull and Machinery 4 - 5

Protection and Indemnity (P&I) 6 - 9

Special Risks 10 - 11

Average Adjusting 12 - 13

Cargo 14 - 17

Commodity Trading 18 - 19

Analytics 20 - 21

Super Yachts 22 - 23

View from U.S.A. 24 - 25

View from Asia 26 - 27

ForewordWelcome to the 2012 Willis Marine Market Review.

Over the course of the last year we have encountered many interesting challenges to our business and that of our clients. One of the great strengths of our marine business is its adaptability and with the support of our global associates we have continued to keep Willis at the forefront of the industry.

Our global marine philosophy continues to offer unrivalled solutions. The greater the problem, the better we are able to deploy and demonstrate our skills. The continued support of our long term customers and their continued recommendations to others is perhaps the greatest testament to our people and philosophy.

I hope you will find this year’s Review both interesting and thought provoking.

Alistair RiversChief Executive Officer - Willis Marine

MARINE MARKET REVIEW 2012

Willis Marine Market Review | April 2012 1

2 Willis Marine Market Review | March 2012

For most Marine insurers 2012 has not got off to the finest start with the recent loss of the cruise liner ‘Costa Concordia’. While this may have stiffened the hull market, its long term effects remain questionable. What may prove more damaging are the P&I and Liability aspects which could be of far greater significance to insurers as matters evolve throughout the year.

eConoMIC UnCertAIntYIn Europe, perhaps more than in other areas, we find ourselves living in difficult times. Hardship and social uncertainty affect many people, especially those in the Mediterranean based countries. The effects in our now globalised world permeate much further than that of course. The maritime industry depends heavily upon consumer demand which drives not just the requirements for finished products but also the raw materials needed to produce them. Europe has been one of the largest markets for both, so any lasting economic downturn has significant consequences.

The fast growing economies in Asia - most notably China - together with the emerging economies of India and Brazil and signs of recovery in the U.S.A. will all go some way to counter balancing these European woes. However, the maritime industry also depends greatly upon the financial services provided by banking, insurance and reinsurance institutions in Europe, who are themselves increasingly affected by growing concern over their investments in European sovereign debt. Another year of uncertainty therefore appears to be signalled for the maritime industry.

MArKet seCUrItYNot only is the financial stability of the banking sector under surveillance but also the vitally important Insurance and Reinsurance organisations that dominate so much of the global underwriting capacity. Quite where this will end remains uncertain at the time of writing but the rating agencies are increasingly focused upon all (re)insurers’ investment portfolios and as a result some notable companies have suffered significant rating downgrades. Insurance plays an essential role in protecting a business’s assets and balance sheets. Stability is essential for everyone and brokers will be considering these aspects carefully when selecting insurance carriers, not allowing pricing to be the only driver.

IntrodUCtIon

INTRODUCTION

2 Willis Marine Market Review | April 2012

Willis Marine Market Review | March 2012 3Willis Marine Market Review | April 2012 3

0

20

40

60

80

100

120

140

160

2008 2009 2010 2011

45%

$31m

24%

$78m

27%

$82m

19%

$145m

Success rate (%)

Total ransom (US$m)

Source: Control Risks 2012

PIrACYThe issue of piracy continues to blight our industry without any concerted resolution in sight. Some suggest that we now have a second generation of pirates who are less skilled than their predecessors, who have in turn retired to enjoy their ill gotten bounty. This seems a little far fetched but it is true that security measures being taken by many shipping companies have been increasingly effective. While the number of successful attacks may have diminished this has only served to increase the demands and expectations of those that do occur, which is demonstrated in the chart below.

INTRODUCTION

sAnCtIonsSanctions continue to be ramped up against those regimes who threaten stability and they continue to require the upmost vigilance on the part of clients, insurers and ourselves. The ongoing challenges in the Gulf region and knock on effects to insurance contracts for shipowners will remain an issue to be debated over the months ahead.

If this paints a rather bleak picture, it should be remembered that the maritime industry is perhaps the purest of all global businesses, it has seen and overcome many similar challenges in the past and there can be little doubt that the entrepreneurial spirit that drives so much of this industry remains intact.

HUll And MACHInerYReaders of our last review of the hull market may recall that among the topical issues was the fresh underwriting capacity which had recently entered the market, particularly in Lloyd’s.

While we as brokers always welcome any increase in the choice of underwriters available to our clients, we were rather bemused as to how the new capacity providers had been able to construct their business plans.

Since then, of course, events have moved on and during the last year we have seen a number of notable issues impacting on the hull market.

Firstly, the Newcastle based Marine Shipping Mutual (MSMI), an off-shoot of North of England went into run off after 40 years of operation. Although extensively supported by both European and London reinsurers, the potential for profitability when underwriting 100% of Hull values was exposed by the inadequacy of persistent market rating levels. It was indicative of the soft hull market in mid 2011 that there was no shortage of alternative underwriters offering to replace this capacity.

The next issue was the extent to which the financial crises within the Eurozone would impact on underwriters’ security and of course this is far from finished. Within the hull market the only casualty so far has been the French insurer Groupama, who were dramatically downgraded by the rating agencies as their parent company’s exposure to the Greek economy became apparent.

At the time of writing in late March 2012 there has been no further contraction in capacity. Quite suddenly the hull market has entered what we would describe as a mixed state of flux.

The trigger was of course the well publicised Costa Concordia disaster. While this hull loss of around USD 500m will be painful for the 25 underwriters who share in Carnival’s fleet insurances, it is unlikely to result in a contraction in capacity. Rather, we have seen a new determination by those underwriters that they will extract a ‘pay back’ from the rest of the world’s shipowners.

For the losses of the few to be paid by the many is a fundamental principal of how insurance works, or should do, except that there are plenty of other underwriters who did not have any share of the loss.

So we currently have a diverse hull market, with the majority of underwriters in the London market adamant that premium reductions are history and even renewals as before are unacceptable. While in other markets, particularly in the Far East and in Scandinavia, underwriters are less adamant and more inclined to be independent of the latest fashion in the London hull market.

What our clients want to know is will this firmer market stick?

Our crystal ball, which relies heavily on past experience, would suggest that underwriters need more than good intentions to turn a market. While we are the first to recognise that the quality of marine hull insurance policies can vary considerably (a claim is always a good test!), there is no escaping the fact that the price of hull insurance, like the price of guns and the price of butter, is a function of the relationship between supply and demand.

With world shipping in recession there is no immediate prospect of an increase in demand and the loss of MSMI can hardly be described as a meaningful contraction on the supply side.

So for now we would describe the firmer market as largely aspirational – and patchy. As long as capital providers are prepared to tolerate marginal returns from their pure hull and machinery book, a truly hard market will probably turn out to be a mirage.

HUll AND MACHINERy



HUll AND MACHINERy

ProteCtIon And IndeMnItY (P&I)renewAl At FebrUArY 20, 2012Firm, confrontational, variable, late, but pretty much as expected… As anticipated in the Willis P&I Review, despite the relatively modest announced general increases, the renewal at February 20, 2012 was disproportionately confrontational, protracted and on average concluded far later than normal.

Clubs entered the renewal in a perceived climate of increasing claims costs and volatile investment income. Shipowners, operating in one of the worst economic environments for a generation, approached the same renewal seeking any way to save costs. It was little surprise therefore that even inflationary increases were contested uncompromisingly.

On average we expect that, taking into account the value of changes in terms and deductibles, the overall result for the market at February 20, 2012 is likely to be close to the increases targeted (in the region of a 4% increase).

This average in no way tells the whole story however. Two particular features of the 2012 renewal were the variance in the way that different clubs approached renewal and the range in the renewal proposals for individual fleets. Some clubs were far more inflexible in their approach than others and against a low average the variance in offers was enormous.

It is no exaggeration to state, even excluding extreme ‘one offs’, that the range in renewal proposals experienced in the 2012 renewal was over 60% (i.e. the difference between the largest reduction and the largest increase was 60%). Differential loss records of course account for some of this, but such a wide variance is very unusual - particularly in the context of relatively modest, relatively uniform general increases. We would expect therefore that a number of clubs will have significantly higher results than others following this renewal.

Added to all of the above, the protracted nature of the International Group reinsurance negotiations ensured that the clubs were not in a position to grant late concessions and therefore there were few late capitulations. The unprecedented result of reinsurance arrangements are outlined opposite.

reInsUrAnCe resUlts At FebrUArY 20, 2012When is an announced reinsurance result not an actual reinsurance result?

The announced International Group (IG) reinsurance results were reported in our bulletin dated 13 January. In summary the announced changes were as follows:

Announced Cost Changes:

�� No increase in cost of combined reinsurance programme

�� 6% increase in world tonnage

�� The combined effect of no increase in total cost of the IG reinsurance programme and a 6% increase in world tonnage allowed average reductions of 6.3% in rates per GT

�� All classes of ship benefited, though largest reductions were allocated to tankers

�� US voyage additional premiums reduced by 30%

These cost changes are outlined in the graphs on page 8.

Structure Changes:

�� Reinsurance structure unchanged from 2011/12, but the Pool layers amended slightly.

P&I


P&I


Collective Overspill Protection (One Reinstatement)

USD 3.06B

Third Excess Layer (Unlimited Reinstatements)

USD 2.06B

Second Excess Layer (Unlimited Reinstatements)

USD 1.06B

75% First Excess Layer (Unlimited Reinstatements)

USD 560M

Pool - Reinsured by Hydra USD 60M

USD 45M

Individual Club Retention USD 8M

25% Co-Insurance (Hydra)

Aggregate of Passenger and Crew Risk USD 3.00B

Sub-limit in Respect of Passenger Risks USD 2.00B Limit

Oil Pollution USD 1.00B Limit

Pool USD 30M

Catastrophe/Overspill Call Liability of Shipowners Approximately USD 6.9B

Individual Club Retention: The Club bringing the claim to this layer of the Pool to retain 10% of the loss in excess of USD 45m up to USD 60m.

10%

The revised structure of the programme is shown above. In essence the Pool layer reinsured by Hydra was split into two layers, one from USD 30m to USD 45m, the second from USD 45m to USD 60m. This was engineered in order to amend the loss allocation formulas for contributions from individual clubs and also to introduce a new ‘individual club retention’ component. This new individual club retention means that the individual club bringing a claim to the new upper pool layer will have a further 10% retention of the loss in excess of USD 45m up to USD 60m. Both changes are intended to have more direct or quicker accountability to the individual club contributing claims to the Pool.

InternAtIonAl GroUP (IG) reInsUrAnCe strUCtUre At FebrUArY 20, 2012

UnPreCedented AMendMent to tHe ACtUAl reInsUrAnCe resUltWith the agreement of the IG and the announcement of the IG reinsurance results on 13 January (reported by Willis the same day) the reinsurance brokers for the IG concurrently set to work to place the reinsurance programme. With tragic synchronicity, later that same day Costa Concordia ran aground off the coast of the Isola del Giglio, Italy.

Bearing in mind the size and continuity of the IG reinsurance programme, it would have been surprising if, on its own, a single major event at that late stage in the renewal would have caused a material and immediate amendment to the terms. Shortly afterwards however the estimate for the loss of Rena, the container ship which grounded off New Zealand in October 2011, was increased by over 50%. The two factors combined, with the deterioration in the Rena estimate arguably being the key catalyst, allowed the following market of the IG reinsurance programme to demand an immediate re-rating.

Faced with the threat of not being able to complete the placement of the first layer of the reinsurance programme, the IG was forced into accepting a USD 40m additional premium.

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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Clean Tanker

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Other

Cost Changes by Vessel Type

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US Voyage Additional Premiums - Cost Changes

Vessels without SBTVessels with SBT

Dotted lines: ‘as if’ the USD 40 million additional premium was passed on at 20 February 2012


P&I

After a hurried consultation between the clubs in the IG, it was agreed that as the 2012 reinsurance rates had already been announced, they could not subsequently be amended and each club would have to ‘absorb’ their proportion of this additional premium.

As highlighted earlier, this turmoil simply added to an already fractious renewal season.

Inevitably, as a starting point to next year’s reinsurance renewal, this additional premium will form part of the 2013 renewal negotiations. (To put the quantum of this in perspective, we have included in the first ‘cost changes’ graph dotted lines in the 2012 year to show how they would have looked had the increase been allocated against the different vessel types in the same proportion).

exPeCtAtIons For tHe 2011/12 FInAnCIAl YeAr We commented on the factors affecting the financial aspects of the market at some length in the 2011/12 Willis P&I Review. The observations regarding claims levels, premium trends etc. remain valid. The factor worth mentioning is that equity prices continued on average to increase towards the end of the policy year. Consequently we would expect most clubs’ financial results to be better than might have been feared six months earlier.

Against this background we anticipate that the market will probably report a combined modest overall surplus when all the reports and accounts are published. As usual there are likely to be material differences in the performance of individual clubs and we will update on this when the full results are audited and published.

Firm, confrontational, variable, late, but pretty much as expected…


P&I


sPeCIAl rIsKs MArIne lIAbIlItY MArKet – “tHe ‘CostA’ eFFeCt”At the beginning of January 2012, Marine Liability underwriters were facing a difficult situation – increasing reinsurance costs, over capacity in the sector and a softening market.

Moving forward to the beginning of February 2012 – these underwriters have been presented with a potentially market changing incident.Marine Liability underwriters have always experienced problems in justifying general premium increases on the back of losses resulting from hurricanes, earthquakes and floods. However the ‘Costa Concordia’ casualty is a genuine maritime loss, for which the majority of them will be paying through their participation in the International Group of P&I Clubs’ Reinsurance Programme.

As reviewed in the previous article, the renewal of this programme was quoted on an ‘as expiring’ basis prior to the loss and the subsequent placement stalled as, post ‘Costa’, underwriters decided to put down their pens and wait for more premium. This subsequently materialised in the form of a 20% loss additional premium on the first layer of the Group’s programme.

Underwriters are hoping that this now drives through a general hardening in rates throughout the sector and many are stating that they will be looking to achieve minimum 5% increases going forward.

Whether this can be achieved market wide is as yet unclear, as there is still over capacity in the sector and income hungry participants may well be more willing to compromise on desirable business than incumbent markets seeking premium increases. Time will tell.

sHIPYArds – “to GUArAntee or not to GUArAntee”Conflicting underwriting philosophies exist within the Marine and Energy markets that affect the insurance solutions available to shipyards and purchasers of ships.

Insurance for construction risks in the Marine market under the Institute Builders Risks Clauses ceases upon completion of the construction risk and delivery to the owner. In the past Marine underwriters offered guarantee coverage to shipyards, traditionally for a 12 month period, as part of a package for builders risks. Those shipyards that have maintained the breadth of their package policies over a number of years may still benefit from this coverage.

However, where insurance was purchased on an individual basis or in cases where guarantee cover was never consistently included under a

package, latterly Marine underwriters have generally been reluctant to offer this coverage either to the shipyard or to the purchaser.

The attitude of the Marine market contrasts with that of the Energy underwriters where, in the main, the Welcar Form is used for construction risks. This automatically includes the option to purchase Maintenance and Discovery coverage for a basic 12 month period after completion of the construction risk and delivery by the shipyard to the purchasers. The coverage allows for some flexibility in extending the 12 month period.

This anomaly does cause some confusion with both shipyards and purchasers and it is the Broker’s role to explain the inconsistencies of the two markets. Most insurers are looking to increase their range of products and, in order to eliminate this anomaly, we would like to see members of the Marine market align themselves with their Energy colleagues on this issue.

PAnAMA CAnAl - “sIZe MAtters”The expansion of the Panama Canal is going to have a significant effect on global trade - especially in the U.S.A. where the new larger canal will mean more than just larger ships calling at East Coast ports. It is going to drastically change the country’s port and rail infrastructure and ship movements.

The USD 5b canal expansion will allow ships of 13,000 TEU capacity to transit the canal, meaning that the transit time to the East Coast of America of 21 days from Asia will be very similar to the Suez route and, whilst not as quick as the Intermodal System of 18 days, will avoid some of the reliability issues suffered by the Railroads. The expansion will also allow the majority of the world’s cruise ships to transit.

SPECIAl RISKS


So what does this mean for the U.S. Ports Industry? It will certainly reduce reliance upon U.S. West Coast routes to and from Asia, not only the ones carrying oil, but also the ones bringing General Cargoes.

Panamax vessels that would typically call at West Coast ports and then have their offloaded goods shipped out to the rest of the U.S.A. via rail or truck will now be able to transit the canal and bring goods and products closer to their final destination. For instance, instead of a vessel calling at Los Angeles and unloading goods that would travel across the country via the U.S. intermodal system, cargoes will be able to steam through the canal and deliver goods to New York, Houston or Miami.

One issue to be addressed is the Houston Ship Channel. The channel is 40 feet deep and, with large infrastructure beneath, deepening is virtually impossible. The solution may be more lightering operations. Large ships come in, the cargo is broken down onto smaller vessels, and products arrive at port. Lightering could be big business in the future.

Some East Coast ports that are already expanding to receive post-Panamax vessels will have the advantage in 2014, whilst those that do not may well lose out to neighbouring ports. In the end, traditional shipping and port operating fundamentals are going to be reinvented when the expanded canal becomes fully functional. The project poses many questions for shipowners, port operators and many more involved in the Maritime industry.

AsIA – “tIGer eConoMY now?”With Asia now home to around half the world’s merchant fleet, 14 of the world’s top 20 Ports, and three of the world’s largest shipbuilding nations, the maritime and supporting industries are adopting a more sophisticated attitude to risk which has led to an increase in demand for more complex liability programmes and an opportunity for the market to expand.

Within the region as a whole, the Marine Liability market shows comparatively low rates of insurance penetration. However, as the flow of capital continues to drive strong economic development and the demand for more sophisticated insurance products increases, it is showing signs of steady growth. This has in part been due to a greater understanding of risk management in the wake of the financial crisis and the recent natural disasters in Australia, Japan and Thailand. Local and foreign insurance companies are competing to capture this growing market share and, in the prevailing market conditions in the region, rates are under pressure due to the amount of available capacity.

SPECIAl RISKS

lloYd’s oPen ForM 2011 The prospect of having to sign a Lloyd’s Open Form (LOF) salvage agreement is not one any shipowner looks forward to. It means that the vessel is in imminent danger. Whilst this is a difficult time for any owner, it is particularly difficult for a container or general cargo vessel owner. And, if it is a large container vessel, the prospect of having to collect General Average and salvage security can be one of the few things to make an average adjuster wake up in a cold sweat!

Large container vessels operate to tight schedules, establishing exactly what cargo is on board can be problematic, and there is the difficulty of establishing multiple owners of cargo consolidated into one container. From experience, many of the smaller cargo interests will be uninsured. The security collection process can turn into an international exercise involving shippers, receivers and cargo insurers from all over the world.

When a shipowner signs a LOF agreement, it triggers the salvage and General Average security process and the average adjuster and Lloyd’s Salvage and Arbitration Division go into action.

The tried and tested system has just about coped with vessels carrying up to around 4,000 TEU. However vessels are already in service which are three times larger than this and there are even bigger ones being built, up to 18,000 TEU.

With this in mind, the Lloyd’s Salvage Group, which manages the LOF format, has reviewed ways of:

1. streamlining the salvage security collection process2. reducing the amount of correspondence with cargo interests 3. dealing with cargo that is unrepresented at the arbitration hearing

and low value cargo

The result of this working group has been a revision of both the LOF contract (LOF 2011) and the Lloyd’s Standard Salvage and Arbitration (LSSA) Clauses, with the intention of simplifying the salvage award process for container vessel cases.

We are happy to endorse these new clauses and look forward to fewer procedural nightmares for shipowners and average adjusters alike!The key revisions are as follows:

ClAUse 13 (lssA ClAUses)The parties agree that any correspondence or notices in respect of salved property which is not the subject of representation in accordance with Clause 7 of these Rules may be sent to the party or parties who have provided salvage security in respect of that property and that this shall be deemed to constitute proper notification to the owners of such property.

Up until now, Clause 7 notices for unrepresented cargo interests have had to be addressed to the cargo owner. Under the new clauses, the amount of correspondence will be substantially reduced by allowing the notices to be sent to the guarantors (insurance companies).

ClAUse 14 (lssA ClAUses)Subject to the express approval of the Arbitrator, where an agreement is reached between the Contractors and the owners of salved cargo comprising at least 75% by value of salved cargo represented in accordance with Clause 7 of the Rules, the same agreement shall be binding on the owners of all salved cargo who were not represented at the time of the said approval.

With previous editions of the LOF contract, even if some parties reached a salvage

AVERAGE ADJUSTING


AVerAGe AdJUstInG

AVERAGE ADJUSTING

settlement with salvors, a full arbitration could still be required in order for the unrepresented cargo’s proportion of the award to be made. Those who settled might lose the benefit of that settlement as all of the salvage payments are allowed in General Average and re-apportioned over the General Average contributory values, as provided by the York-Antwerp Rules.

Under this new clause, if over 75% of the represented cargo interests reach settlement then, with the Arbitrator’s approval, the salvage settlement will cover all of the cargo.

ClAUse 15 (lssA ClAUses)Subject to the express approval of the Arbitrator, any salved cargo with a value below an agreed figure may be omitted from the salved fund and excused from liability for salvage where the cost of including such cargo in the process is likely to be disproportionate to its liability for salvage. Again, prior to the new clauses, salvage security was collected from all interests irrespective of value. With consolidated cargo this meant obtaining security from relatively small cargo interests which are often uninsured and therefore have to provide cash deposits.

Under the new clauses, and with the approval of the Arbitrator, it will now be possible to exclude cargo below an agreed value. This will considerably reduce the amount of time and effort required to collect salvage security from minor cargo interests.

This system has been employed by average adjusters in General Average claims for some years.

We are happy to endorse these new clauses

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CArGooVerVIewCargo clients continue to enjoy the benefits of a soft market, with reductions in both premium and deductibles and increases in limits at little or no additional cost.

From an insurer’s perspective, several years of reductions in both premium and deductible levels are now being reflected in their results, with attritional losses narrowing the gap between profit and loss. The natural catastrophes in Australia, Chile, Japan and Thailand affected profits but a relatively mild Hurricane season in the U.S.A. provided some relief.

In normal circumstances, this should mean that we are at the bottom of the cycle and we should be moving into a hard market – but these have been anything but normal circumstances!

Despite dwindling returns, competition remains fierce amongst insurers, driven through over capacity fuelled by a flurry of new entrants to the marketplace.

At the same time, clients have begun to show signs of emerging from the worst effects of the credit crunch with an increase in both shipped values and volumes. In particular, the increase in oil prices, resumption of construction projects and continued economic growth in the BRIC countries are contributing directly to an increase in premium volumes for the cargo market.

In view of this, we see no end to the soft market condition for the foreseeable future.

AttrItIonAl lossesA harsh economic environment, together with an increase in commodity prices and consumer demand for the latest electronics, can only lead to one direction for the cargo market – increased losses.

The frequency of hijacking claims has significantly increased since the onset of the economic slowdown, with metals, electronics and consumer goods in particular being targeted. Historically these losses occur in the same high risk countries; however this has now spread to low risk countries such as Chile. As a typical shipment may be valued at between USD 500k – USD 1m, this is having a big impact on insurers’ results.

CAt lossesThe cargo market has been particularly affected by Natural Catastrophe (‘Cat’) losses, such as those emanating from the Australian floods at the beginning of 2011. The movement of storage risks out of the traditional property markets and into the Marine market saw many marine covers see large flooding losses during 2011. The lower deductibles seen in the Marine market meant that clients saw their contribution to these losses reduced, enabling better cash flow for recovery to get their business fully operational once again. The beginning of 2012 has seen a repetition of the flooding in many areas of Australia. The changing global risk exposure is becoming an underwriter’s biggest challenge in maintaining profitability. It is still very early to tell the impact a second year of losses may have on the cargo market.

The Tohoku earthquake in Japan also led to many marine related losses, especially in the manufacturing areas of Northern Japan. Many of these were uninsured however as Japanese polices traditionally exclude (earth)quake cover. Many clients’ global supply chains were badly affected as a result. This same impact was also seen in the floods that hit Thailand, with manufacturers closing factories as a result.

Losses emanating from the Hurricane season in the U.S.A. did not affect underwriters in the same way as in previous years. The relatively calm second half of the year prevented the market from turning unfavourably for insurance buyers.

We have highlighted some of the top 10 reported incidents in the past 12 months to Lloyd’s of London claims agency, Xchanging. The list does not include piracy related claims or ‘Cat’ events.

CARGO


CARGO

loss descripTion locaTion aMounT usd

Military radar equipment in containers missing/possibly damaged

North Africa 140,000,000

Misappropriation of 140,000 MT soybeans

Indonesia 93,000,000

Satellite damage. Failure of crane hydraset, resulting in satellite being sprayed with hydraulic fluid during acoustic testing

U.S.A. 15,300,000

Alleged substitution of 5 containerised shipments of copper cathode with rocks, in transit

Tanzania 12,000,000

Theft of trailer of pharmaceuticals Quebec 10,980,000

Contamination of feedstock (heating oil) in storage with PCB’s

U.S.A. 8,500,000

Fire in tobacco storage/ processing warehouse

Zambia, Africa

6,100,000

Fire in warehouse destroying aviation spares/parts

Italy 5,500,000

Damage to steel coils due to collision between carrying vessels, GA declared

China 5,500,000

Loss of jet fuel Northern Europe

5,000,000

Figures provided by the Joint Cargo Committee on 01 august 2011. Figures rounded. Losses above do not inCLude CLaims For ga, Cat events or piraCy reLated CLaims.

PIrACYAlthough piracy off the coast of Somalia is not a new risk, it seems that the Marine market and especially cargo underwriters are starting to feel the full effects of General Average ransom payments. Intriguingly, the Marine hull and cargo markets have reacted very differently to this problem. Hull underwriters will charge additional premium for vessels transiting the Gulf of Aden, through War risks, whereas cargo underwriters will not exclude this coverage since it remains as standard with ‘All Risks’ (A) Clauses.

As the pirates have moved from being opportunist thieves to more highly organised crime organisations, ransom payments have increased as they now appreciate the value of the goods in their control.

Many companies involved in shipping commodities such as oil, metals and grains will often charter an entire vessel, with cargo values often exceeding USD 250,000,000. The contribution from cargo underwriters, for their General Average contribution, is increased with the reduction in the value of vessels.


tHe InsUrAnCe MArKetThe flood of new entrants to the cargo market continues, with new entrants including:

�� U.K.: Alterra, Apollo, Channel, Flagstone, Pro-Sight and WR Berkley have started writing cargo as Lloyd’s syndicates. Aviva and Northern Marine, who previously only wrote domestic U.K. business, and NIPPONKOA, who previously only wrote Japanese Risks, have started writing international accounts.

�� U.S.A.: Ascot syndicate have confirmed their intention to write cargo accounts in the U.S.A.

�� Asia: Korean Re and Samsung have both started to expand their international portfolios.

�� Europe: Swiss Re has announced they will be establishing Marine offices in Genoa and Zurich to write primary risks.

There have also been a couple of departures: Argenta Asia, following heavy flood losses in Thailand, and Starr Marine have closed their Continental Europe offices.

Corporate pressure for underwriters to grow their cargo book has continued, especially in the second half of the year. It should be noted however that the average size of premium reductions at renewal was smaller than seen in recent years.

In addition there are an increasing number of accounts where insurers have been prepared to walk away from risks rather than continue to write them at levels that they view are unprofitable. Whilst there is little sign of change for 2012, adverse losses and reduced margins may force a change in underwriter focus.

CARGO

KeY PeoPle MoVeMentsSince our last Market review, the continual merry-go round of people between companies has reached new heights:

James Lawson from Tokio Marine to ZurichJohn Gibson retires and is then employed by Tokio MarineLinda Dias moves from Groupama to Pro-Sight John O’Brian starts at Axa DubaiMatthieu Daubin transfers from Axa London to head up the Cargo Team in ParisPedro Mairos starts at Axa LondonLuca Ronsisvalle from Willis to Axa SingaporeAndrew Thorpe from CV Starr to AlterraBart Grefe from CV Starr to AlterraCaroline Monnikendam from Ace to CV StarrJo McWhirter from Chubb to AmlinAndy Carter from Amlin to WR BerkleyDarren Long from CNA to ChubbAndy Corton from Travelers to PembrokeNick Derrick from Argo to Travelers (starting in Q1 2012)Grant Witheat from Pembroke to ChannelPaul Gooderson from BRIT to Argo (starting in 2012)Gerrard Quinn from ARCH to BRITJames Gaiger from Markel to Millennium (starting in May 2012)Richard Burnett from Ark to Markel (starting in Q1 2012)


CARGO

A harsh economic environment, together with an increase in commodity prices and consumer demand for the latest electronics, can only lead to one direction for the cargo market – increased losses


CoMModItY trAdInG2011 will be seen as a year of chequered fortunes by economists, investors, traders, and all other stakeholders who were affected by the vagaries of the commodity markets.

Sudden surges, especially in the first quarter, followed by equally dramatic price drops when the global economic outlook changed caused headwinds for most of the commodity classes towards the end of the year.

In theory, supply and demand should be closely monitored when trying to predict where prices should go. For a number of years, however, the global macro-economic outlook has been added to the key drivers which affect prices.

Investors keep tabs on the weather, harvest and output production, global demand, supply disruptions but now also need to consider changes in consumption patterns, swings in acreage utilisation, global currency markets and causal links with other asset classes, plus government interventions and the ongoing debt crisis.

Oil and precious metals saw major price surges following the depressed growth outlook for the Western economies struggling with sovereign debt crises and political unrest following the Arab Spring Revolt. These reduced slightly towards the end of the year on the back of a strengthened U.S. dollar. For 2012 we expect fairly high price levels to be maintained, with markets caught between ongoing concerns over the Iranian stand-off and slackening demand for refined products.

Also instrumental in 2012 will be the China effect, which has previously profoundly reshaped the world markets for industrial metals, cotton, sugar, corn, oil and played a key role in affecting a string of other commodity classes. Will the Chinese economy succeed in a soft landing, or will inflationary uncertainty and currency exchange rates ensure volatility will remain high?

Fiscal tightening, government intervention, very slow debt erosion and the Eurozone debt crisis will have a major impact in 2012 and this will undoubtedly prove to be a fascinating year for future historians.

Against this backdrop, the commodity insurance segment has seen many of these factors mirrored in increasingly worse technical underwriting results and deteriorating combined ratios, in turn causing some commodity allocated capacities to be reallocated or even curtailed altogether.

The market has seen seismic shifts, with the coming and going of well established key players, and new capacity snapping up market share through outright acquisitions, team shifts and a focus on certain niches.

In an effort to curb their worsening commodity plight, commodity insurers are increasingly tightening clauses and scrutinising broad policy wordings, with more emphasis than ever before being placed on technical underwriting skills and enhancing recovery processes. Prices are beginning to edge upwards for technically unsound risks.

The Marine market is also witnessing the coming-of-age of dedicated marine platforms, offering previously unseen transparency to all parties involved on marine risks.

In addition, commodity insurance buyers are displaying greater than ever corporate governance toward their insurance procurement strategies, with an increased awareness of the need for mathematically and statistically sound pricing strategies, and a greater willingness to put their programmes through a regular structured tendering process.

The ongoing threat of piracy shows little sign of abating in the near future, leaving the commodity markets struggling to find an answer to its geographic expansion and the increased use of violence. The presence of armed guards on board of ships is one control that is being used to curb the billion dollar losses incurred so far.

For the insurance buyer facing these challenges, satisfaction will critically hinge on the in-house knowledge, familiarity and expertise of their broker.

COMMODITy TRADING


COMMODITy TRADING

Instrumental in 2012 will be the China effect, which has previously profoundly reshaped the world markets

AnAlYtICsAlthough our clients value their partnership with insurers, they want to engage with them on a level playing field where both entities are knowledgeable parties to the insurance contract. While the growing sophistication of insurers’ actuarially derived underwriting models is well publicised, many of our clients have felt at a disadvantage prior to developing their own loss models.

However this is now changing, with more and more clients working with our analytics team to develop analyses that can be presented not only to their internal treasury and finance divisions but also used as the basis for insurance negotiations.

2011 has highlighted two particularly challenging areas in the Marine industry where detailed actuarial analysis can be of real benefit:

1. The impact of commodity price volatility on transportation and storage risks.

2. The expected and unexpected impacts of natural catastrophes, notably with respect to storage risks and supply chain disruption.

CoMModItY PrICe VolAtIlItY For the world’s major commodity traders and transporters, sophisticated commodity price and currency hedging strategies and state of the art logistics are a given. However, only a subset of these companies applies the same technical rigour to the retention and insurance of their storage and shipment exposures.

In a world of stable commodity prices, consistent shipping methods and ‘soft’ insurance market conditions, insuring from ‘the first dollar’ has been the obvious solution. However, the picture is more complicated under volatile and dynamic trading environments.

From steel to oil to grains, spot prices in 2011 changed substantially and rapidly. The result: potential underestimation of the severity of losses, sub-optimal risk retention structures and inadequate insurance arrangements.

Similarly, growth and competition has led to an increasing diversity of destinations, shipping methods and storage facilities. The impact: potential underestimation/incorrect profiling of loss frequency, leading to higher than expected aggregate levels of retained risks.

For both of these scenarios, actuarial loss forecast models offer commodity traders and shippers an objective, scientific assessment of their exposures, storage and shipping risks as they stand today (rather than as they stood over the previous five years).

The result: while clients have limited ability, or in many cases desire, to tame the volatility of the commodity markets in which they operate, they can seek to understand and optimise the management of their transportation and storage risks and, in turn, minimise their cost of risk.

ANAlyTICS

0%

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Source: IndexMundi

300%

2007 2008 2009 2010 2011

WheatCrude

Metals


nAtUrAl CAtAstroPHesThe year 2011 encompassed over 820 natural hazard events, many of which were severe natural catastrophes.

In addition to the Japan earthquake/tsunami events that happened in March 2011, the severe flood events in Thailand that occurred between August and November 2011 hit the Marine market hard, in particular with respect to damage to storage, business interruption and supply chain disruption. The total insured losses for the Thailand flood events are currently estimated at around USD 15 to 20 billion.

In the same way as clients can use analytics to understand and optimise the management of their transportation and storage risks in relation to commodities, clients can also take steps to improve how they manage their Nat Cat exposure and negotiate it with the market.

Identify the Nat Cat ExposureNatural hazards ranking assessments can promote improved awareness to commodity traders and shippers and help to shape their strategies for managing their exposures to natural catastrophes such as the Thailand floods scenario in the future.

An example of this type of assessment is a hazard ranking matrix. This compares the likely intensities of a variety of hazards across multiple locations, often represented in the form of a heatmap. This kind of tool can be very useful to inform risk managers about sites that might benefit from further risk quantification and /or a CAT risk engineering survey.

ANAlyTICS


For earthquake, windstorm and river flood risk the assessment is based on a single return period per hazard i.e. a standard probability of each event occurring. For high frequency hazards such as hail, zones with very low to extreme hail intensities are used to derive a relative view of risk, whereas for tsunami risk the intensities are derived from the height of a location above mean sea or lake level as well as the distance from the respective body of water.

The next stage of the analysis would be to calculate the probability of the hazard occurring for each location, combined with its likely severity, utilising fully probabilistic catastrophe modelling.

Quantify the Nat Cat Risk Clients can utilise probabilistic natural catastrophe models to quantify their natural catastrophe risks for given perils and/or combined perils, for example for storage, warehouses and cargo. Commodity traders and transporters in particular can get a better understanding of their loss expectancies for property damage on aggregated portfolio and/or location level. The results are often presented in the form of loss exceedance curves.

In many cases the completion of a catastrophe risk assessment can result in a less conservative view of risk that, again, provides organisations with valuable leverage in insurance negotiations.

Spot prices in 2011 changed substantially and rapidly


sUPer YACHts PrICes stAbIlIse wHIle rAtes ContInUe to slIde In A bUYer’s MArKet The turbulence in world economic markets is still affecting the large yacht market. New build orders remain slow with potential owners driving harder and harder bargains – playing one yard off against another with the aim of getting builds done in record time and at hugely reduced cost when compared to three to four years ago.

However, both the Sales & Purchase market and the Charter industry showed slight improvement during the Mediterranean summer, which has continued into the Caribbean season. Prices were largely at 80% of those seen in 2008 but at least the downward curve has begun to flatten. We are not seeing anything like as many ‘lay-ups’, with money beginning to flow back into the refit system and refit yards reporting a full winter’s order book.

Boat shows are still offering many yachts for sale at bargain prices but the opportunist buyers may well have reached the conclusion that we have reached the bottom. It appears that the Yacht Sale & Purchase brokers have had, on many occasions during the year, to settle for much reduced sale or charter commissions than perhaps they are accustomed to.

From an insurance perspective, the client’s desire for a premium based deal has never been stronger. The market loss ratio remains satisfactory although not as good as in previous years. We have seen a significant number of new insurers wanting to be involved in large yachts.

A combination of modest loss ratios, the hull market continuing to underperform and increased market capacity has seen rates continue to slide. In our 2010 review we noted “by mid-late 2009, rates were lower than they had been in over ten years”. Rates have continued to decline and are probably an additional 15% lower today.

The markets have long looked for a ‘game changing scenario’ and perhaps events in Italy and Greece early in 2012 may present them with just such an opportunity. London and European insurers remain the dominant force. However, the well publicised problems in the Eurozone have caused some owners (particularly those in the U.S.A.) to take a closer look at the stability of some European markets.

no ClAIMs bonUsThe common practice of offering No Claims, Continuity and even Low Claims Bonus clauses has previously enabled insurers to protect their existing books but, with claims on the increase, these incentives are not having quite the effect they were 12-18 months ago. Even if they have had a claim, yacht owners are far more likely to move their business if the renewal premium is increased. 2012 shows no signs of rate hardening. It will take a monumental loss for this to change in the short term.

The industry is still awaiting the anticipated influence of China, India and South America into the upper reaches of the market. There is evidence of these nationals entering at the USD 5-10m mark but it remains to be seen if they develop an appetite for larger yachts.

SUPER yACHTS


SUPER yACHTS

Rates have continued to decline since 2009 and are probably an additional 15% lower today

VIew FroM U.s.A.nAtUrAl CAtAstroPHesWhilst the rest of the world suffered from large loss events in 2011 – the March tsunami in Japan (USD 210b), the New Zealand earthquake (USD 20b) and the Australian floods (USD 7.3 b1 ) – the overall U.S. Marine insurance environment remained reasonably stable.

Despite this, the first six months of 2011 produced events in the U.S.A. (storms, flooding, fires and earthquakes) that totalled almost USD 30b in economic losses, of which USD 7.5b was due to the tornadoes in the Southeast. That is almost three times the 10 year average of just under USD 12 b. The insurance costs for 2011 are yet to be finalised but they may well be the worst on record.

While these U.S. events were tragic and financially devastating to those affected, they were all natural (if such a word can be used in that context) disasters unrelated directly to the U.S. Marine industries.

It would appear that the insurance markets are tending to be more disciplined in this new world of instant communication and calculation. Insurers expect to reclaim in additional premiums any losses they have suffered. Thus natural catastrophes such as windstorm, earthquake and floods will lead to an immediate hardening of rates in those classes of business whilst the remainder of the market remains relatively calm.

The result has been that near water Marine industries such as ports, terminal and shipyards have been particularly impacted on their property risks, which are rather more static than the Hull and Machinery risks of their waterborne cousins.

But will large risk aggregations begin to unsettle the relatively calm waters of the Hull and Machinery market?

CrUIse IndUstrYWe are anxiously watching events unfolding in Italy following the Costa Concordia disaster. The cruise industry is big business in the U.S.A., with huge exposures which can be further complicated by the vessels calling at U.S. ports and with a preponderance of U.S. citizens on board. Cruise ships are increasingly becoming floating towns, with even greater density of human lives. The good news is that modern safety systems and equipment come into play with today’s cruise ships, which are designed to get those important lives off the vessel as quickly and effectively as possible.

Concordia may be a turning point for the current rating levels here but is it likely to be repeated or happen again in future years? Is a loss of such magnitude simply a spike on the graph of Marine maelstroms?

PAnAMA CAnAl exPAnsIonRisk aggregates lead us also to consider other potential risks, such as the Panama Canal expansion project which will be finished in 2014 (see also page 10-11, Special Risks article). The ‘New Panamax’ vessels which will use the canal have drafts of around 50 feet (15m) with a carrying capacity of 13,000 TEUs (20 foot containers) which can be accommodated by both the Suez and Panama canals.

While a cruise ship may benefit from additional lifeboats, a containership is complicated by the nature of its diverse cargo and increased exposures are not just related to the overall value of the cargo but also to the ‘General Average’ adjustment with so many potential interests on board. Many ports along the Eastern U.S. and Gulf of Mexico coastlines have bought new cranes and dredged to greater depths for these vessels so additional removal of wreck issues must also be considered.

Of course, these new container vessels are very well equipped, managed and maintained. While the risk of a casualty may be lower, the severity will tend to be higher. Murphy’s Law and Mother Nature will inevitably conspire together to ensure that casualties and indeed catastrophes will continue to occur. The increased exposures inevitably result in bigger claims - modern risk management will hopefully reduce their incidence.


VIEW fROM U.S.A.

1Munich Re Global Natural Catastrophe Update June 2011


VIEW fROM U.S.A.

The first six months of 2011 in the U.S.A. produced almost USD 30b in economic losses

VIew FroM AsIA The Asian insurance markets can generally be divided into a two tier market – i.e. risks that are obliged to be retained domestically (which are often largely ceded to treaty reinsurance) and those that require facultative reinsurance (often because of their exposure or complexity).

With a large proportion of risk across the region being retained in treaties, the costs are driven to a large extent by the major professional reinsurers. In general there has been a price adjustment according to risk exposures, with some reinsurers pulling back in certain territories. Vietnam, for example, has seen a reduction in proportional reinsurance availability and so slowly the domestic insurers will be subject to bigger retentions and therefore exposed to larger first losses. If there are a series of larger claims such as the recent “Vinalines Queen” this will inevitably force premiums up in a market which continues to co-insure or reinsure itself.

The tragedy surrounding Thailand’s floods is unlikely to affect the hull markets but there are a series of stock throughput and cargo risks which will be picked up domestically or, if not, will certainly fall back on Japanese insurers. They are likely to cover the majority of the hi tech cargoes and vehicles in storage (we also discuss this in our Cargo section).

Certain reinsurers such as CCR (who have pulled out of Thailand) and ACR have been hit hard, whilst others such as Hannover, Swiss Re and Berkshire have stepped in. At the time of writing, we expect further pricing adjustments at 1st April for the Korean treaty renewals and also in Japan as the flood damage (following the Tsunami) inevitably forces reinsurers to push for further increases.

soUtH eAst AsIAThe South East Asian facultative market continues to be driven by Singapore. The 2011 “hunting” season began in moribund fashion - giving mainly “as expiring” renewals with a sprinkling of increased continuity credits (and other returns in order to outweigh increases). However, as the year progressed, mixed signals from underwriters became the order of the day - certain following markets rebelled from following the lead and offered their own sometimes higher prices.

This sent brokers into the global markets, trying to pull together the pieces with interesting results. By dropping certain underwriters and combining an array of prices in Europe, Asia and the Middle East large reductions to the client were achieved. Personally we saw 15% to 20% on a regular basis - at the beginning of 2012, indeed, we heard of over 35% on one particular account here.

oUtlooK For 2012So will this trend continue into 2012?

The long term prognosis is of course it can’t, especially in a Marine market that most see as bobbing along at the bottom. Some underwriters in Asia will be affected by the already disastrous start to the year (Costa Concordia again) as their head offices in London look to recoup across the whole of their portfolio, including Asia. Something has to give and we expect to see more underwriters walk away from unprofitable accounts. But these will be the stronger long term players.

We are urging clients to avoid any compromises on the security of underwriters exposed to sovereign debt issues or those who are overly exposed in certain areas. Every dollar counts, pressure will be intense and so the answer is “yes” - there will be a continued buyer’s market in 2012. There is still enough capacity out there for deals to be done.

VIEW fROM ASIA


VIEW fROM ASIA

We expect to see more underwriters walk away from unprofitable accounts


wItH tHAnKs toBen Abraham Charles Barder Chris BhattNigel BrunningRichard Close-SmithMark Feltham Andrew Hamilton Lewis Hart

Neil MacnaughtanTrevor McGarry Eric Noe Darren RowlandNic RubenAlec Russell Rachel Wilkinson

Willis Marine Market Review | March 2012 ac

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.

8857/03/11

Willis Limited

The Willis Building51 Lime StreetLondon, EC3M 7DQUnited KingdomTel: +44 (0)20 3124 6000

www.willis.com

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.

10412/04/12

ond Bey he T h orizon - Willis Group · 2013-03-16 · reinsurers, the potential for profitability...

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