Premiums do not cover the cost of risks, marine insurers told

A damaged shipping container. Credit: Marine Accident Investigation Branch (UK)
A damaged shipping container. Credit: Marine Accident Investigation Branch (UK)

Marine insurers have been told they need to factor in the rapidly increasing threat of major events when it comes to cargo cover, particularly now that hull prices are “unsustainable”.

Astrid Seltmann, vice-chair of International Union of Marine Insurance’s (IUMI’s) Facts & Figures Committee, said there were worrying sides for cargo insurers following significant losses last year that gave rise to the most expensive North Atlantic hurricane season in history.

“The cargo market has been impacted by major-event losses, and 2017 has highlighted the accumulation risks we have in a number of sites around the world. It is a concern, in my view, for the market and we have to identify where the accumulation risks occur,” said Seltmann, presenting the global fleet figures for 2017 at IUMI’s annual conference in Cape Town, South Africa, this week.

“The figures show that the increased risk of these event losses are not being priced within the cargo products we deliver.”

Cargo was the biggest marine class of business again last year, accounting for USD16.1 billion of the total marine insurance premiums of USD28.5 billion.

Hull insurers continue to struggle to deliver profits and Seltmann warned that the pricing of the cover at present, against a background of an increase in the loss ration, is a major problem.

“When you have a year where we have not had an extraordinary level of losses but the loss ratio for hull insurers has continued to increase, then you have to draw the conclusion that current income level does not even cater for a normal loss year. The price charged is not adequate for the risk,” she said.

“The current income is unsustainable. Overall premium income reached USD28.5 billion in 2017, which represents a 2% increase compared with 2016. This upswing is largely attributable to growth in trade plus strengthening of European and other currencies against the US dollar. But it masks the dramatic situation that is unfolding when current premium levels are viewed in relation to covered risks and the impact of claims.

“The cargo market was recently affected by unprecedented nat-cat and outlier event losses, and this has negatively impacted underwriting results. It also signals the increasing, and often unknown, accumulation of values both on shore and at sea.”

On hulls’ continued struggle, she explained, “In the hull market, falling vessel values have, among other market conditions, contributed to an erosion of income to a degree where income is now not sufficient to allow for normal repair costs in a given year. This downward trend is particularly worrying given the relative absence of major hull losses in recent years.

“The last 10 years’ statistics clearly show an increasing volatility in the impact of claims on underwriting results caused by the random occurrence of claims with unprecedented cost. As vessel sizes continue to increase, this trend will not reverse, and the heightened risk must be taken into account. The shipping and insurance industries will have to embrace this level of volatility and uncertainty that may impact future profitability.

“In general, IUMI statistics clearly illustrate the need for sustainable underwriting by understanding the simple – and sometimes not so simple – mathematics of evaluating the risks and expected costs associated with a prudent marine portfolio,” Seltmann concluded.