Beware squalls

10-09-2016

Beware squalls

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Marine re/insurers are facing a wide range of issues, from high levels of competition to piracy in Asian waters. Bermuda:Re+ILS investigates.

Squalls are a natural part of life on the high seas. The marine re/insurance market seems to be busily sailing in and out of various squalls as they appear and disappear around it.

Over the past decade some of the issues that have emerged include piracy, falling demand for cargo, fluctuations in the price of oil and in one case the loss of an entire cruise liner after its captain tried to impress a female passenger and ran aground on some rocks.

Looking at the marine re/insurance market as a whole, Adrian Poxon, executive vice president and head of global specialty reinsurance at Endurance Re, based in Zurich, says that the market is facing a series of pressures.

“The current state of the marine market is very competitive, although the competition varies depending upon the line you are looking at. If I had to rank them, energy has been the most pressured in terms of competition in sub-lines of business—then cargo, then hull and then liability,” Poxon says.

“Energy in marine re/insurance is considered to be upstream energy, not downstream, and the market pressure is directly attributed to what’s happened in the outside world in terms of the price of a barrel of oil. Over the past 18 to 24 months, the price of oil went down as low as the $20s per barrel before it recovered to between $40 and $50. This has had a profound impact on what the energy insureds can actually achieve in terms of their exploration and production and the costs that they have to endure to produce oil and gas.
 
"Energy has been the most pressured in terms of competition in sub-lines of business—then cargo, then hull and then liability.” Adrian Poxon, Endurance Re

“At $40 a barrel there’s not enough margin left in the business for them to do anything except continue to produce the oil from the wells that they’ve already developed, putting any new projects on the backburner. In turn, this will reduce the amount of drilling, which reduces the amount of premium that comes into the market through control of well cover. 

“That sector has had a double whammy, so to speak. You have competition for business, which has produced rate reductions, and you’ve had a significant reduction in the amount of business that’s actually been done in that area. It’s fair to say that in 2015/16 the amount of premium income that has disappeared from the energy market is very, very significant—probably around 30 percent. If you look at the International Union of Marine Insurance (IUMI) statistics, during 2013/14 there was roughly $5.2 billion of premium income in the upstream market but today it’s around $2 billion.”

Poxon says he isn’t certain why there is so much competition in cargo.

“It’s predominantly in the London Market. London seems to have become very aggressive towards cargo business and in the conversations I’ve had I think a lot of people feel that it’s as a result of the facilitation that’s occurred in the overall marketplace in London, and especially Lloyd’s—the amount of competition that facilitation has produced is extreme and it’s produced some very questionable underwriting standards.”

 

The view from Bermuda

“The marine reinsurance market is relatively small in comparison to the non-marine market in Bermuda,” says Validus Re in a statement sent to Bermuda:Re+ILS.

“However, those who are located here offer significant capacity and expertise which keeps Bermuda as a destination for most buyers of marine reinsurance protection. The synergy with the property market allows a unique offering of products and ideas to flourish which keeps Bermuda attractive.

“The approach to marine insurance on the Island is very analytical, with a strong actuarial influence in both pricing and aggregate management, eg, cargo and energy accumulations.”

The flexible capital that the Island can provide definitely produces benefits and clients regularly combine traditional purchases alongside opportunistic relationships with funds which as a combination increases the attraction of the Island and enhances its profile.

“This flexibility extends to how we, as markets, approach business and allows a broader cross-class approach to be provided to clients,” says Validus Re.

On the flipside, the fact that Bermuda is geographically at arm’s length from virtually all clients makes the interaction potentially more limited and opportunities to create new business difficult, without extensive travel.

“It does ensure that when you see clients there is a focus, but it undoubtedly limits certain elements of the business which you might see elsewhere (such as the daily passing of business in Lloyd’s). However, our location does benefit our interactions with the Americas and allows these channels to be explored with a lot of ease. Although the reinsurance market on the Island is dominated by non-marine business, the brokers and reinsurance buyers appreciate the variety of products that this creates.”

 

Tattered skull and crossbones

One major worry for the entire marine industry has been the resurrection of piracy. The collapse of the Somali government in the 1990s and the effective disappearance of the Somalian Navy created a vacuum in the waters of the North-East Indian Ocean—one that led to roving bands of pirates in skiffs using rocket propelled grenades to threaten a wide variety of passing ships.

Validus Re says that generally, piracy is a concern because of kidnap for ransom and cargo theft. “Kidnap for ransom in and around the Gulf of Aden has decreased significantly due to the increased security presence on most marine vessels nowadays, but cargo theft is still a concern in areas such as West Africa and around Asia.”

“A few years back the main area of concern with piracy was off the north-east coast of Africa, off Somalia, along the trade route between Asia and Europe that goes through the Suez Canal. Today, piracy seems more prevalent in West Africa, off the coast of Nigeria and Ghana but it’s a different type of piracy. Off Somalia it was a case of pirates hijacking the ship and crew for ransom. Off West Africa it’s more about the cargo,” adds Poxon.

“The piracy off West Africa, while nasty, is not a real issue for us in terms of reinsurance as we don’t tend to see a lot of piracy claims coming in. The other main area where piracy is of concern is around the islands of Indonesia, but here the piracy is usually concerning smaller vessels such as tugs, barges and inter island vessels and this tends also to be of less significance for reinsurers.”

If piracy is not seen as being as major a danger as it was five to 10 years ago, are there any areas of geopolitical concern where marine insurance is tricky? One area where there seems to be growing anxiety is the South China Sea, due to the ongoing crisis over the artificial islands that China is building there despite multiple overlapping territorial claims from other countries in the region.

According to Validus Re the South China Sea is definitely an area of interest, but currently there is not much concern over shipping routes. “Currently the lifting of sanctions on Iran is the most sensitive area in the geopolitical sphere as it creates certain organisational sensitivities in handling the business and the associated exposures that we can cover. In February the US Office of Foreign Assets Control (OFAC) announced changes to the trade and economic sanctions for Iran.

“While US persons continue to be broadly prohibited from engaging in transactions dealing with Iran or its government, OFAC has issued a general licence (Licence H) authorising foreign affiliates owned or controlled by a US person to engage in certain transactions. We are able to operate within the parameters of OFAC’s general licence H, but have to be very careful and monitor the situation closely as it evolves. As a result this is an area of marine insurance which is maintained carefully.”

 

 

Endurance Re, Adrian Poxon, Insurance, Reinsurance, Bermuda, Validus Re, MENA, North America, Asia-Pacific

Bermuda Re