Marine Insurance
A Powerful Force

• Lori Chordas
• December 2020
• 

AFTER THE BLAST: A massive explosion at a port in Beirut on Aug. 4 caused extensive damage across parts of the city, and insured losses estimated at $1.5 billion to $3 billion.

Key Points

• The Situation: The marine insurance market has experienced large losses in recent years, driving an increase in prices and a reduction in limits and capacity in the market.
• Making Waves: The line is also the target for new and evolving exposures, including cyberattacks and COVID-19.
• What Is Ahead: The industry is responding to recent events by improving safety and transport protocols, adding coverage exclusions and making other contract language changes.

As the sun rose over Beirut on Aug. 4, bright skies enveloped the coastline along one of Lebanon's busiest ports. By early evening, however, the scene was anything but tranquil, with smoke and debris billowing into the air after more than 2,700 tons of improperly stored ammonium nitrate exploded in a warehouse on the seaport.

The blast, which claimed more than 200 lives and injured at least 6,500 others, destroyed large swaths of the Lebanese capital city, racking up what some reports projected at around $3 billion in insured losses. But as the dust began to settle, some industry experts cut those projected losses in half.

This year's blast is an eerie reminder of another incident that came almost five years ago to the day. In August 2015, the Chinese port of Tianjin was rocked by a series of deadly explosions ignited by an overheated container of dry nitrocellulose stored at the port, resulting in nearly $3.5 billion in insured losses.

Unforeseen man-made risks like those and the large losses they bring—which fall to various insurance lines including marine—are proving to be as complex and costly as natural catastrophes, said Cynthia Nanthalall, head of marine at Hollard Insurance Co. in South Africa.

In recent months, marine insurers and global reinsurers have been saddled with a series of man-made accumulation exposures that include fires on container vessels, industrial storage facility blazes, cyberattacks and a pandemic.

Mother Nature also has unleashed her fury on the market, including what Michael Pellegrini, Marsh JLT Specialty's North American marine practice leader, calls a “market-changing” event in the line. In March, destruction to various storage facilities near Nashville, Tennessee, he said, caused nearly $500 million in estimated gross cargo losses from tornado activity.

Pellegrini noted most tornado claims paid by the marine market were through the cargo stock throughput product, which extends coverage for inventory at warehouse locations along with the international and domestic transit exposure. Traditional cargo policies also cover goods in the “due course of transit,” which includes temporary storage during transit and consolidation/deconsolidation locations, he said.

Some experts fear the recent rise of events is a harbinger for the marine insurance market—a sector that over the past several years has been hit hard by climbing prices, reduced capacity and attrition.

Sea Change

The marine market has been experiencing choppy waters in recent years.

Last year, cargo insurance premiums dipped slightly to $16.5 billion, according to the International Union of Marine Insurance.

The market also experienced losses that “have dealt a severe blow to a class of insurance already bruised by decades of soft trading,” Nanthalall said.

More recently, the market has seen reduced limits and capacity, tightened terms and conditions, and rising prices largely fueled by the retrenching and withdrawal of binding authority by Lloyd's syndicates in the line.

Nanthalall said pressure placed on those syndicates to review underperforming portfolios and “the extent to which business plans have been put under review” have hardened rates in reinsurance program pricing. In addition, changes in structure, and in some instances a withdrawal of capacity for certain types of risks, have occurred, including the decreased underwriting appetite for the deliberate storage of motor vehicles.

Over the years the marine industry has suffered a number of losses to vehicle containers on vessels and in seaport storage facilities. In 2015, thousands of vehicles were destroyed in the Tianjin blast. Last year, 4,200 cars were damaged or lost—at an estimated loss value of $350 million—when the vessel MV Golden Ray capsized off a Georgia port, according to Property Claim Services.

Losses like those have further strained a market that has “underperformed” over the past decade, said John Miklus, president of the American Institute of Marine Underwriters. He said there are always one or two events tipping the market, such as the series of Atlantic hurricanes and major casualties in recent years that “knocked a hole” in insurers' profits and losses.

The spring tornado activity in Nashville happened after the market was already heading to “where a general lack of profitability was causing insurers to look at the pricing of their books and existing aggregate exposures,” said Marsh's Pellegrini. “Then in the middle of that overhaul comes a major tornado that extended the phenomena of increased pricing and restricted terms.”

The marine insurance line also has suffered a prolonged period of industrywide underwriting losses in classes such as hull and cargo, noted Markus Spielmann, chief underwriting officer—Lloyd's, global clients, offshore energy, P&I—global marine partnership at Munich Re.

He pins recent capacity withdrawals by several players, along with managing general agents struggling to find carriers for their business, on Lloyd's initiative “to close the performance gap, with the aim to make significant corrections to troubled and underperforming lines of business such as hull, cargo and yacht.”

However, he said, reduction in market capacity and an improvement in quality have led to “encouragingly positive” rate change developments for most marine classes in the London market and beyond—something he hopes will end the long spell of unsustainable results.

Is that signaling a change in the market? Perhaps, said industry experts who are hopeful the current situation is beginning to turn. A number of promising signs have been pointing in that direction.

For example, in 2019 IUMI reported improved loss ratios in the market.

Last year large shipping loss events dropped 20%, continuing a 10-year downward trend, according to Allianz Global Corporate & Specialty's Safety and Shipping Review 2020 report.

That's good news considering last year's 13% rise in cargo vessel fires aboard ships, such as the Grande America and the Yantian Express. According to IUMI, those two high-profile incidents generated roughly $290 million in cumulative hull and marine, protection and indemnity, cargo and other losses.

This year also has seen a number of market improvements, including April, July and October reinsurance renewals yielding “clearly positive” rate changes and promising results for many reinsurers such as Munich Re, Spielmann said.

In September, IUMI cargo committee chair Sean Dalton told attendees of this year's IUMI annual conference that most marine insurance markets geographically are now “hard” or “improving” amid much change.

Heating Up

Several recent marine insurance market losses are spurring changes in the line.

According to the Association of Insurance Companies in Lebanon, about 70% of damages from this year's port explosion in Beirut were uninsured. Indeed, insurance penetration in Lebanon is generally low, AM Best noted in its September Best's Market Segment Report, MENA Reinsurers Strive to Adapt to Testing Conditions.

Insured losses from the blast will largely fall to local and London market carriers and the global reinsurance market, Miklus said.

In October, Swiss Re AG said in its third-quarter earnings statement that claims from the Beirut blast “dominated” its man-made losses for this year's first nine months, and that it established a $222 million reserve in the third quarter to pay for its share of claims from the event.

Also in October, Hartford Financial Services Group announced in its third-quarter earnings call that it incurred $11 million in losses from four large ocean marine losses during the quarter, including the Beirut explosion.

AM Best said in its report that it also expects Middle East and North Africa reinsurers to carry exposure for the event, noting “the ceding of meaningful insured losses to regional reinsurance markets would be expected to strain technical performance margins over the near term.”

While U.S. carriers were relatively unscathed by the Beirut blast, they have had their own accumulated losses to contend with over the past two years, including a spate of warehouse fires such as this year's tornado-related blaze in Nashville and last year's fire at a Jim Beam bourbon facility in Kentucky that destroyed 45,000 barrels of whiskey. IUMI reported $150 million in cargo losses from that incident.

Natural catastrophes over the years also have been dealing a devastating, costly blow to the marine industry.

In 2012, Hurricane Sandy pummeled the U.S. Eastern Seaboard, leaving in its wake nearly $3.5 billion in gross cargo losses, according to IUMI. Six years later, the market was hit again, this time with nearly $500 million in cargo losses when Typhoon Jebi blew across parts of Japan.

The rise of those and other nat-cat-generated events, Miklus said, are now changing the way companies “decide what limits they want to offer, and to underwrite exposures more diligently in cat-prone areas.”

Miklus said he also has seen an increased focus on non-named windstorms on the heels of this year's Nashville tornados and California wildfires, along with “companies now making specific language changes to policies focused on those events.”

While the finger of blame can sometimes point to Mother Nature, Miklus pins human error as a frequent culprit for the rising number of losses coming into the marine market.

According to reports, the owner of the warehouse responsible for the Tianjin explosions failed to correct nearly a dozen violations for which it was cited prior to the blast. Those violations included risk-control failures, illegal construction, operating issues and national standards violations.

Natural and human-related risks like those, along with rising concerns about the mishandling of dangerous goods and misdeclared cargos, are signaling a warning for the industry about the importance of identifying and managing risks pertaining to hazardous chemicals, said IUMI President Richard Turner.

He said his organization along with others in the industry are now working diligently to create vigorous risk controls and improve safety and inspection protocols related to the transport and storage of dangerous goods.

Insurers are doing their part by revising policies to add cargo coverage wording, including clauses for cyber and communicable disease.

Risky Business

While cargo-related perils have long threatened the marine market, the industry is also in the throes of new and evolving exposures such as cyberthreats, political risks and piracy.

In 2019, there were 162 incidents of piracy and armed robbery of ships worldwide, according to IUMI.

This year, there has been a 400% rise in cyberattacks since the spread of COVID in the spring, Allianz reports. While those attacks have the potential to strike nearly every facet of the marine market, including ports and terminals, Marsh's Pellegrini said marine insurers historically had been relatively silent on cyber.

But that's no longer the case.

“Today, companies are doing all they can to understand their potential cyberrisks and are adding physical damage provisions and exclusionary language to their policies,” he said.

The industry is also preparing for impending deadlines such as to the ISM Code, which requires ship managers and owners to assess cyberrisk and implement relevant measures across all functions of their safety management systems by Jan. 1, 2021.

Allianz Global Corporate & Specialty's Andrew Kinsey warns of yet another exposure with the potential to impact every aspect of the shipping industry. In an interview with ^AMBestTV, Kinsey, a senior marine risk consultant, said one key concern of COVID is the lack of adequate crew change-outs and “the fact that we have seafarers who are now over their one-year contracts, and in many cases, six months over.”

The pandemic also has disrupted the maintenance and servicing of machinery and vessels; laid up cruise ships and oil tankers; and lessened the demand for oil, leaving millions of barrels being stored on tankers idling around major oil ports and terminals and potentially exposing them to political risk and harsh weather conditions, Allianz noted in its safety report.

In recent months, global marine insurers have seen premium volumes decrease because of the pandemic and exposures increase from accumulations aboard vessels and in ports, Spielmann said. So far, many of those exposures “relate to temperature-sensitive goods as well as forwarding charges, since general policies do not provide coverage for inherent vice, delay or loss of market,” he said.

Insurers have been responding to changes brought about by COVID in various ways, including the introduction of communicable disease exclusion clauses for each marine class of business to clarify the intended scope of coverage, Spielmann said.

As the threat of global outbreaks, cyberattacks and other perils yet to be known continues to rise, so too does the need for risk modeling and tools such as satellite imagery and GPS technology to simulate and estimate those exposures, Hollard's Nanthalall said.

There's also a need for increasing vigilance and communication in the marine market, Kinsey added.

“It's important to know who you're working with. Know what your Plan A is, your Plan B, and your Plan C. One of the key things we tell our insureds is that just because it worked yesterday doesn't mean it will work tomorrow,” he said.

When the Smoke Clears

As 2020 draws to a close, it will go down as one of the most challenging, tumultuous years in history.

Yet despite global economic turmoil, an unprecedented pandemic and a wave of large-loss events, experts believe the marine insurance market remains well poised for growth.

In fact, analysts at Zion Market Research expect the market to grow at a compound annual growth rate of 3.2% and generate more than $37 billion by 2026—a significant rise from $29.4 billion in 2018.

While marine insurers will continue to face potential dangers that lurk on the sea and in ports and other areas impacting the market, Marsh's Pellegrini said recent events have provided many lessons learned and caused insurers to recalibrate underwriting strategy to prepare for impending perils.

He added that marine insurance buyers are also reconsidering purchasing strategies.

“They also now better understand where to place and retain risks and make decisions such as whether to buy commercial insurance,” he said. In turn, Pellegrini expects more companies to consider alternative forms of risk transfer including captives and integrated programs.

Will the marine insurance market continue to face a wave of challenges in the new year?

Yes, Pellegrini said, “but it will be more stable in those challenges.”

“Working through issues like contract language will be more prevalent than trying to send off substantial increases. Pricing will continue to go up, but it will be more measured, he said. “Our job as brokers will be to increase contract certainty and help clients better understand coverage nuisances and how they can best use data and analytics to understand risk tolerance and financial capabilities in order to shape purchasing decisions.”

Looking ahead, Mathilde Jakobsen, a director at AM Best, sees a further hardening of the protection and indemnity market and said a number of P&I clubs already have announced further general premium increases ahead of the February 2021 renewals.

However, as mutuals, she said, “the clubs have to balance their need for rate increases with consideration for their shipowner members, many of which have been hard hit by the economic downturn and reduction in trade due to the pandemic.”

The marine market is gearing up for some novel changes forecast for the coming years, including increased digitization and the advent of fully autonomous commercial cargo vessels, Miklus said.

But while those tools offer much promise for the industry, Hollard's Nanthalall is concerned fully autonomous ships will introduce new risks to the market and force insurers to come to grips with the levels of autonomy, legal implications and associated threats such as cyberrisks attached to those perils.