A perfect storm of business challenges is roiling the waters in the marine insurance market.
- Adrian Leonard and Patricia Vowinkel
- December 2018
- Stormy Weather: Excess capacity, declining rates and large losses are putting pressure on marine insurers to improve performance in 2019.
- A New Course: Lloyd’s of London is exerting pressure on several of its syndicates—singling out marine insurance—to demonstrate they can turn a profit or be placed in runoff.
- On the Rise: Marine insurers in Scandinavia and Asia are emerging as competitors to the London market.
After a period of excess capacity, declining rates, large losses and disappointing performances, marine insurers are under pressure to turn the ship around as they head into 2019.
Marine insurers in London especially have experienced a series of challenges recently. In a market flooded with capacity, they have had to reduce rates to compete. Big losses last year and this year further complicated matters.
Insurers suffered major losses in 2017 from hurricanes Harvey, Irma and Maria. An accumulation of attritional losses as a result of exposure to a number of natural catastrophes this year also took a toll on some marine insurers. A fire at the Lürssen shipyard in Bremen, Germany in September delivered another painful blow, with losses estimated as high as $700 million. Marine hull lines were expected to bear the brunt of that loss.
The challenges have become so vast that Lloyd's of London warned syndicates that have produced consistent losses in recent years that they must demonstrate how they will return to profitability or face being put into runoff. Marine was singled out as one of the lines facing notable problems.
A few syndicates already have departed from one or more marine lines.
And that was before warnings came from some insurers about third-quarter profits.
Lancashire Holdings Ltd., a Bermuda-domiciled Lloyd's underwriter, warned of impending net losses of up to $75 million in the third quarter, pointing to marine and natural catastrophe claims. Lancashire said $30 million of the underwriting loss was likely to be in the marine account.
RSA Insurance Group, a U.K.-based multiline insurer, said it expected an underwriting loss of about $91 million in the third quarter with higher weather, large losses and attritional claims. Underwriting losses in the U.K. and London were especially high in marine, the group said.
All told, about 10% of Lloyd's 100 or so lines were not meeting the expectations of its performance directorate, according to Lloyd's Chief Financial Officer John Parry.
The action is part of an extended annual approval process for Syndicate Business Forecasts. Lloyd's underwriting units use them to map their business plans for 2019.
In most cases, Lloyd's is urging managing agents to cut their marine premium incomes or withdraw from the business. Managing agents are the Lloyd's underwriting businesses, which are, for the most part, subsidiaries of international carriers.
Insurers CNA Hardy, Barbican and AmTrust have already departed from one or more marine lines.
In October, CNA Hardy said it would immediately stop writing property treaty, marine hull and some types of construction policies within Lloyd's. The lines being discontinued “have struggled to deliver consistent profitability even in light of improving market conditions,” CNA Hardy said.
Barbican Syndicate 1955 plans to withdraw from property insurance, marine cargo and hull insurance, and professional indemnity insurance, after receiving approval from Lloyd's for its 2019 business plan, Barbican Insurance Group said in November. Syndicate 1955 remains committed to its other business lines and has increased capacity for marine reinsurance and energy.
“We have taken some hard decisions, that reflect prevailing market conditions, to ensure the sustainability of our plan,” said Iain Bremner, managing director, Barbican Managing Agency Ltd.
AmTrust said in June it was exiting the marine cargo, hull and liability lines of business following a strategic review.
Aspen made a similar decision. CEO Chris O'Kane said in a conference call in August that the company's Lloyd's business in international professional indemnity and marine hull had turned in disappointing performances.
“We will no longer underwrite these books on the Lloyd's platform,” he said. In August, Aspen agreed to be acquired by private equity funds controlled by New York-based Apollo Global Management for $2.6 billion.
SCOR's Lloyd's operation, the Channel Syndicate, has reportedly opted to cease writing hull and cargo business. SCOR is expected instead to write its London marine business from a company-market platform.
The Standard Syndicate 1884, a marine-focused syndicate, will be placed into runoff in January, according to The Standard Club, an apparent casualty of the Lloyd's profitability edict. The operation, part of the UK's 130-year-old Standard Protection &Indemnity Club, a mutual marine liability insurer, was launched only in 2015.
Regional markets are typically closer to local clients and know the unique risks for their market. They are willing and able to serve the local accounts and will provide the necessary capacity, at the appropriate rate, for these risks
Losses on the Upswing
The sector's losses go beyond recent catastrophes and the shipyard fire.
The cost of wreck removal, for example, has skyrocketed in recent years as governments seek gold-plated environmental protection following a marine casualty.
The claim arising from the wrecking of the Costa Concordia, which ran aground in Italy, totaled more than $2 billion. The indemnity for the cruise ship's hull was only about $500 million.
The challenge of rising loss costs comes as a surprise given the shipping industry's improved safety record. The number of total losses of vessels was “stable” in 2017 at 94, the second-lowest total since 2007 and well below the 10-year average of 113, according to Allianz Global Corporate &Specialty (AGCS).
Improved ship design, enhanced risk management and shipping safety regulation account for a 38% decline in total losses over the past 10 years—as does falling shipping activity, according to Baptiste Ossena, AGCS's global product leader for hull and marine liabilities. Total losses numbered 151 in 2008.
Large losses make the difference.
In recent years, the most costly 1% of all hull claims accounted for at least 30% of total claims costs in any given year, according to the International Union of Marine Insurers (IUMI).
For cargo insurers, the 2016 Tianjin port explosion was a huge blow, revealing an unexpected aggregation of risk that IUMI believes could ultimately cost $6 billion.
Claims may come under even more upward pressure as more vessels enter into Arctic waters. Those areas are difficult to assess if there is an incident.
The amount of cargo transported over the Northern Sea Route rose nearly 40% in 2017, to a record high, according to Russia's Federal Agency for Maritime and River Transport. Reported incidents in the waters above the Arctic Circle increased 29%.
Cargo loss ratios showed an extraordinary increase in the years 2014-2017, which might indicate a new normal, according to Astrid Seltmann, analyst with the Nordic Association of Marine Insurers and Vice-Chair of IUMI's Facts &Figures Committee. Value accumulations on single sites or vessels, alongside a resurgence in natural catastrophes, are a particular concern.
Indeed, natural catastrophes have been taking a serious toll on the sector.
Data from Lloyd's yacht portfolio, for example, shows that this class had been profitable since 2001, although margins had fallen steadily with rates since 2007.
Lloyd's yacht business, however, declined into the red in 2016, and was disastrous in 2017, when the portfolio yielded a combined ratio in excess of 160% after weather—particularly Hurricane Irma—smashed scores of high-value vessels.
Inability to gain access in the post-storm chaos exacerbated the problem, as many damaged yachts deteriorated into constructive total losses in the interim. The recent Lürssen shipyard fire, which destroyed a 100-plus meter yacht under construction, further exacerbated yacht insurers' woes.
With insurers pulling back capacity, rates are expected to begin to stabilize and even move higher.
“The international market has shown signs of improvement during 2018,” said Mark Edmondson, chairman of the Ocean Hull Committee of the International Union of Marine Insurers and head of marine at Chubb Global Markets.
IUMI estimates that $100 million of capacity has been removed from the market over the past year, with few start-ups to offset the withdrawal of a number of high-profile hull insurers.
He further said that facilitisation, the creation by brokers of capacity vehicles backed by groups of insurers, “appears to be under increasing pressure due to worsening performance and heightened regulatory scrutiny.” The latter is probably a reference to the UK supervisor's investigation into alleged anti-competitive practice by large brokers.
“Overall the deterioration of underwriting results, over what has been a considerable period, has appeared to have triggered a brake in the decline in market conditions,” Edmondson said.
A cyclical market adjustment is “long overdue,” especially for hull risk prices, which have declined steadily for several years, according to Neil Roberts, head of marine underwriting at the Lloyd's Market Association, the trade body for Lloyd's managing agencies.
While rates continued to decline during the 2017/2018 renewal season, “reducing capacity for hull risks may put a stop to rate cuts,” he said.
Pricing in the cargo market has been more stable, but is already beginning an uptick.
Citing the effects of pressure from Lloyd's on profitability, Hiscox pointed to a “much-needed” 20%-plus rate increase since August on cargo business.
“Cargo is becoming more difficult to place, and conditions began to tighten up over the summer, when at least five hull, four cargo and a couple of yacht books were shut down,” Roberts said. Since then, more Lloyd's syndicates and insurance companies in London and further afield have ceased underwriting one or more of these marine classes.
Navigators Group, a Stamford, Connecticut-based global insurer specializing in marine and other lines, said in May that it saw rate increases in the low- to mid-single digits in international marine compared to declines a year ago.
Premium volume for its London market marine business dropped 19% in the second quarter, according to Navigators CEO Stanley Galanski, speaking on an earnings conference call in August. International marine premiums outside of London were down 14.2%. International marine's $9 million underwriting loss weighed on overall international results, yielding a $3.4 million underwriting loss, and the company suffered attritional losses in international marine in cargo and in hull and transit.
Navigators agreed to be acquired in late August by Hartford Financial Services Group for $2.1 billion in cash.
While the marine market in London seeks to correct course, other insurance centers are emerging as competitors.
Marine insurance products available in Scandinavia, Asia and elsewhere may not be equivalent, yet when they emerge from lower-cost markets, keener pricing is possible.
“Regional markets are typically closer to local clients and know the unique risks for their market,” said Pat Hickey, executive vice president and head of U.S. marine at Aspen Insurance. “They are willing and able to serve the local accounts and will provide the necessary capacity, at the appropriate rate, for these risks.”
Navigators said competition was taking a toll on the London market, while other marine markets were doing better.
“While we remain committed to the London and Lloyd's marine markets, we believe the best opportunities for ocean marine in the short-to-intermediate term will be in our regional offices serving continental Europe and Latin America,” Navigators' Galanski said in May.
Some London operations, like the Lloyd's managing agency Neon Group, are taking advantage by acquiring marine managing general underwriters in distant markets (Oslo and Genoa, in Neon's case), and bringing the premium and risk back to London.
In other cases, marine insurance contracts simply leave the London market. Norwegian insurer Gard won the hull insurance business for more than 800 vessels belonging to shipping giant Maersk from the London operation of XL Catlin.
Aspen's Hickey does not believe regional markets will alter the dynamics of the global market significantly, “as they are already delivering appropriate capacity at a local level,” he said. The combination of global expertise and a local presence should allow carriers to meet the “increasingly complex needs of the marine market,” he added.
Market Redefining Itself
Some of the recent developments in the market were outlined in a July blog post by Lloyd &Partner, an international wholesale broking operation and a member of the Jardine Lloyd Thompson Group. The blog highlighted some of the challenges in the cargo market.
The 2017 Lloyd's marine loss ratio, of which cargo is a part, came in at 122%, according to the report. Cargo, as a stand-alone business, was reported to be closer to a 135% loss ratio. The report said as many as 14 cargo syndicates were believed to be under review by Lloyd's.
“In 2018, the London cargo market is seeing further market consolidation, with Axa buying XL Catlin for a staggering USD 16 billion and AIG buying Validus Re. This reduces the number of market leaders available which in turn restricts choice for clients,” the report said. “So with four becoming two, we will, regrettably, see reduced market appetite and potentially consequent job losses,” the report said.
“The impact of this capacity shrinkage and market consolidation has to be managed carefully by claims brokers, as service and solutions need to be maintained to the high standards that Lloyd's mandate on its managing agents,” according to Lloyd &Partner.
“We do not believe this is just a momentary market correction but this is the market redefining itself to safeguard the long-term trading future. Insurers are reengineering parts of their portfolios so they can return to sustainable profit margins and so they can continue to offer product solutions to meet the demands of their clients.”
Adrian Leonard is a writer for Best’s Review. Patricia Vowinkel is executive editor of Best’s Review. They can be reached at email@example.com.