Clogged Supply Chains Complicate Risk Concerns for Ocean Marine Insurers
Insurers worry about increases in volume and speed, bodily injury possibilities and a higher frequency of losses from container or cargo damage within ports.
- David Pilla
- December 2021
DELIVERY BACKUP: Shipping containers pile up in the harbor in Long Beach, California. Ocean marine insurers are concerned about the increase of cargo port accumulation at terminals. (Photo Adryel Talamantes/NurPhoto) (Photo by NurPhoto/NurPhoto via Getty Images)
- The Situation: Stymied ports, cargo losses and jammed transportation networks are challenging ocean marine writers.
- Troubles: Supply chain problems have led to the aggregated exposure of vessels waiting to get into port and the increase of cargo port accumulation at the terminals.
- The Inflation Factor: Rising cargo and materials costs are impacting the ocean marine insurance business.
Ocean marine insurers are in choppy waters with supply chain problems arising from clogged ports, frozen transportation networks and cargo-loss events as the COVID-19 effect overwhelms commerce after having dried it up.
“One issue that's arisen as a result of supply chain problems is the aggregated exposure of vessels waiting to get into port and the increase of cargo port accumulation at the terminals,” said Tom Nasso, head of ocean marine, Ascot Group. “Port and terminal business and the amount of throughput coming in and stored has created some bottlenecks.”
Nasso said insurers worry about increases in volume and speed, including which trucks are coming in, bodily injury possibilities and a higher frequency of losses from container or cargo damage within the port.
“Being able to underwrite the changing valuations at a single location and monitor this when the bottleneck occurs is increasingly more difficult,” he said. Ascot came into the U.S. ocean marine market in 2019, said Nasso. The company didn't have any U.S. legacy issues when it started building out the foundational portfolio so it was able to accomplish its build-out according to the strategy it laid out from the beginning, he said.
According to AM Best's ranking of the top U.S. ocean marine insurers based on 2020 direct premiums written, Ascot moved up to No. 18 from No. 26 as 2020 DPW rose 113.6% from the previous year. Tokio Marine moved to No. 5 from No. 6 in the ranking as DPW rose 27.1%. Liberty Mutual rose to No. 11 from No. 15 as DPW rose 21.2%.
One issue that's arisen as a result of supply chain problems is the aggregated exposure of vessels waiting to get into port and the increase of cargo port accumulation at the terminals. Port and terminal business and the amount of throughput coming in and stored has created some bottlenecks.
The value of DPW for the total U.S. ocean marine industry increased 5.8% to $4.17 billion in 2020, according to a Best's Rankings report.
Port accumulation concerns marine insurers most right now, as cargo sits in congested ports in the United States for long periods, said Ralph A. Salce, vice president, ocean marine, Tokio Marine America. Accumulation risk can be expensive as several policies together can generate huge numbers, he said.
Global trade collapsed for about 90 days in 2020 due to COVID-19, with nothing at the ports because very little was coming in, said Salce. Now, there are durable goods sitting in ports that can't be moved because there isn't enough intermodal transportation to get them out quickly enough, he said.
The strain on the global supply chain has changed over the past 12 months as an effect of the pandemic, said Alex Berisha, U.S. marine cargo manager, Liberty Mutual. As the economy started opening up, that led the shipping industry to try to make up for lost time and the market is seeing a strain now with a backlog of vessels, he said.
Salce noted that for ocean cargo policies, Tokio Marine doesn't pay for delay or loss of market, but the insured does. For insurers, the products that make it to port during this supply chain disruption create another problem as people try to rush through as much product as they can with the same infrastructure. It creates room for human error that can lead to cargo losses, said Salce. “Our concern is what kind of steps are not being taken because speed is so important right now,” he said.
Severe weather and labor shortages in the U.S. ports are part of the problem, said Berisha. “You see record backlogs, particularly in California,” he said. “Vessels can't get into port because of the long lines. Vessels that are in port are taking longer to get the containers off because of staff shortages.”
General and social inflation also are having an impact, said Nasso. “When you have major loss events like Hurricane Ida, you have a large number of vessels that may need to be repaired,” he said. “Inflation is increasing the cost of labor, materials and the time it takes for the repair to happen. Social inflation is also affecting the marine liability risk as well.”
Sean Dalton, executive vice president and head of marine, North America, Munich Re US, said insured values are increasing as a result of inflation, demand and increasing freight costs, with container freight rates at record levels.
Toward the beginning of the year, the industry saw a number of losses on the West Coast with containers going overboard due to heavy weather, said Berisha, noting insurance buyers were probably having more goods on board than they normally would and shippers decided to press through some heavy weather. By the end of February, the marine cargo industry had seen more container overboard losses than they had in the entire previous year, he said.
Now there is a lack of available vessel capacity and a shortage of containers, Berisha said. There have been delays in providing containers and getting them back to where they can be loaded for various reasons, including staff shortages and lack of available trucking. The industry has seen losses related to Ida, partly because inventories were higher than normal due to supply chain disruptions and therefore impacted by storm surges, said Berisha.
With a normal supply chain, theft is one of the insurer's biggest concerns, said Salce. But with the current supply chain problem, ships are being delayed before they get to port. Nothing will happen to the cargo if it's sitting on a vessel. Once it's off the vessel there's a lot of push to get it to its final destination, he said. Once it is moving, there's less chance of theft.
The Suez Canal blockage by the cargo ship Ever Given was a high-profile, highly publicized event that also led to costly supply chain issues, said Berisha. The blockage was a little over 20 days but it probably added a 120- to 150-day delay for that channel. It held up trade valued at $9 billion per day or $400 million per hour according to Lloyd's List, he said.
Lars Lange, secretary general, International Union of Marine Insurance, said the port explosion two years ago in Beirut, Lebanon, was another incident that demonstrated the ways supply chains can be disrupted. Natural catastrophes, record cargo vessel fires, container overboard losses, wreck removal and social inflation are all increasing losses for marine insurers and reinsurers, said Dalton. “Every year or two over the past 15 years, we experience another unprecedented marine loss,” he said.
The Reinsurance Factor
Marine reinsurance premiums are increasing, and on a risk-adjusted view, rates are increasing, said Dalton. The biggest drivers have been an increase in underlying subject premium and changes in the underlying business. “Reinsurers are addressing loss-affected and underpriced business, while buyers are evaluating structures to make sure they fit their needs,” he said. “Marine reinsurers are part of larger property and casualty (re)insurance companies. As such, they are impacted by their results, and are expected to perform well and consistently improve their business.”
Reinsurers in marine are keen to know about cyber exposure in all lines, including marine, said Nasso. “They're also still watching communicable disease coverage and, in general, terms and conditions. I think they also find the portfolio mix you write important, whether it's being separated between liability, cargo, hull and protection and indemnity.”