Review of the Marine Hull Insurance market - JLT

August 2010Review of the MarineHull Insurance marketDistinctive. Choice.

Distinctive. Choice.JLT is an international group of risk specialists andemployee benefits consultants and one of the largestcompanies of its type in the world. We offer a distinctivechoice to our clients and partners through ourcombination of independence, scale and specialism.As an independent business, we are able to operatewith autonomy and flexibility. We have the scale toprovide solutions to the complex demands of theworld’s leading companies and to deliver global servicingwhilst recognising that the needs of each of our clientsare unique.By developing highly specialised services, we provide ourclients with a depth of expertise and experience. The valuewe create is driven through the personal determination ofour 6,200 highly motivated and skilled people.

OverviewA review of the past 12 months in the marine hull insurance market can only be made mindful of thedevelopments in world trade, the global financial situation and the impact this has on the shipping industry.In addition to these global influences we have the insurance industry issues of fluctuations in capacity, thepotential impact on both rating and image for the “Deepwater Horizon”, the piracy crisis in the Gulf ofAden (including the US Executive Order) and Iranian sanctions.Within this paper we provide a commentary on these issues and offer our own view of the current situationin the marine market and where we believe the hull insurance market will be in the next 12 months.

Shipping IndustryThe current climate for ownersremains testing with many shippingcompanies still facing very difficultsituations. World industrial output isdown on recent years and worlddemand for oil has not increased asmuch as projected in 2009. Thecontainer trade has been throughpossibly the biggest slump thissector has ever seen and vesselvalues have dropped correspondinglyover the past 12 months. We haveseen a promising upsurge in thepast few weeks which hopefully willbe sustainable in the long run.Over the past 12 months shipyardswere left with a “toxic orderbook” due tothe gap between contract and marketprices. There are still a considerablenumber of new buildings to be deliveredand establishing a line of credit remainschallenging. This has led to someoperators being left in a very difficultposition, in some cases requiring therenegotiation of new building contracts,both in terms of price as the gapbetween contract and market pricewidened, and delivery which clearlyShipowners wanted to defer until themarket improves or credit becomesmore readily available. In some caseswhere renegotiation has not beensuccessful this has led to increasinglycomplex and unpleasant legal disputes.The industry has faced an up-hill battledue to downturn in demand againstoversupply. The management of thisoversupply will be the biggest challengethe shipping industry faces over the nextfew years, and obviously much willdepend on how future demand develops.Perhaps not surprisingly given theannually renewable nature of ourbusiness the financial downturn in world

trade had a delayed impact on themarine insurance market. We haveseen a huge reduction in insured hullvalues and an increase in thenumber of vessels being laid up.These trends continued until recentlywhere in the last few weeks we haveseen values being increased andvessels being reactivated. In somesectors we have also seen a numberof new buildings being delivered.From a marine insurance perspective,lower values, lay ups and thereforereduced exposures meant reducedpremium volumes coming into boththe Hull and Loss of Hire marketswhich has generally been the trendfor the past nine months.Underwriters remain concerned thatthe apparent lack of liquidity Ownersand Operators are experiencing willimpact vessel maintenance but thisconcern has not translated into anyincrease in claims activity. Strictregulations and the high standardsmaintained by ship owners generallyhave ensured this concern has notmanifested itself.We have seen a greater focus fromunderwriters on Owners’ financialcommitments, with disclosure ofmortgage arrangements becoming acommon request. The potential forlate premium payment is also ofsome concern and tight creditcontrol monitoring is commonplace.This activity is now generallyoutsourced in the London marketwhere the underwriters themselveshave little influence on extendingterms of trade.The “Deepwater Horizon” case willundoubtedly have an impact on theimage of the shipping sector and thecarriage of energy related products bysea which the industry has fought sohard to improve over the years. Theoffshore energy sector will obviouslyfeel this far more keenly both in termsof image and increases in rates. Inour opinion we do not believe thatthis claim will have a negative impacton marine insurance rating. Whilst anumber of treaty reinsurances areplaced on a combined energy andmarine basis we could see somecapital providers reallocatingcapacity into what they considermore stable classes of insurance.Piracy remains a concern forUnderwriters, Owners and Operatorsalike, with vessels trading throughthe Gulf of Aden and Indian Oceanhaving to cope with the peril, exposureand cost of Piracy. This crisis seemsset to continue with in excess ofUSD 300m in ransoms and associatedcosts having now been paid out bythe insurance industry over the pasttwo years. Underwriters arebecoming increasingly nervousabout the spread of this activity to1,000 miles off the Somali coast.The White House Executive Order13536 on 12 April 2010 has appliedmore pressure and an even tighterframework within which the shippingand insurance industries are able todeal with this criminal activity. Wehave written a separate paper onthis subject providing guidance toowners and operators on the impacton this order and under whatcircumstances OFAC need to becontacted. Please visitwww.jltgroup.com/piracy-insurance.The United Nations Security Counciladopted Resolution1929 imposingadditional sanctions against Iranwhich strengthened the existingmeasures in place. The EU isexpected to implement thisResolution with further substantivesanctions in the near future. Thesanctions stipulate that no insuranceor reinsurance contract can beprovided relating to the movement ofrefined petroleum products to Iran.This is a developing situation but thedepth of international concernregarding Iran and the need tocarefully and diligently monitorcompliance with all existing andfuture sanctions against Iran isparamount. A Lloyd’s MarketBulletin was issued on 8 July 2010(reference Y4409) to direct themarket accordingly.

Marine Hull marketThere remains a plethora of capacity formarine hull insurance in the marketwhich creates a very competitive tradingenvironment. The renewal season inJanuary illustrated this being relativelystable with few headline increases andowners renewing for the most part onan “as expiry” basis for those withgood records.Whilst straightforward reductions are rare wehave seen various mechanisms being used overthe past three months which realise the samenet effect to owners contingent on continuity,loss ratios or premium payment. We suspectthat over the next 12 months longer termpolicies will again become more prevalentsubject to the provisions of LSW 196A (Noticeof Cancellation Clause for long term policies).These comments relate to the market ingeneral as undoubtedly there are certainspecialised shipping sectors which have theirown unique variables for which a specialistmarket has developed within the insuranceindustry, for example the offshore industry,overside equipment sector, the Yacht marketand the Gas industry.We continue to see banks demand qualitysecurity and anticipate that their requirementswill become ever more prevalent in the marineinsurance sector as has been the trend overthe past few years.We have also seen a greater differentiationbetween good operations with good lossrecords and sub standard operators whohave a history of attritional losses. The marketis generally making it harder to obtain all riskscoverage from quality security at a costeffective price where there is evidence of poormaintenance. The emphasis is very much onthe quality of the operation rather than theage of the tonnage as well run older vesselscan be considered an attractive propositionin some markets.

Changes in capacity over the past 12 months and regional visibilityIn recent years we have seen additional capacityfor international business evolving from a numberof markets including London, Holland, France andRussia. Some of these are new operations butthere are a number of underwriters who werepreviously not writing International marinebusiness who now have a remit to provide capacityin that arena. In the Middle East and Singapore wenow have access to a number of operations whichpreviously had a solely domestic focus.By the same token a number of European operationshave continued to pursue and bolster regional officestrategies in order to become better aligned with thelocal industries. For example there are now a number ofhousehold names established in the Middle East andSingapore including AxA, RSA, Watkins, Catlin, Groupamaand Chaucer all with marine capability. This in itself doesnot mean that capacity has increased rather it has beenredistributed and become more visible in those regions.It does however mean that there is more focusedcompetition in those now mature markets.The new capacity joining the Marine market or about tojoin the Marine market include the following:Montpelier Re – Lloyd’sWR Berkley – OsloBarbican– Lloyd’sLaveretus – Power Barge specificWR Berkley – Soon to write marinefrom Lloyd’sDMI– Dutch Marine InsuranceConsolidation in the Marine market includes thefollowing:• Amlin purchased Fortis Corporate Insurance forEUR 350m. 3 June 2009• Codan (a subsidiary of RSA) purchased TrygVestaForsikring A/S marine book of business in April 2010The net effect of this movement is more Marine capacityhas been entering the market and will continue to do sotowards the end of this year.One of the reasons that capital providers are attracted tothe Marine market is the lack of volatility. The peaks andtroughs in the market have become relatively soft overthe past few years. This obviously depends on theclasses on which companies have focused and sectorsin which they specialise. The following Lloyd’s “T” riskgrouping code figures illustrate the average loss ratio forthe marine market over the past few years.Hull Results to the Lloyd’s market “T” AccountYear Loss ratio1999 139%2000 116%2001 91%2002 92%2003 59%2004 78%2005 80%2006 90%2007 96%2008 90%2009 61%*• * (Six quarters’ figures ontriangulation)• Figures are gross loss ratiosSource: Xchanging Data & informationservices.OutlookWith the number of new Marineinsurers continuing to enter themarket the combination ofincreasing supply of capacityagainst relatively static demandwill put rating levels underconstant pressure over the next12 months. This year has, so far,not produced the headlinemarine losses we have seen inthe past. Investment returns forunderwriters have also increasedconsiderably compared with lastyear. This trend will assist incontaining rating and deductiblelevels which if maintained weexpect to be borne out in theDecember reinsurance renewals.

Construction and ConversionAncillary InterestsThe Builders Risks’ marketremains relatively soft with anumber of underwriters nowparticipating in this arena whichhas proved for some to be aprofitable move. Underwriterswho may not have made theprofits anticipated under their“T” code are often able to relyon the balance of their “TS”code business to provide somebalance to their portfolio.This is becoming an increasinglyspecialised market requiringtechnical expertise and detailedunderstanding of the associatedrisks especially in the offshore andmega yacht sector. There have beena significant number of conversionsespecially in the FSO/FPSO sectorand this is a trend that is expectedto continue as some of the majorproject around the globe come tofruition. Whilst the final contractvalues involved in these projects aresignificant there is enough capacityin the market to provide theprotection required. We forecastthat rating will remain stable in thissector over the coming months.Capacity for Disbursements, Hullinterest, Mortgagees interest,Cash on Board and otherancillary marine interests as withprevious years remains plentiful.Competition for attractivebusiness remains strong and anumber of facilities are readilyavailable in the market with anumber of alternative leadingunderwriters.War MarketThis class of business isdominated by the Londonmarket and by domestic Warpools in some of the world’sleading maritime nations.There is plenty of capacity forwar risks and this is a verycompetitive market. Thedynamics of the war markethas led JLT to develop anumber of very innovative Warrisks structures to assistowners and charterers alike.In the past 12 months theexposure to this market haschanged dramatically with mostowners moving the peril ofPiracy (where applicable) fromthe Hull clauses to the War placing.This provides clarity of coveragefor owners and avoids theapplication of a deductible in theevent of a hijacking and protectsowners’ Hull records against aransom claim. Whilst this has ledto the application of additionalpremiums on charterers/ownerswe have also seen a significantnumber of ransom paymentsmade. As we mentioned earlierwe estimate the market has paidin excess of USD 300m inransoms and associated costs torelease vessels from Somalihijackers in the past 24 months.We have also seen a number ofvessels sustain damage duringattacks and hijackings.The industry continues tomonitor the situation in the Gulfof Aden/Indian Ocean verycarefully and maintains a regulardialogue with a number ofshipping organisations, forexample BIMCO, ICS andIntertanko who have beeninstrumental in ensuring theinsurance industry is regularlyconsulted at IMO working groupsand alike on this crisis.The areas of “perceivedenhanced risk” in general aresubject to closer scrutiny thanever before with Aegis providingthe Joint War Risks Committee(JWC) with regular advice andglobal intelligence. These listedareas are amended on a far moreregular basis than in previousyears to more realistically reflectthe increase or decrease inglobal tensions in specific areasaround the globe.

Special Contingency CoverThe Special Contingency orKidnap for Ransom (K&R)market has not previously beenthe domain of mariners butwith the advent of hijackingson the high seas of the scalerecently experienced this classof business has developedconsiderably. There are now anumber of underwriters in themarket providing this type ofcoverage. A few have alsoincurred some of the lossesreferred to in the previoussection and whilst thereremains plenty of capacity forthis exposure we have seensome increase in premiums ontransit rates by some insurersrecently who do not believe themarket can be sustained at thecurrent levels.This is traditionally a PersonalLines coverage and thereforeamendments to the wordinghave been essential to reflectthe requirements of the marineindustry. These include thewaiver of subrogation againstHull or War underwriters toensure that this is a first losspolicy and also, where required,the placing is extended toinclude the property as well asthe crew.The existence of such a policy ishighly confidential. The morespecific advantages that can bederived are documented in ourwhite paper “Piracy Coverageand Response” which can befound on our web pagewww.jltgroup.com/piracy-insuranceJardine Lloyd ThompsonLimited (JLT) have formed aPiracy Forum to harness theexpertise of the marine teamand the Financial Risks Securityand Political Risks Division inorder to monitor theinternational, political and legalarena, and assess the impact onthe shipping industry andinsurance market.This forum ensures that JLTremain at the forefront ofdevelopments relating to thiscrisis which in turn enables us todesign solutions and respond toclients concerns as they arise.PiracyCoverage and ResponseDistinctive. Choice.ENERGY & MARINEThis white paper has been prepared for ship owners and operators andaddresses the key insurance issues that need to be considered.Executive Order 13536Blocking Property of Certain Persons Contributing to the Conflict in SomaliaOverviewPiracy, never the most straightforward of subjects, remains a focus of attention for navies, governments,insurers and shipping industry bodies who continue to address the numerous legal, political andinsurance issues that have arisen. That said, the overriding concern of individual ship owners andoperators naturally remains how best to prevent an attack, and how to protect against the financialconsequences of a successful hijacking.This entire issue became more convoluted when on 12th April 2010, the President of the United States issued ExecutiveOrder 13536 entitled “Blocking Property of Certain Persons Contributing to the Conflict in Somalia”*. This paper is notspecific to piracy, but is rather a measure that has been taken against entities and individuals involved in activities thatconstitute threats to the peace, security and stability of Somalia. Piracy and armed robbery at sea are deemed to beincluded in this definition, although the term “ransom” is not specifically mentioned. Notwithstanding this, the wording of theOrder, leaves little doubt that the action of responding to a demand for ransom money in order to secure the release of ahijacked vessel, its cargo and crew, could contravene the Order, and leave the victim at risk of being in breach of USGovernment sanctions.This paper provides a brief background to the Somali piracy crisis; the Order itself and its intent and answers some of themore pressing questions that shipowners and their insurers have raised. This is not intended to be a fully comprehensivedocument; indeed many issues remain unclear and subject to further interpretation. Nevertheless, it is hoped it will be ofassistance to those who are concerned that they might become involved, in one way or another, with a piracy incident.*www.ustreas.gov/offices/enforcement/ofac/legal/eo/13536.pdf

Business InterruptionSupply in the Loss of Hire marketis far more keenly matched withthe demand. This has been thecase for a number of years andwhilst we see the occasionalrally with rates reducing this isthe exception rather than the rule.London has a small and highlyselective Loss of Hire capacityfor placements on a stand alonebasis and participation isnormally dependant on acombination of Hull and Loss ofHire income. The Scandinavianmarket has traditionally hadmore success with this class ofbusiness and captures themajority of domestic andinternational owners.The demand for Loss of Hire has notincreased in the last 12 monthswhich is perhaps not surprising giventhe dynamics in the shippingmarkets and financial institutions towhich this coverage is often linked.We anticipate demand for Loss ofHire will increase as the marketgathers pace that income streamprotection will assist not only in theextension of credit but the basicprotection of balance sheet exposures.London-based Transmarine continueto grow their business as a standalone specialist provider and leaderin Marine Trade Disruption andConsequential Loss insurance.Writing 100% of risks this marketprovides a real alternative to standardLoss of Hire cover with its productdifferentiation. The comprehensivepolicy wording provides a one stopsolution to purchasing conventionalstand-alone policies such asStrikes, Loss of Hire/Earnings andCruise Indemnity.The Strikes Club based in Monacohave also come to the fore in thepast 12 months providinginnovative coverage for delayexposures which are not readilyavailable in other markets.Underwriter transfer marketThe following individuals have transferred or have announced a transfer around the hullunderwriting community in the past 12 months.From Aon to Swiss Re– Peter Townsend/Lee BrightFrom Swiss Re to Montpelier Re – Mike Southgate/Mike Thompson/Chris Stafford-HillFrom Talbot to WR Berkley– Louise NevillFrom Codan to Barbican– Gary Sangedal/Suzanne WardFrom JLT to Watkins syndicate – Emma RussellFrom RSA to Catlin– Keith PotterFrom Fortis to DMI– Ernst-Jan SundermeijerFrom Gerling Oslo to Bergvall Marine – Mona HaakonsenFrom NEMI to WR Berkley Oslo – Bjorn Olav Norbye/Eva ByeFrom Catlin to Amlin– Iain HenstridgeFrom Swedish Club to Skuld– Clas RydenFrom Swedish Club to Skuld– Rune BagenholmFrom ACE to Liberty– Rob Henbury

JLT Marine CapabilitiesAt JLT we constantly look toalign our business with theshipping industry and the varioussectors we serve. We aim tocontinue to be flexible enough todo that so we can continue toassist owners and operators withtheir existing exposures and alsotheir future aspirations.Our marine division is one of thelargest in the world looking after theinterests of some 5,000 vessels fromcoastal tonnage to USD1bln FPSOs.We also look after a third of theworld gas fleet and many of theworld’s largest port and terminaloperators. We place in excess ofUSD 260m of marine premium intothe market and handle over 1,500claims each year.We take pride in our service and thebusiness that we have grown aspart of a consistent team over anumber of years. We have anaverage of 14 years service withinour team. Our approach to businessis different from other brokers whichensures that we deliver the bestresults to our clients.Most importantly we understandthe shipping industry and thenumerous pressures of operatingin that arena. We ensure that thetime and effort and considerableexpense put into running operationsare fully appreciated by insurers.We structure deals that are sensitiveto an individual operator’s positionin the marketplace to enhance theirtrading position.We invest heavily in spending timewith our clients to understand theirtechnical operation, aspirations andculture. When accidents happenwe are there to swiftly get you backafloat. Our senior executives travelextensively to maintain this approachand we encourage the lead insurersto visit your operation for themselvesto facilitate an understanding andco-operation which is in our viewessential to getting the best value.We specialise in marine risks fromtraditional Hull and Machinery andP&I to Financial, Credit and Politicalrisks exposures. We maximise thecoverage with underwriters to ensurethat our clients get value for money.The size of our book also gives usthe capability to leverage the bestdeals for our clients. For example,we are the largest producer of tankerbusiness to the providers of COFRguarantees and hold a similar statuswith a number of the leading marineinsurers in the world.

ContactsDivisional Managing Director –Energy & MarineMartin St Pierre – PartnerTel: +44 207 558 3910Email: Martin_St_Pierre@jltgroup.comJardine Lloyd Thompson Limited6 Crutched FriarsLondon EC3N 2PHTel +44 (0)20 7528 4000Fax +44 (0)20 7528 4500www.jltgroup.comLloyd's Broker. Authorised and Regulated by the Financial Services Authority.A member of the Jardine Lloyd Thompson Group. Registered Office:6 Crutched Friars, London EC3N 2PH. Registered in England No. 01536540.VAT No. 244 2321 96.© August 2010. 262474