Marine Market Review - uib group


Marine Market Review - uib group


“Dependable Corporate

Insurance in

any language”



2008 and 2009 have been two of the more unusual underwriting years that have been seen in recent memory.

The markets (both financial and insurance) have moved in ways which have not been easy to foresee, and charting

a course through the stormy waters has required an ability on the part of insureds, brokers and underwriters to be

reactive and agile. In the following pages we examine recent history to set the context and assess the impact upon

the markets.


The arrival of the new millennium brought with it change on many levels. London has been at the forefront of that

change, some of it voluntary, some of it imposed.

For the business centred in and around Lloyd’s of London the Market Reform process has seen change in the

methods by which business is quoted and bound. “Contract Certainty” has been adopted across the board. Greater

consistency and transparency is the ambition, and is becoming reality. Electronic data is being fully incorporated

into daily practice with good effect for knowledge transition and sharing, and business models are taking shape

which will be the templates for future decades. Nevertheless the insurance business remains a people-focused

industry, with the interplay between broker and underwriter at the heart of its continued success and aspirations for

the future.

The challenges before brokers, underwriters and insureds are being firmly accepted and overcome, and the

expectation is that Lloyd’s will become more, rather than less, of a dynamic force in the years to come.

For the businesses with roots outside Lloyd’s – predominantly the P&I Clubs – the last nine years have presented

challenges of similar nature. Although the International Group is far from achieving standardised documentation

(indeed, the I.G. no doubt wishes to avoid any such standardisation so as to maintain the individuality of the Clubs

who compose the Group) the Clubs have moved forward with models which provide greater insight into their

underwriting processes. The degree of transparency which follows allows brokers and insureds together to have a

better grasp of a Club’s particular direction and underwriting intent.

Added to this has been the attention paid by the Financial Services Authority (FSA) to the underwriting models

employed throughout the International Group, resulting in a remit to the Clubs to move away from using investment

income to fund underwriting deficit. This is a fundamental change of approach and imposes on the Clubs a need to

underwrite on a nett account basis. All the Clubs have grasped this nettle, and it has become the foundation stone

for the future of underwriting within the Group. As discussed later, the timing of this may well have been fortuitous.


2008 was a year of extremes. Both ends of the financial spectrum were represented. Broadly speaking, the early

part of the year yielded strong results for many as the majority of international financial and trading markets went

from strength to strength.

Then the pendulum swung. The second half of the year featured a sudden and steep decline where previously

there had been growth and success. The world’s financial markets appeared to be in meltdown. Governments were

intervening in commerce to prop up the economies of their countries. Large financial corporations were folding

almost overnight, or “nationalising” themselves with taxpayer money as their levels of accrued debt were exposed.

The value of investments and assets shrank at an unprecedented speed. Confidence disappeared from the global

market, and most industries were caught up in the maelstrom.

For those whose performance in early 2008 had been strong there was a cushion of sorts. 2009 did not promise to

allow that same cushion. Rather, it showed the prospect of increasing decline. Many were left with huge uncertainty

as to whether, having survived a turbulent 2008, they would be able to do likewise in 2009.

As 2009 got going it continued the downward slide. There was little prospect on the horizon for slow down of the

speed of decline, let alone a turnaround. And yet, as 2009 now draws to a close, the turnaround has occurred in

many areas. The recoveries in the financial markets have been documented elsewhere and we will not repeat them

here. The insurance markets do not move at the same pace and to the same extremes as the financial markets,

but the dramatic improvement in global finance is already filtering through. Perhaps the most obvious example of

this has been the turnaround in the finances of the I.G. Clubs. Those Clubs that held faith with their investment

strategies have seen return on investment place them back very close to their previous levels. Nine months ago such

a position looked improbable.

The recovery experienced by the majority of insurance companies has not applied quite so comprehensively to

shipping. The number of vessels in lay up in 2009 has been significant, and there are no immediate signs that

returning economic strength is bringing those vessels back into service quickly. Indeed, the signs are that vessel

owners are taking a very much more cautious approach as they seek to maximise available tonnage against running

costs. Where, eighteen months ago, there was a shortage of tonnage and shipyards had full books, the current

tonnage oversupply is keeping the market depressed. Certain yards have had slots open up, but others have seen

their books remain full through to 2012 and beyond. The lower numbers of newbuildings delivered in 2009 (under

100 million dwt) and the expected number of scrappings in 2010 (likely more than double the 13 million dwt of

2009) may go a little way to redressing the balance.

The traditional equation is that falling revenues lead to lower activity, which in turn leads to decreased investment

as lower asset values affect the bottom line. The latter part of 2009 has injected some strength back into the asset

values but there is not yet sufficient confidence in the global economy to execute a strategy which would bring

about increased investment, leading to higher activity. It will likely take six to nine more months of sustained gentle

growth to bring that about, and that may be too much to hope for at present. Some see the slow return of strength

to the market to be a false dawn, with the expectation that it will fall again soon. Given the very recent information

emerging from Dubai, this argument is not without credibility.


In 2006 & 2007 the P&I Clubs had something of a dress rehearsal for adverse financial conditions as the Group

claims from those years caused strain upon the I.G. pool and reinsurance programme, requiring the I.G. Clubs to

re-evaluate Member contributions to the individual Club finances. This was not an easy sell at the time. General

Increases were well above average during those years, and the shipowner Members most certainly felt the burden

of the financial support they were required to give. Fortunately for most involved, the General Increases and

Supplementary Calls occurred while the global economy was in a period of substantial growth and shipowners were

enjoying profitable times. Additionally, the increased financial requirements were consistent across the Clubs and

thus the Club Members were able to easily see that these were industry-wide issues rather than contained within

one or two particular Clubs. The grass was not greener elsewhere.

Difficult though it has been for the Clubs to make these calls, the hard work appears to have been done. As the

global economy (hopefully) continues improving so it can be expected that the Club finances will grow accordingly.

Indeed, some would say that the Clubs are now ahead of the curve. The calls levied so far have put some strength

back into the affected years, and cautious and consistent underwriting practices may allow the Clubs a period of

financial comfort. The extent to which they pass that balance sheet protection through to their members remains to

be seen. It has to be acknowledged, however, that the General Increases imposed for the 2010 renewal are a healthy

step in that direction. The 2010 General Increases are (on average) more in line with figures last seen in 2000, which

demonstrates how difficult the intermediate years have been for the I.G. Clubs, and suggests that as a whole the

Clubs are more strongly financed now than they have been for a decade.

The fact that the Clubs now have restrictions on utilising investment income to offset underwriting result means

that there has been a different focus for more recent years. Where before there may have been a temptation to fund

underwriting deficit with investment income, this is no longer the blueprint. Given the effect on investment income

in the latter part of 2008 and the early part of 2009, this looks to have been a very good thing. The emphasis has

instead been on more structured underwriting modelling rather than a balance sheet transfer. As it has turned out,

the financial recovery of 2009 has added further strength to the Club reserves and finances, whilst the underwriting

portfolios have a different, and improved, focus.

As the 2010 renewal approaches, it appears that the Clubs are now well placed to move forward with financial

strength. Assuming the 2006 & 2007 years do not deteriorate dramatically further (how much worse can they

get?) and that 2008 stays within reasonable limits, then the Clubs should be fairly robust for the next few years

following the (at least partial) replenishment of their finances. This is not to say that cheap cover will be available.

The altered underwriting procedures should counteract that. No doubt the now traditional deductible increases will

continue unabated.

Those providers of P&I insurance outside the International Group have seen the same issues apply, but their commercial

underwriting and business models have on the one hand provided slightly wider scope for risk consideration, whilst

on the other hand they have had to impose this on a client list whose understanding of (and sympathy for) the

mutual principles may be less than that of an I.G. Club Member. The non-I.G. clubs have emerged in good shape,

and the P&I facilities in the wider market (which are predominantly fixed premium) have balance sheet protection

from their other business lines.

A few years of solid and consistent renewals – in other words, a period of calm after the storm – will do everybody

some good.


The 2006 & 2007 underwriting years have set new (unwanted) highs for claims on the International Group pool far

beyond anything previously experienced. The statistics for these years have been described as a claims “explosion”,

or a “spike”. To describe it as a spike suggests that it is (hopefully) an anomaly within the overall Group claims

history. But it is too risky to consider it as merely an aberrant statistic. To describe it as an “explosion” is to suggest

that it has earth-shattering impact and consequences. This rather over-states the situation. There is no doubt that

the effect upon the pool (and the Group in general) has been felt strongly and widely. But the mutual system which

is at the heart of the Group protocol gives the Clubs opportunity to recover some ground through supplementary or

excess calls, and this option has been widely exercised by the Group members.

At the time of writing, 2008 has the signs of following in the footsteps of 2006 & 2007, although the early indicators

would suggest that the ultimate level of claims cost will not reach the dizzy heights of 2007 (which is currently at

$850 million). The 2009 year is too immature to yet provide much of a clue as to whether it will follow the path

of its immediate predecessors. It seems likely that the lower tonnage levels in use will act as a depressor on claims

volume, and it is to be hoped that the number of significant casualties will likewise decrease.


The Hull & Machinery market has not experienced the somewhat severe gyrations of the P&I world. It has

nonetheless suffered its own problems over the term. The H&M market appears fairly staid by comparison in that it

does not suffer the same degree of financial variation. Whilst it has never been a high profit market, it is a consistent

one. With the exception of catastrophic losses, which occur infrequently, it is usually content to move along at its

own pace. High frequency attritional (often Machinery) claims are the typical blight upon this market. There tend

to be large volumes of these claims which, in part, represent a ready source of maintenance income for owners and

operators. Although aware of this, to date the insurers have not acted decisively to stem the flow of these claims.

That possibility is on the horizon though.

The market capacity has not particularly diminished in the recent troubled financial times. Whenever a carrier

withdraws from the sector there usually seems to be another who is perfectly willing to step in anew or to increase

an existing line, hence the overall capacity for the class has not been dramatically affected.

The noticeable change over the last few years has been an increase in the appetite of underwriters to take larger

portions of individual risk. The consequence has become that when a substantial loss (say in tens of millions of

dollars) occurs it tends to land on a much smaller number of insurers. This means their results are badly affected

but the remainder of the market escapes the loss. Twenty years ago the large losses were much more widely spread

and it was a rarity for an underwriter to completely escape a major loss on a high profile account. Thus the market

can experience really quite different results between one underwriter and the next – often sitting in the same

marketplace seemingly participating in similar books of business.

As for renewal trends, the main Markets are now, in the 2nd half of 2009, offering pretty flat renewals. At the end of

2008 and beginning of 2009 there was a discernible trend for a portion of the Market to be seeking (and achieving)

small increases across the book. These small increases were in the region of 5 % to 7.5 %, but many renewals with

excellent records went through with 2.5 % rises at that time. This trend has now passed and fleets renewing with

reasonable records are now regularly passing through with ‘as expiring’ terms.

The forecast for next year is, as usual, hard to predict but we do not see any reason for significant change from the

current status.


Although sharing some of the conditions and experience of the H&M markets, the Marine Liabilities market is

somewhat more aligned to the P&I sector and therefore tends to share some of the P&I-based underwriting results

& consequent renewal trends. Marine Liability underwriters do not have the mutual system in play, and thus have no

ability to levy Supplementary Calls. Their concentration is therefore slightly more focused on the initial underwriting

terms. They differ from the H&M market in that it takes much longer for their result to truly develop, meaning that

claims can & do sometimes appear a considerable time after the risk was actually written.

In several areas the liabilities section of the Market is still trying to push rates up a little at renewal. Whereas this

push fizzled out in the H&M market, the Liabilities market is continuing to seek a slight (5% – 7.5 %) upward trend.

The lower number of interested underwriters restricts capacity and competition, thus increasing their chances of

imposing rate rises. Also, there are only a few overseas markets who can provide useful capacity on proper marine

liability risks, thus concentrating attention within London.

It is again difficult to predict the market movement for 2010 and beyond, but it would not be surprising if ultimately

the markets hold steady after a period of small incremental rises. We do not therefore expect there to be dramatic

changes in terms, pricing or capacity in the general Marine Liabilities market.


In early 2008 we commented that “the premium pot for cargo business had only remained at the size it is due to it

being fuelled by underlying commodity prices”. When, as a result of the global credit crisis in late 2008 and early

2009, the value of those commodity prices fell, underwriters found themselves with diminished cargo volumes and

values and an excess of capacity.

Obviously, given world market conditions, turnover fell far short of estimates for many. The natural reaction of

underwriters at the time was to try to push for premium increases on such accounts in order to counterbalance the

shortfall. It was an understandable approach, but one which had little chance of success due to the growing capacity

in the market. Additionally, the cargo owners themselves were unwilling (or unable) to accept comparative increases

in premium at a time when they were suffering from a significant downturn in their own markets.

This position required the brokers to exploit the excess capacity in the market by moving (or threatening to move)

business to hungry competitor insurers if the incumbent insurer had targeted rate increases. As a consequence many

renewals in 2009 went through at flat pricing or, where the record was good, achieved reductions.

Despite lower commodity values and the contraction in worldwide trading, which in turn generates lower premium

revenue, ratios for cargo business remain good. Consequently, Cargo underwriters are still keen to take on new

business and this, coupled with the fresh and still growing capacity, is likely to mean that the favourable market for

cargo insurance buyers will continue into 2010.


Traditionally, as tonnage activity reduces so claims rise, at least initially. When market conditions are bullish and

owners have their vessels trading at good (if not excellent) rates they are less willing to interrupt the trade to process

the H&M claims unless they have no choice. Also, Owners tend to be more willing to shoulder some of their own

losses and can decide against submitting claims so as to protect their loss records/ratios for “leaner” years. The

opposite tends to be true too. When those “leaner” times occur (and global recession such as we have recently

seen inevitably produces business hardship) insurers tend to see an increase in claims notifications as insureds seek

to utilise their insurance coverage to protect their balance sheets.

In the hull markets, less demand for vessel trade leads to more lay ups and periods of inactivity. This then allows time

to address issues which may have been less prevalent when the vessel was working.

The liabilities markets tend to have a longer “tail” (or period during which claims get notified). Thus the effect

gets deferred over a longer period of time. But usually there is a sudden (if short) increase in claims notifications as

affected or injured parties look to call upon the insurance of others to maximise income. Of course, as time goes on

and trade drops off the law of averages kicks in and the general number of claims declines.

The depressed period between the middle of 2008 and the middle of 2009 is too short to say yet whether a medium-

or long-term claims reduction will now occur. As mentioned, tonnage trading activity is not yet back to previous

levels, and it looks likely to be some further time before it gets there. But the signs of recovery are encouraging and

if the trading activity does get back up to speed within the next nine to twelve months then the reduction in the

number of claims will likely only appear as a small downward dip on the graph.


As 2008 dawned, the wider insurance world already had its challenges laid out before it. The years leading up to

2008 had created cumulative pressure on certain markets which was pushing insurance pricing upward. Notable

among these directing factors were the 2004 & 2005 hurricane seasons.

2004 was a record-breaking year. It produced nine Atlantic hurricanes and five tropical storms, as well as six Pacific

hurricanes and six tropical storms. The Atlantic weather events were responsible for over 3,300 deaths and $50

billion in damage.

2005 quickly broke those records. The Atlantic gave rise to fifteen hurricanes (four of them attained category five

status) and twelve tropical storms, while the Pacific season contained seven hurricanes and eight tropical storms.

2,280 deaths were noted, and over $128 billion in damage was recorded.

The effect of these two substantial claims years left little windstorm capacity available in the markets, and those

brave enough to remain writing the risk achieved rises at an unprecedented level. 2006 and 2007 were benign by

comparison, and capacity was starting to return to the markets when 2008 blew through.

In 2008 there were eight recorded Atlantic hurricanes and eight tropical storms, whilst in the Pacific there were

seven hurricanes and ten tropical storms. This was the fourth busiest year on record since 1944, and ranks behind

only 2004 and 2005 in cost with $41 billion in damage (the greater portion of which was caused by Hurricane Ike).

Thankfully, 2009 has been a year of comparative calm, but the presence of three of the top four most costly

weather events occurring within a five year period has caused strain on the markets and a degree of conservative

underwriting. It will likely be some significant time before the windstorm capacity becomes in any way bullish once

more and rates drop accordingly.


The dynamics at play in the current marine insurance market have created an interesting situation. As previously

described, on the one hand there are the shipowners who are struggling with lower levels of activity, increased cost

and depleted profits, whilst on the hand the insurers are attempting to enforce market conditions which represent

increased competition, larger capacity, consistent heavy claims volume with high exposures, and perhaps more

stringent underwriting models.

Even in the best of financial times those who buy marine insurance always want their cover at the best price. This is

doubly true when times are bad. A smaller bottom line on the balance sheet adds pressure to all insurance purchases.

Where there is abundant capacity in the market it is normally possible to obtain alternative sources of cover at lower

prices. On this occasion, however, the desire of underwriters will be to maintain current pricing models, so it can

be anticipated that renewals will be hard fought. The Cargo market looks set to proceed on an “as is” basis with

capacity which exceeds demand and inhibits the ability of underwriters to impose premium increases. The Hull &

Machinery market is much the same way, tempered perhaps by greater balance between capacity and interest, allied

to a slightly more robust underwriting approach across the market. It is to be anticipated that much business will

seek to be retained by existing underwriters on competitive terms. The Liabilities market is a little more stringent

than the Hull market and underwriters will need to be aware of global market forces as they push for rate rises.

A certain degree of sympathy can be expected, but no largesse. The P&I market looks set for the I.G. Clubs to be

gentle upon their members but they will be keen not to lose any of the hard fought ground.

On all fronts there are difficult times ahead. Competition remains paramount across all markets and, perhaps more

than ever before, there is a need to understand the business intentions of underwriters and insureds to ensure that

programmes are correctly and appropriately constructed for the short, medium or long term. No doubt all concerned

will be hoping for a period of calm to steady the ship after the recent turbulent waters. If 2010 can avoid the

financial variations of its predecessor years, then there is every chance of that happening.














United Insurance Brokers Ltd

69 Mansell Street

London, E1 8AN, England

T: +44 (0) 20 7488 0551

F: +44 (0) 20 7480 5182


UIB is an accredited Lloyd’s insurance broker and is regulated by the Financial Services Authority (FSA).

Company Registration Number: 02480634


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