MARINE MARKET REVIEW 2009
UIB MARINE MARKET REVIEW 2009
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 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 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.
TWO YEARS OF TURMOIL
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
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
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
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.
UIB INTERNATIONAL REACH
UIB OVERSEAS AND
ANDREW LITTLE – MANAGING DIRECTOR
TOM RICHARDSON – DIVISIONAL DIRECTOR
PATRICK JORDAN– ASSOCIATE DIRECTOR
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