The Hull and Machinery insurance market has been soft over a sustained period with rates falling to historical lows. This has led to a number of marine insurance brokers questioning if this trend can continue and if there are any signs that the market will change in the near future.
This is buoyed by the fact that the most recent Lloyds of London combined ratio for the marine underwriting market running at 105.4 per cent. In other words this class of business is being written at a loss. Coupled with this, some underwriters are beginning to withdraw from the market due to the fact they cannot continue to write an unprofitable book of marine business.
The market has slumped to the current low rates principally due to over capacity within the marine insurance markets and the ship owners’ desire to purchase cheaper insurance to compensate in a depressed freight market. This has led to competition between underwriters to simply maintain their book of business by offering lower rates. In the past marine underwriters were able to make up some of their lost income by writing ancillary insurances such as Increased Value and in particular War Risks, where claims were less frequent. The activity of the Somali piracy in the Indian Ocean hugely boosted the War Risk income for underwriters, but this has now abated and basic War rates are insufficient to make any real difference to the overall premium income they receive.
In recent weeks the reductions being achieved at renewals have been lower than in the past, which tends to indicate that underwriters are taking a harder line and trying to bring the market back into equilibrium. Fleets with good claims records continue to achieve small reductions, at least in the short term, and those with poor claims records are now likely to be penalized.
Overall the market is likely to reach a point within the next 12 months where the bottom is reached. For how long the markets will trawl along at this level before another turn is still an unknown factor, but here are some indicators, which could be material to a change:
Will more underwriters pull out of the marine market or will more be tempted to put their toes in the water?
What will be the overall claims trend over the next two years? In the past major marine catastrophes’ had been expected to be the game changers in the rating of marine risks, but this has not been the case.Will this change in the future?
Will underwriters be tempted to offer longer term insurance deals at their present rating levels to ensure that they maintain their book of business and will ship owners be enticed to accept longer term deals when there is still uncertainty about the direction of the market?
The most recent P&I renewal saw all Clubs effectively submitting a ‘no increase’ scenario for the first time in a generation after having pushed for general increases every year. Historically when P&I rates decrease or level out, hull and machinery rates tend to increase.
Lloyds of London has announced they will be opening a new office in Brussels to overcome the possible issues, which Brexit may raise for UK based insurers. Will this have an effect on the London insurers’ vision for the marine market? Will this encourage the non-UK based marine insurance markets to take advantage and continue to offer marine insurance at more competitive levels?
There may be other unknown factors in the current geo-political world in which we currently live, which might also have a bearing on the future for this class of insurance. For instance will the Chinese economy alter; is there an oversupply of tonnage to meet demand; will the new US administration have any effect on world trade; will cyber risks play any part in the future of marine insurance; will the most recent piracy activities in Somali region rise again?
In conclusion we should perhaps be mindful that there are likely to be changes over the coming two years, or even over a shorter period, which will potentially have consequences for our ship owner clients and there will be increased pressure on us, as brokers, to meet those clients’ demands.