Marine insurance industry shows its resilience despite tight economic conditions
The International Union of Marine Insurance (IUMI) - representing 40 national and marine market insurance and reinsurance associations - presented its annual statistical report on the marine insurance market at its annual conference held in Cape Town.
Whilst global marine premiums were up by 2%, IUMI highlighted an increasing mismatch between income levels and covered risk.
The Vice-Chairperson of IUMI's Facts & Figures Committee, Astrid Seltmann, explained:
"Overall premium income reached USD 28.5 billion (R421.8bn) in 2017 which represents a 2% increase compared with 2016. This upswing is largely attributable to growth in trade plus strengthening of European and other currencies against the US dollar. But it masks the dramatic situation which is unfolding when current premium levels are viewed in relation to covered risks and the impact of claims.
She pointed out that the cargo market was recently affected by unprecedented natural catastrophes and outlier event losses and this has negatively impacted underwriting results. “It also signals the increasing, and often unknown, accumulation of values both on shore and at sea.
In the hull market, falling vessel values have, among other market conditions, contributed to an erosion of income to a degree where income is now not sufficient to allow for normal repair costs in a given year.”
Heightened risk
Seltmann stressed this downward trend is particularly worrying given the relative absence of major hull losses in recent years. The last ten years' statistics clearly show an increasing volatility in the impact of claims on underwriting results caused by the random occurrence of claims with unprecedented cost. “As vessel sizes continue to increase, this trend will not reverse, and the heightened risk must be taken into account. The shipping and insurance industries will have to embrace this level of volatility and uncertainty which may impact future profitability.”
The offshore energy market has also seen a substantial erosion of premium income caused by the low oil price and the consequent low activity in the offshore sector. Insurance capacity has remained abundant, however. More positively, the 2017 hurricane season had little effect, and major claims impact remained low. It remains to be seen when and to what degree the rising oil price will support an upswing in this sector.
Sustainable underwriting
“In general, the IUMI statistics clearly illustrate the need for sustainable underwriting by understanding the simple - and sometimes not so simple – mathematics of evaluating the risks and expected costs associated with a prudent marine portfolio," says Seltmann.
The distribution of the USD 28.5 billion global income between geographic regions remained stable, with only a 1% increase in the share of Asia and Latin America as compared with Europe. In 2017, Europe represented 49% of the global income, Asia/Pacific 29%, Latin America 10%, North America 6%, Middle East 4% and Africa 2.4%.
For global marine premium by line of business, cargo continued to represent the largest share with 57% in 2017, hull 24%, offshore energy 12% and marine liability (other than Protection & Indemnity) 7%.
Hull sector
The hull sector recorded a global underwriting income of USD 6.9 billion representing a decrease of 2.3% on the 2016 result. Exchange rates exert less influence on the hull market due to the global nature of the hull portfolio. The downward trend in global hull premiums appears more severe when compared against world fleet numbers and vessel values. Whilst the global fleet continues to grow in numbers and in average vessel sizes, the average insured values have reduced year-on-year since the financial crash of 2008. This, together with depressed freight rates, is affecting overall premium income. 2017 saw a slight rally in vessel values in the bulk market and 2018 is likely to see values increase for the offshore fleet but, in the main, IUMI's figures show an increasing mismatch between fleet growth and premium income.
Cargo sector
Premium income for marine cargo insurance was estimated at USD 16.1 billion for 2017, representing a 6% increase on the 2016 result. Cargo was the only line with an actual increase in volume and, consequently, its relative share of the overall global premium. However, it must be noted that this increase in absolute numbers was the result of an upswing in trade in combination with exchange rate fluctuations (which affect cargo premiums more strongly than other sectors).
The period 2014-2016 showed an extraordinary increase in loss ratios, primarily caused by the impact of outlier and natural-catastrophic losses. Seen in the context of increasing accumulation exposure and climate change, this might indicate a "new normal".
In 2017 this recent trend continued and is expected to be affected more than average due to a number of natural catastrophic events including hurricanes, the Mexican earthquake, flooding in Bangladesh and the Californian wildfires. Underwriting year results always deteriorate due to the lag in registering and paying claims. When all claims attaching to the 2017 underwriting year are known, a final gross loss ratio of around 80% is likely to be reported.
Offshore energy
Global premiums for the offshore energy sector reached USD 3.5 billion in 2017 representing a 5% reduction on 2016. It should be noted that the reduction from 2016 to 2015 reached a massive 21%. The majority of business in this sector is transacted in US dollars and so exchange rate fluctuations have very little impact. The strong decrease in income from 2014 driven by the falling oil price now appears to be flattening out as the oil price begins to rally.
