A year ago, the container shipping industry was in the doldrums with oversupply of capacity and lay-up of 7% of the global fleet in capacity terms. Predictions were that the market would only fully recover in 2018. One year on, we speak to some insurance players for their sentiments on the marine cargo market.
This time last year, the world was reeling from the collapse of South Korea’s giant Hanjin Shipping. That bankruptcy, together with a wave of consolidation for container shipping companies in the following months, has helped to normalise the supply-demand situation somewhat after prolonged excess capacity.
The world’s largest, Maersk Line, reported a profit of $339 million, its first in five quarters, while Cosco, Asia’s largest container line, booked a 1H2017 profit of about CNY1.86 billion (US$285 million) compared with a loss last year.
For marine cargo insurers however, optimism has not yet caught up. Global trade growth remains relatively weak, and the cargo insurance sector remains highly competitive with continued pressure on margins and profitability, said Mr Tom Taberner, Regional Manager Energy & Marine Asia, Allianz Global Corporate & Specialty (AGCS).
Sharing this view is Mr Mark Johnson, CEO of Hong Kong headquartered marine broker FP Marine Risks. He said sluggish world economic growth, causing current levels of demand are a contributing factor to insurers’ competitive pricing.
Asia’s growth areas
There are some regional pockets of positivity though. Examples are Singapore, Malaysia and Indonesia, where the economies seem to be picking up and this may help cargo volumes to increase, said Mr Said Khan, Regional Head of Cargo, Beazley, expressing optimism. China is another key driver of trade.
“We believe there are good opportunities in the region for project cargo insurance, particularly with the Belt and Road initiative that China is spearheading. There is enough expertise in Singapore especially to support the understanding and underwriting of such risks locally. Beazley is experiencing this trend, with an unprecedented number of risks being submitted to us in Singapore. Elsewhere, Indonesia is also seeing the ramping up of infrastructure which means there will be more material shipments for the projects,” he said.
For FP Marine Risks, while it has not been immune to the trend of reducing premium rates and trade volumes, it has produced a profitable book of business as it focuses on select geographic areas to maintain a strong market position. “We have seen exports from China continue to grow while other areas have fallen away but overall our book remains balanced,” said Mr Johnson.
Increase in underwriting capacity
In Asia, there has been an expansion of domestic markets with investment in underwriting expertise. There has also been a shift in local strategies to increase underwriting capacity and thus retain more business onshore, observed Mr Mike Davies, Chief Underwriting Officer, Marine, APAC, XL Catlin.
He said that there has been more competition, with more insurers looking to grow or start writing cargo business, increasing pressure on premium rates. This is coupled with a shortage in experienced cargo underwriters, leading to a rise in talent costs as another factor which affects insurers’ profitability.
Expansion is also coming from new players. In March, shipping liner APL partnered with an unnamed major marine insurer to offer cargo assurance to shippers who want protection against risks of loss or damage to cargo-in-transit. Meanwhile, Great American Insurance Group launched its first Asia office in Singapore in end 2015, and has recently hired senior marine underwriters.
Underwriting capacity may not equate quality. Mr Khan said a lack of underwriting discipline, coupled with overcapacity, continue to affect the market, with some players preferring to chase premium rather than require an adequate price for the risk.
Risks in marine cargo
At the International Union of Marine Insurance’s (IUMI) annual Spring meeting earlier this year, one key risk of concern highlighted for cargo underwriters was accumulation losses, both on board and in port.
Ultra Large Container Carriers and accumulation risk in ports
One vulnerability is the high cargo value of new generation Ultra Large Container Carriers (which carry 20,000 Twenty-Foot Equivalent Units (TEU)), while another is the accumulation risk in ports, particularly in Chinese cities like Shanghai, Shenzhen and Tianjin, where cargo throughput values could reach hundreds of millions to over US$1.5 billion daily.
Recalling the 2015 Tianjin disaster, Mr Donald Harrell, Chairman of IUMI’s Facts & Figures committee said at its Annual Spring meeting that marine risks continue to grow both in size and complexity. He said: “It is vital that underwriters fully understand the potential losses that they are being asked to insure… As marine underwriters, we must continue to innovate and provide cost-effective insurance solutions to enable seaborne trade to continue without interruption.”
Another major risk at the forefront in recent times is cyber threats. Maersk suffered a global IT breakdown in June 2017 following the NotPetya attacks, causing massive disruption to cargo shipments, order processes and port operations, and estimated costs of the impact could come up to $300 million.
AGCS’ Mr Taberner said that cyber attacks have the potential to have catastrophic consequences for a business given the right confluence of events, and they can lead to infinitely more exposures due to the interconnected nature of the industry. A cyber attack compromising control of a vessel could lead to, for example, two mega ships colliding, with losses to the tune of $4 billion.
“The challenge facing the industry currently is in budget constraints. Already, crew, training and maintenance budgets are under severe pressure. It is important that the standard practices, such as crew education and identifying measures to back up and restore systems are implemented to reduce cyber risk,” he said.
Another risk is cargo exposure to Nat CATs. The Port of Houston’s container terminals in Texas were closed for a week as a precautionary measure as Hurricane Harvey made landfall end August. One estimate is that closing such a major port for a week can cause financial losses of up to $2.5 billion from delayed or cancelled business transactions, said Ms Maria Burns, director for the Logistics and Transportation Policy Program at the University of Houston, in the Houston Chronicle. Some business could be lost altogether if ships unload cargo at another port while their usual port is closed.
While piracy is a key risk for the region, cargo theft cases due to piracy in Asian waters has been less of a worry recently, seeing only three cases of oil hijacking for theft in 2016 compared to 12 in 2015.
Mr Taberner has observed that there are some signs of carriers adjusting their underwriting appetite in certain sectors, with an increased focus on the risk management of the insureds’ operations.
AGCS is increasing focus on risk management to add value to clients. Examples include the use of Big Data technology that allows real-time tracking of ships and individual containers to improve monitoring of supply chains, efficiency and recovery in the event of theft. Its international insurance programmes, which offer centralised global coverage not just to help companies expand internationally but also enable them to gain a greater awareness of risks, are seeing rising demand.
“As businesses go global, increased complexity in the supply chain and accumulation exposure requires understanding and modelling,” he added.
Models and solutions
Last year, modelling firm RMS released its Marine Cargo & Specie Model, one of the first of its kind, which helps to strengthen marine risk insurers’ decision-making for risk selection, underwriting, and accumulation management associated with onshore cargo risk. The model also integrates industry exposure databases and mapping files for 150 global ports. It enables more granular quantification and visualisation of marine exposure.
Indeed, the industry has responded to risks well with solutions in the past year, not just innovative, but also collaborative. In January 2016, BIMCO (Baltic and International Maritime Council), together with other leading shipping organisations, launched an industry-first set of guidelines to help the global shipping industry prevent major safety, environmental and commercial issues that could result from a cyber incident onboard a ship (it was updated recently). Be Cyber Aware at Sea is another global maritime initiative, which aims to raise awareness of cyber threats.
However, pure risk advisory from the industry is not sufficient, said Mr Taberner, whose view is that government action is needed to strengthen the regulations governing various countries. Effective regulation and by extension, risk management can only be possible when industry and government or international organisations collaborate.
He cited the example of the International Maritime Organisation’s new regulations requiring all shipping companies to have a cyber risk management plan by January 2021-a compliance deadline he finds too long. “The delay in ensuring compliance could lead to disastrous consequences given the rise in the number of cyber attacks recently. Regulators urgently need to provide an impetus to the industry to comply with essential safety requirements,” he said.
For Mr Khan’s concerns, regulation is an important way to improve underwriting discipline, which in turn is beneficial to all players in the industry. “We welcome regulation that puts an emphasis on treating customers fairly,” he said.
FP Marine Risks’ Mr Johnson’s wish is that regulation will be sufficient to protect clients, but is not so overbearing that it stifles imagination and innovation.
Value-added innovative services
Mr Johnson said that with competition driving premium rates down, insurers also need to look at additional services and value that can be added beyond risk management, like those which drive efficiencies into product and services.
“We should be considering the role of technology and automation, not only in how we generate documentation but in how we source capacity quickly and how we transact business. This will have the additional benefit of capturing significant data which then allow better analysis and more innovative underwriting,” he said.
Blockchain, online cargo and freight platforms, autonomous control systems and self-steering vessels are but a few developments which will disrupt the marine cargo industry in future, highlighted Mr Davies.
Commenting on blockchain, he said: “Moving goods around the globe is extraordinarily process intensive. Mountains of data are shared, numerous contracts are signed and executed, and monies are transferred between different participants. Volume and complexity of these transactions result in data duplication and reconciliation issues. For the different participants in this process, blockchain offers the potential for processing transactions faster, more securely, less expensively and with full transparency. It also enables all parties to have the same version of the truth, thus reducing duplication and eliminating the need for reconciliation.”
Just last month, EY and Guardtime announced the world’s first blockchain platform for the marine insurance sector, launched in collaboration with XL Catlin, Willis Towers Watson, MS Amlin, A.P. Møller-Maersk A/S, ACORD and Microsoft to be implemented from 2018. It connects clients, brokers, insurers and third parties to distributed common ledgers that capture data about identities, risk and exposures, and integrates this information with insurance
As we near the end of 2017, the overall sentiment seems to be one of cautious optimism for the marine cargo market. Mr Johnson said that there have been rate reductions and consolidation but barring unforeseen events, FP Marine does not expect a hardening market. “But we do foresee a period of stabilisation where premium rates decline less or not at all and continued market consolidation may produce slight premium firming,” he said.
Mr Khan said that while the market has been soft for some time, he believes that it is now approaching the bottom of the cycle and he hopes that there will be a return to better underwriting discipline and more appropriate pricing levels.
One thing that resonated was the need to stay innovative to tide over the rough times. Mr Davies said: “There are certainly many disruptions rippling through the shipping and logistics industry that will directly impact the cargo insurance sector. The important thing is insurers should generally understand these disruptions, embrace and embed them to offer innovative and sophisticated solutions while improving operating efficiencies and resource utilisation.”