SINGAPORE-A spate of large losses in the shipbuilding industry has prompted insurers to toughen their standards and limit coverage for shipyards, according to marine underwriters.

Speaking at a workshop at the International Union of Marine Insurance conference earlier this month in Singapore, Simon Beale, chairman of IUMI's Ocean Hull Committee, noted that seven major losses in shipyards between October 2002 and January 2004 cost marine underwriters a total of $738 million.

Insurers' losses included $310 million stemming from an October 2002 fire on the Diamond Princess, which was under construction at a Japanese shipyard; and a $228 million loss for the Pride of America, which flooded and sank while under construction in Germany in January.

In contrast, total international annual premium for shipbuilding risks was only $100 million in 2003, said Mr. Beale, who is also divisional underwriter at Amlin P.L.C. in London.

"That demonstrates the need for a dramatic repricing of the building risk market and the decision to (hold) this workshop and devote it to building risks," he said.

And because of increasingly sophisticated ship designs and construction methods, shipyards, in some cases, are losing sight of basic principles such as vessel safety, stability and integrity during construction, according to John Lillie, managing director of the London-based Salvage Assn.

Also eroding standards is the growing use of subcontractors, which can lead to a loss of control over safety and construction practices, he said.

Financial pressures also are contributing to the problem, Mr. Lillie said.

Tim Huxley, managing director of London-based shipping services provider Clarksons, said that although ship owners are profiting from high revenues, shipyards are not faring as well.

Ships due for delivery this year were contracted at much lower prices than what they fetch today, and the costs of steel and labor are rising, so shipyard profits are marginal, he said. In addition, shipyards are facing growing competition as new players such as China enter the market, Mr. Huxley noted.

The risk of fire is a particular concern, especially until appropriate fire-suppression systems have been installed in a vessel under construction.

"At the start of construction, there is little flammable material, and fire is easily controlled. But later, there is more, and fire can have serious consequences," said John Curley, marine manager for Southeast Asia at Lloyd's Register Group, a marine risk management organization in London.

"Until fire protection systems are in place, the vessel is dependent on temporary systems and physical fire watches," he said.

The shipyard losses were exacerbated by underwriters providing coverage that was too broad and too long term, according to Peter McIntosh, hull underwriter at Wellington Underwriting P.L.C.'s syndicate 2020 in London.

Underwriters also failed to pay adequate attention to the aggregation of risk, particularly with regard to natural perils and to riders broadening coverage, he said.

"At the moment, there is a fine balance, and market capacity could easily slip away if there is continued loss in this marketplace. And that is no good for any of us, especially the buyers," he said.

"There are many reinsurers, I imagine, (that) will not be offering the retentions and cover they were offering in the past," Mr. Beale added.

Underwriters are insisting that shipyards conduct risk assessments, Mr. McIntosh said.

The Joint Hull Committee, which represents Lloyd's of London and London company market hull underwriters, has developed a warranty-JH 143-that requires shipyards to undergo a risk assessment before policies are issued or renewed, he noted.

In addition, the market is considering applying cancellation and review provisions to policies, which would allow underwriters to adjust terms or cancel coverage prior to renewals, he said.