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Marine sector awash in capacity

Underwriters compete aggressively for business as demand drops and capitalization soars

Marine sector awash in capacity

Against a backdrop of a slowdown in global trade and an extremely competitive shipping environment, buyers of marine hull and cargo insurance continue to see lower rates for their coverage and abundant capacity for their risks.

Experts say marine hull insurance buyers are experiencing “double-digit” rate declines as underwriters compete for premiums.

“I have seen hard and soft markets,” but “I have never seen anything like this,” said Marcus Baker, chairman and managing director of the global marine practice at Marsh Ltd. in London.

He said many underwriters are clamoring for premiums and market share.

There is plentiful capacity for marine insurance with a client base that is struggling with falling freight and commodity shipments, Mr. Baker said.

“The market is very competitive across all lines of business and in all geographies,” said Lee Meyrick, managing director and chief underwriting officer of global marine at XL Catlin in London.

“Capacity continues to exceed demand,” which itself has declined against a backdrop of lower insured values, said Mark Cracknell, senior partner of marine at JLT Specialty Ltd., a unit of Jardine Lloyd Thompson Group P.L.C., in London.

There is new capacity coming into the market, so some underwriting talent is moving, which also increases competition for business, Mr. Meyrick said.

While there is plentiful capacity for marine hull insurance business, it has stabilized in recent months, said Joe Hughes, chairman and CEO of Shipowners Claims Bureau Inc. in New York.

But, he said, the hull capacity of regional markets, such as those in East Asia and the eastern Mediterranean, continues to develop.

Many underwriters have set up local offices around the world to attract more business from those markets, Mr. Baker said.

Local access can be useful when dealing with claims, which Mr. Baker said eliminates time zone differences as one example of its benefits.

“I don't think buyer demand for hull insurance is any higher now than in the past,” Mr. Hughes said. But “the necessity for proper cover has never been greater, given the need for asset protection — with which lenders are perennially concerned — particularly in a troubled freight market.”

“Buyers are really looking for a commercial deal,” Mr. Cracknell said. Reducing retentions is the only major change marine hull buyers can secure, he said.

Likewise, no great changes are being made to terms and conditions, but some extensions are being made on marine hull business, such as widening business interruption coverage, said Marsh's Mr. Baker.

Protecting value, revenue

Some buyers are looking at coverage such as residual value insurance, which insures the forecast value of leased assets at a given point in time, because current ship values are thought to be toward the lower end of the scale, said Mr. Cracknell.

Some buyers also are exploring ways to protect revenue, such as loss-of-hire coverage, Mr. Cracknell said, though he noted that these remain marginal for many buyers.

The “relatively benign loss picture” and the ability of underwriters to release prior-year reserves means that many insurers continue to post acceptable results despite the soft conditions, said XL Catlin's Mr. Meyrick.

While experts say it likely would take more than a large loss to turn the market, attritional losses — which typically increase when the shipping industry's margins are squeezed — may start to hurt underwriters' results.

The fact that underwriters are collecting less in premiums because rates are falling may mean that attritional losses will begin to bite when reserve releases slow, Mr. Meyrick said.

Mr. Baker said steady pricing on repairs and materials also could increase attritional losses.

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