MMR: WORLD'S MARINE HULL UNDERWRITERS WAITING FOR THEIR SHIP TO COME IN

Marine hull insurance buyers may soon see an end to the bargain priced rates and terms they've enjoyed in recent years as speakers at the International Union of Marine Insurers' conference urged underwriters to return to responsible underwriting and harder rates or face losing money.

IUMI President Nicholas Adamantiadis, who is also a marine underwriter with Athens, Greece-based Hellas Insurance Co. S.A., opened the IUMI conference with a warning that, "Since last year we have witnessed competition that has gone a little bit out of control."

Figures compiled by IUMI from 42 responses of its 48 member national marine insurance associations and released for the first time at the conference earlier this month in Paris show their combined hull underwriting premiums in 1995 were $4.97 billion, down 11.2% from 1994.

The New York-based American Institute of Marine Underwriters produced statistics showing that total U.S. marine net premiums improved again in 1996 to $1.24 billion from $1.22 billion in 1995. However, the combined ratio from all lines deteriorated slightly over the same period to 91.6% from 91.2%

Peter Christmas, chairman of IUMI's Ocean Hull Committee, wrote in the annual report presented by the committee to the IUMI gathering that hull rates globally "have fallen rapidly and progressively" since their peak in 1994.

His report said that based on the profit declared by hull underwriters during these years and the general levels of reduction in price, "it is likely that on a gross basis, underwriters would generally return a loss in 1996."

Mr. Christmas, also a marine underwriter with Lloyd's syndicate 735, also said in his report that despite this fall in business, nearly all of IUMI's member associations report an increasing number of underwriters and a rise in capacity, "which will probably continue to put pressure on terms and conditions." He warned that "if the last cycle is repeated, it is likely to be another couple of years at least before we see any significant change."

Speaking to the assembly, Mr. Christmas said his main concern, shared by hull underwriters in many other markets, is that "the improvements achieved during recent times will level off or decline as a result of the depressed state and overcapacity in most sections of shipping." He warned that this, coupled with a competitive, over-subscribed marketplace "make prospects grim."

IUMI's hull committee chairman also expressed his concerns about several developments in the shipping markets that increase underwriters' exposures. These include a build up of large and high-valued vessels, many of which are getting older and therefore more likely to need repair, while trading in areas further from repair and salvage facilities.

Over the past two years, the aggregate value exposure for underwriters also has increased. He cited as examples a passenger vessel capable of carrying 3,700 passengers and crew worth $500 million and a Dubai ship repair facility where the presence of two modern liquefied natural gas vessels took the aggregate total of vessels there for repair at one time to $700 million.

Mr. Christmas also repeated a concern that emerged at last year's IUMI conference about the large number of new high-speed craft coming into service, usually to trade in confined and crowded waters. While casualties among such vessels so far have been relatively low, he noted concerns about potential claims as they age and are sold to less responsible owners or managers.

However, there were a few exceptions to the gloomy prognoses.

Although U.S. marine underwriters have a relatively small hull account-under $300 million in premiums in 1996, compared with more than $1.3 billion for the London market-it did grow by just over 5% last year and is profitable.

John Hickey, president of the American Hull Insurance Syndicate, said the U.S. ocean hull insurance sector "is starting to see some positive signs."

These signs include underwriters beginning to realize they're not making money on certain business and an important first indication that the market is turning: Brokers are finding it difficult or impossible to place certain higher-risk business.

However, Richard DeSimone, chairman of the American Institute of Marine Underwriters, does not share such optimism about the U.S. market. Speaking of the marine market generally, he said "trends are definitely showing signs that the market will deteriorate" and that after a good run, "rates are falling and coverage is getting broader."

Giving the Institute of London Underwriters' annual presentation to IUMI of statistics on global marine casualties, ILU Deputy Chairman Steven Redmond said there was an "improving or relatively stable trend" during 1996.

While the number of merchant ships over 500 gross tons lost last year was up one to 113 over the previous year, the combined tonnage of these ships was the lowest on record at 701 gross tons, against 761 gross tons in 1995. Figures so far for 1997 show the trend is continuing to improve, Mr. Redmond said.

The figures provide "some positive points that shipping is a safer industry as a whole," said Mr. Redmond, who also is underwriting director at London-based Eagle Star Reinsurance Co. Ltd.

ILU Chairman Nigel Jenkins said that while in 1996-97 the marine market has softened, he believes this softer market is approaching its end and is near the bottom in most classes. He emphasized that if the market is to maintain stability, "the next move on rates has to be" upward, and he added, "I see that happening."

Michael Ellis, London-based general manager of The Salvage Assn., one of the world's major casualty surveyors, expressed the same concerns as Mr. Christmas about the rising average age of ships, saying they present underwriters new challenges in risk assessment. He also expressed concerns about the potential exposure to claims that resold vessels generate for hull and machinery underwriters.

He warned that such vessels sometimes sail with a new crew within hours of being taken over by new owners, with few or no checks made on such important items as engine condition or lube oil quality and often no access to log books and maintenance records, which have been removed by the previous owner. He said underwriters probably could reduce their claims costs considerably if they pressed such owners for details of their inspection arrangements and crew training and excluded or restricted machinery damage for at least the first few months.

Mr. Ellis also urged underwriters not to forget their potential exposures resulting from the Year 2000 computer problem that may affect many systems.

The blame for current overcapacity in the hull market and bottom-line underwriting lies with hull underwriters themselves, according to Lars Lindfelt, managing director of The Swedish Club.

"It is only you who can create a balanced market where there is a chance for fair rates to prevail," he told delegates. He also accused hull underwriters of supporting substandard shipping by making it possible for even bad shipowners to find cheap cover.

Apart from employing stricter

underwriting criteria, he told underwriters one way of correcting this is for them to "get their act together" and stop supporting certain flag registries.

Mr. Lindfelt said another way would be to create a controlling body over the International Assn. of Classification Societies, the 15 independent bodies that inspect merchant ships to ensure they meet safety regulations. Mr. Lindfelt said that while the IACS is doing a good job, hull underwriters should draw up an approved list of probably no more than six classification societies with which they would work.

Speaking on behalf of tanker owners, Francis Vallat, a former vp of the International Assn. of Independent Tanker Owners, maintained that high-profile tanker disasters such as that of the Sea Empress in February 1996 (BI, Feb. 26, 1996) have given the tanker industry an undeservedly poor reputation. He said that of the approximately 1,850 million metric tons (2,035 tons) of crude oil and refined products delivered in tankers last year, 99.985% was delivered without incident.

Mr. Vallat also cited a soon-to-be-released study by the U.K. P&I Club showing that of 453 property damage claims from tanker incidents during the 10-year period to 1996, one third were not the fault of the tanker or its operators but resulted from pilot error. He said this is a major concern of tanker owners, because it is a problem over which they have no control, though current international laws make tankers 100% liable for pollution damage.

Speaking on behalf of reinsurers, Deirdre H. Littlefield, senior vp-special lines director of Swiss Reinsurance America Corp. of New York, said marine reinsurance remains competitive, partly because Lloyd's of London's recovery has put it firmly back in the marketplace. Clients also are demanding reductions, which in many cases is justified by their good claims experience. Another trend she noted is that clients are retaining more risks and buying less reinsurance.

However, regarding the state of the hull insurance market, IUMI's Mr. Christmas sees some developments he thinks could force a return to more sensible underwriting.

These include the megamergers of brokers, which, because of their large scale, will require a positive financial return that would be difficult to achieve if the markets continue in free fall.

Another factor is that several of the major international insurance companies have warned their marine managements that another downturn like the last would be unacceptable and could lead to reconsideration of their long-term commitment to marine business.

A third factor Mr. Christmas cited is the increasing financial investment in Lloyd's of London by corporate capital, controlled by a limited number of large participants who are likely to require corrective action in the direct writing and reinsurance areas.