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CARGO RATES CONTINUE TO SINK

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Cargo insurance rates continue to decline and show little sign of firming in the near future.

Buyers also are seeing soft prices in the marine market for liability and energy insurance coverage.

Marine insurers bemoan the effects of rampant competition.

James Zrebiec, chairman of the International Union of Marine Insurance's Cargo Committee, said the situation for cargo underwriters has become "desperate."

"Something clearly has to give," said Mr. Zrebiec, who reported on the state of the cargo market during IUMI's annual convention in Lisbon, Portugal.

Marine cargo underwriters managed to post underwriting profits in 1997, but "the current year is another story," warned Mr. Zrebiec, who is also chairman of New York-based CGU International Marine Underwriters, a unit of London-based CGU P.L.C.

The IUMI Cargo Committee's annual survey of member associations found that an increasing number of underwriters are reporting underwriting losses in the first six months of 1998, he said.

While 1997 was a break-even year for U.S. cargo underwriters, it was probably the most competitive sector of the marine insurance market after yacht business, said Mr. Zrebiec, who is also vice chairman of the American Institute of Marine Underwriters.

Which way the U.S. cargo account goes this year is important because a greater percentage of marine insurers in the United States underwrite cargo business than hull business, and cargo makes up the largest single element -- 45% -- of the U.S. marine account, he said.

"Many underwriters feel that the present market conditions are the worst they have experienced. The continuing overcapacity for cargo business both within London and worldwide lead underwriters to wonder how this situation can be improved," London cargo underwriters stated in their response to the IUMI survey.

Michael Harding, a cargo underwriter for Eagle Star Reinsurance Co. Ltd. in London and chairman of the London marine market's Joint Cargo Committee, said the main concern of cargo underwriters, apart from falling rates, ought to be stopping an increase in losses of cargo not in transit.

While there appears to be a general reduction in losses from cargo in transit, there is a sharp escalation of claims relating to cargo while it is stored in ports or warehouses, awaiting transportation.

Mr. Harding said figures compiled by the Institute of London Underwriters show that in 1997 major insured losses to cargo damaged or stolen in transit totaled only $14 million.

However, major insured non-transit cargo losses in 1997 resulting from warehouse incidents, such as fires or theft in storage, totaled $343 million.

Mr. Harding said those figures show that cargo underwriters need to improve their information on non-transit risks, such as the adequacy of loss prevention measures in place at various ports and warehouse facilities.

"In the present dark times for underwriters, only those who have the statistics can perform properly," said Hector Wauters, chairman of IUMI's Cargo Loss Prevention Committee and managing director of Nautica N.V. of Antwerp, Belgium.

Cooperation among marine insurers to create a universal rating system of information on port and warehouse risks was called for by Harri Ek, head of the marine division of Industrial Insurance Co. Ltd. of Helsinki, Finland.

Mr. Ek, a member of IUMI's Cargo Loss Prevention Committee, said cargo underwriters do not know enough about the risks they insure, particularly the onshore risks of cargo not in transit.

As a result, they are unable to properly price the risk, he said.

The rating system he proposed to IUMI for consideration over the coming year would establish new standards for the inspection and evaluation of warehouses and a new format for reporting this information.

Meanwhile, despite what he described as a "disturbing and challenging picture" of falling rates and crazy competition, the AIMU's Mr. Zrebiec noted three favorable signs in the cargo market: world trade is increasing, thereby providing more insurable cargo business; more information technology is available to help underwriters evaluate risks; and the United Nation's International Safety Management Code, which came into effect last July, is expected to improve shipping safety.

Another favorable move for U.S. cargo insurers is the attempt to reform the 1936 Carriage of Goods by Sea Act, a U.S. law, to enable cargo claims litigation involving U.S. shippers to be heard in the United States, according to Geoffrey Jones, a member of IUMI's Liability Committee.

Cargo insurers in the United States want the reform because they are disappointed by the U.S. Supreme Court's Sky Reefer decision, which set a precedent allowing foreign shipowners to require U.S. importers to submit to foreign litigation.

The June 1995 ruling severely impeded the ability of U.S. cargo insurers to recover from those responsible for damage to cargo by upholding a clause inserted by a foreign shipowner in shipping documentation that required a U.S. importer to submit to foreign litigation.

Mr. Jones said "the result is an increase in costs in the recovery process, which will inevitably lead to greater losses to underwriters."

Meanwhile, in other areas of the marine insurance market:

* Liability insurers are seeing continued demand for multiyear policies, which suggests that brokers and clients think the market is as good as it's going to get, said Mr. Jones.

"Hopefully, we've reached bottom or are pretty close to the bottom," he said.

* Total premiums of U.S. energy insurers fell 25% in 1997 to $71.9 million from $95.7 million, according to Peter Connors, senior vp of the energy division of New York-based American International Underwriters.

Apart from competition and an absence of major losses to help boost rates, the sector is under pressure because the major oil companies are merging and faced with oil prices at a 10-year low, Mr. Connors said.

* Members of protection and indemnity clubs could find themselves forced to pay more premiums toward pollution prevention and cleanup costs as a result of efforts by the London marine market to amend Lloyd's Open Form, a standard salvage contract.

Quentin Prebble, chairman of the LOF Joint Working Party, said the proposed amendment, known as the Special Compensation P&I Clause, would force P&I clubs to bear pollution prevention costs just as they do third-party liability.

He said the change could be agreed upon by the year's end, though there likely would be a one- to two-year trial period before the change is fully implemented into LOF.

P&I clubs oppose the proposed change.