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Premiums lag shipping growth

Crew shortages blamed for losses

Energy underwriters urged to conserve recent gains

Record number attends IUMI

Premiums lag shipping growth

Insurers see volume increases, but rates in market remain flat


Published Sept. 24, 2007

COPENHAGEN, Denmark—Global gross premiums have failed to keep pace with the boom in seaborne trade, experts told marine hull and cargo underwriters attending the 133rd meeting of the International Union of Marine Insurance earlier this month.

The world shipping fleet has grown by about 18% since 2001, to 42,872 vessels above 300 gross tons, and is expected to grow another 40% within five years, according to figures presented at IUMI. But while ship numbers have increased dramatically, tonnage has grown at an even faster rate—by 48.1% to 685,738 million gross tons—between 2001 and 2007, reflecting the increased size of new vessels.

This means there is greater risk aggregation per vessel, said Tore Forsmo, chairman of IUMI's Facts & Figures Committee.

"Larger ships means more steel, equipment, cargo and passengers per risk insured," Mr. Forsmo said.

World seaborne trade has increased an "astonishing" 45%, to more than 2.6 billion gross tons between 1996 and 2006, said Mr. Forsmo, who also is managing director at Oslo, Norway-based Central Union of Marine Underwriters, a marine insurance association.

Cargo trade has increased by a similar factor, led by container and multipurpose vessels, where TEUs—"twenty-foot equivalent units," a measurement of cargo capacity on a container ship—have more than doubled since 1998, to 8 billion in 2006. Cargo capacity is expected to increase 35% over the next five years, said Mike Davies, chairman of IUMI's cargo committee.

However, hull and cargo premiums have not risen at the same rate as the size of the fleet and the average ship value, sources said.

IUMI members reported a 14% increase in global insurance premiums, excluding protection and indemnity clubs and reinsurance, at $20.3 billion in 2006, Mr. Forsmo said. Global hull premiums were up 10% to $5.10 billion in 2006, cargo premiums increased 9% to $9.96 billion and offshore energy premiums jumped 68% to $2.77 billion.

"This is just a volume increase. This does not mean that there has been a premium per risk increase," Mr. Davies said.

"While fleets are growing, we as an industry are still struggling and prices are flat," said Fred Robertie, chairman of IUMI's Ocean Hull Committee and president and chief executive officer of the American Hull Insurance Syndicate.

Marine hull "capacity is stable, but business can be placed several times over—even for distressed vessels," he said. "Capacity is a fact of life, but underwriters' appetites for top-line growth have now increased after being stable for several years. We now see outright reductions as underwriters underprice business and chase revenue."

A similar story has played out in the cargo insurance sector, said Mr. Davies, who is Singapore-based managing director of AXA Corporate Solutions' marine division in Asia Pacific. "There has been a 30% increase in the value of world trade, but cargo underwriters' premium has been static…" he said.

"There has been widespread rate cutting in cargo due to overcapacity and underwriters growing their top line," Mr. Davies added. A price war has broken out between European and Asian cargo insurance markets, he said.

"At the start of this year, Lloyd's of London in Asia had three syndicates in Singapore and this will be 12 by the end of the year. This will significantly increase competition of this market," Mr. Davies said.

In terms of premium volume, London is the world's largest market for global hull, with $990 million, followed by Norway, with $715 million. As for the global cargo market, Japan led with $1.6 billion followed by Germany with $1.4 billion.

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Crew shortages blamed for losses

Industry could see 200,000 shortfall in number of qualified seamen


Published Sept. 24, 2007

COPENHAGEN, Denmark—Substandard ships and a shortage of experienced and qualified crew—factors that may have contributed to recent large losses for marine hull and cargo insurers—have rattled the market, underwriters said at the International Union of Marine Insurance conference.

An explosion of seaborne trade and cost-saving measures by shipowners means there is a growing shortage of qualified and experienced crew.

There is an estimated 10% shortfall in qualified seamen currently—about 50,000 seamen—and that number could grow to 200,000 in five years, said Fred Robertie, chairman of IUMI's Ocean Hull Committee.

The shipping boom has downsides for insurers, underwriters say: increased values of vessels; higher repair costs; high steel prices; and congested yards, shipping lanes and ports—all of which add to underwriters' loss ratios.

"The average age of the world fleet is getting younger, driven by the profitability of the shipowners who are building new vessels at an unprecedented rate, but are not getting rid of older vessels," said Mr. Robertie, who is also president and chief executive officer of the American Hull Insurance Syndicate. "We now see more older vessels around and we see the problems associated with older vessels, such as metal fatigue."

At a time when marine premiums have not kept pace with exposures (see related story), the issues were among major concerns aired by underwriters at the 133rd IUMI meeting in Copenhagen, Denmark, earlier this month.

Total losses for hull insurers have fallen steadily since the 1990s, although there have been a number of large claims this year, said Mr. Robertie.

These losses are likely to make the 2006 year of account—into which the losses will fall—the worst year for hull underwriters since 1999. Major claims include: the M/V Republica di Genoa, which capsized March 8 during loading in Antwerp, Belgium; the April 6 grounding and sinking of passenger vessel M/V Sea Diamond off Santorini, Greece; and the January grounding and sinking in the English Channel of MSC Napoli.

"Overall, claims frequency is steady, but the frequency and severity of large losses is on the increase. Weather is still the greatest cause of total loss, but collisions and groundings are on the increase," Mr. Robertie said.

This increase in large losses was thought to reflect the crew shortages. "A review of this year's losses is likely to show that human error is at work," said Mr. Robertie, echoing concerns of other underwriters. "Most losses—some 60% to 70%—are the direct result of human error."

Human error may be linked to what marine insurers perceive as a lack of investment in manpower by shipowners and operators in terms of crew numbers, workload for officers and investment in training.

John Poulson, president in the New York office of consulting firm Noble Denton Group Ltd., said the maritime industry has failed to attract young people to a career at sea. He also noted that shipowners' cost-cutting and use of third-party manning agencies added to shortages of experienced crew.

"Underwriters and owners should be worried about this," said Massimo Canepa, president of the Federation of European Maritime Assns. of Surveyors & Consultants and a member of IUMI's Loss Prevention Committee.

Keith Auld, a member of IUMI's Cargo Committee, also expressed concern. "People shipping goods are doing it on cost, using the cheapest people to handle the cargo and using the cheapest ships to carry the cargo," he said. "If we keep allowing cargoes to be handled this way, we will not continue making money."

In a presentation, Ivar Brynildsen, Oslo, Norway-based senior claims executive at Gard A.S., said red tape, overwork and fatigue may cause crew errors. "Senior officers are tangled up with paperwork and have little time for practical matters onboard," he said.

While underwriters attending IUMI expressed concern over crew standards, they differed in how insurers should respond.

Tokio Marine & Nichido Fire Insurance Co. Ltd. in Tokyo has sought a closer relationship with underwriters to tackle the "worrying rise in serious partial losses," said Najo Sinichiro, who works in the company's underwriting department.

"We look at the competency of risk management, appraise the master and crew and conduct periodic checks of ship condition including the ability and skill of the crew," he said. "The ship management review report includes our suggestions, and the response to our suggestions are taken into account by our underwriters. Risk evaluation is not just an audit. We do not just evaluate our clients; we go for a common goal, step by step."

But underwriters from other markets were more cautious over the role insurers can play in improving the standard of shipping and crews.

"Are we as underwriters in a position to know what the correct level of crew competency is?" asked Peter McIntosh, member of IUMI's Ocean Hull Committee and underwriter at London-based Ark Syndicate Management Ltd. "Hull underwriters look at all these issues, but do we base underwriting decisions on these, or just pay lip service?"

Norwegian insurers have tried to get closer to clients, but with little success, they say. "In the past, the Norwegian market has conducted surveys—not just of vessels, but also the organizations that operate them—but it backfired," said Ole Wikborg, vp of IUMI's Executive Committee and a director at Oslo, Norway-based Norwegian Hull Club. "You cannot tell them how to do all aspects of ship management."

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Energy underwriters urged to conserve recent gains


Published Sept. 24, 2007

COPENHAGEN, Denmark—Underwriters attending the energy workshop at this year’s meeting of International Union of Marine Insurance in Copenhagen had plenty to smile about.

But insurers were urged not to give away the gains of recent years as fears over claims inflation grow.

On the surface, energy underwriters have plenty to celebrate. Gross premiums for offshore energy in 2006 were $2.76 billion, double the level of 2004 before the market reacted to the record Gulf of Mexico hurricane losses of 2004 and 2005. Ultimate loss ratios are projected to be just 50% for 2007, far less than the 300%-plus loss ratios of hurricane-affected 2005 and 2006, and last achieved in 2002 and 2003 when the market reacted to the Sept. 11, 2001, terrorist attacks in the United States.

“The market is fundamentally strong and robust following the correction of 2005, but we need to hang on to those corrections,” said Dominick Hoare, the chairman of IUMI’s Energy and Offshore Committee and group energy underwriter at Munich Reinsurance Co.’s Lloyd’s syndicate 457, which is managed by Watkins Syndicate.

The market has yet to make a profit over the last decade, he reminded underwriters. “There is still a $750 million deficit since 1996, but the market should break even if 2008 and 2009 remain catastrophe-free,” said Mr. Hoare.

But 2007 gross offshore energy premiums are expected to drop to about $2 billion as competition for loss-free business increases, underwriters said.

“In some markets, premiums fell a little and many remained firm, although clean (loss-free) business and non-Gulf of Mexico-exposed business came under commercial pressure,” said Thomas Artmann, Munich, Germany-based underwriting manager, marine, for corporate underwriting at Munich Reinsurance Co.

With the energy insurance market still hard, some brokers placing coverage for floating production storage offloading vessels have tried to get a cheaper deal in the far softer hull markets.

“Last year, there was a trend where people tried to escape the robust energy market and try to shift FPSOs to the hull market, which is obviously not the hardest market in the world,” Mr. Artmann said.

“But for the fact that that FPSOs are shiplike in shape—every other aspect of risk qualifies them as an energy risk—it is a fixed platform, involved in extraction and processing,” said Frank Costa, a member of IUMI’s Energy and Offshore Committee. “The process exposures are identical to that of a platform.”

“There is no monopoly over what business can be placed in a particular market, but underwriters should be familiar with the risk and price it accordingly,” said Mr. Costa, who is also New York-based president of AIG Oil Rig, part of American International Group Inc.

Ole Wikborg, director at Oslo, Norway-based Norwegian Hull Club and a vp of IUMI’s executive committee, said underwriters so far had resisted attempts to place FPSO risks in the hull market. “A few years back, hull underwriters did use their capacity for FPSOs. Will it happen again? Probably.”

Underwriters are also more conscious of claims inflation, especially as the energy sector works to meet the high demand for oil and gas.

The energy sector is becoming “overheated,” Mr. Hoare said. In his opening remarks at the energy workshop, he said energy companies are using a lot of new equipment while much old equipment remains in use.

“We have had good premium growth, but huge value inflation also means claims inflation,” said Mr. Hoare.

“Energy companies are working flat-out and that always leads to increased claims. How far crews are stretched should be a concern for owners and operators, as it could lead to a loss of production,” said Len Messenger, a member of IUMI’s Energy and Offshore Committee who attended the workshop.

His comments followed a presentation by Jim H. La Grone II, of Houston-based Boots & Coots International Well Control Inc.

“Everything on a drilling rig is simple. It is just big, heavy and expensive,” he told the workshop attendees. “But the quality of drilling crews is very low due to the high oil price and the high number of rigs that are in operation.”

Mr. La Grone noted that experienced, skilled crews are needed to avoid costly well blow-outs or rock fractures. But companies often have just four or five experienced guys and 10 others they just pick off the street, Mr La Grone said. He added that the drug test failure rate for drilling crews was 60%.

“What we see is that offshore operators have the best crews. Offshore crews are tremendously better than onshore,” Mr. La Grone said.

Energy underwriters also face a technical challenge with the increasing use of FPSOs that have proved a popular way to exploit resources in water up to 3,000 meters deep. FPSOs are floating processing and loading facilities moored to the sea bed and connected to well heads on the seabed.

“The first FPSO was built in 1977 and since then, their use has grown dramatically and especially since the 1990s when operators became more comfortable with the technology. It is the only technology that can be used in shallow to ultra deep water and in all regions of the world,” said Francis Lobo, risk engineer with Zurich Energy in London, a unit of Zurich Financial Services Group.

“I have seen a lot of problems with flexible risers and moorings as well as cracks in hulls, but in most cases these problems can be dealt with and eventually designed out,” Mr. Lobo said.

So far, underwriters have not been too concerned by the technical challenge posed by FPSOs, Mr. Hoare said. “Technology and energy insurance always go hand-in-hand—in the North Sea, oil fields were built on great technical change,” he said. “Underwriters should embrace technical change and not fear it, but understand what it means in terms of risk.”

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Record number attends IUMI


Published Sept. 24, 2007

COPENHAGEN, Denmark—A record number of marine underwriters attended the 133rd conference of the International Union of Marine Insurance. More than 500 underwriters from 41 of IUMI's 52 national member associations attended the three-day event in Copenhagen, Denmark.

IUMI 2008 will be held Sept. 14-17 in Vancouver, British Columbia.

Before this year's event, IUMI had considered opening the conference to brokers. But after consultation with IUMI members, its executive committee rejected the proposal, said Deirdre Littlefield, IUMI president and director of business development at Starr Marine Agency Inc., part of C.V. Starr & Co., Inc. in New York.

"While it was agreed there could be significant advantages to including members of the broking community in our organization, the overwhelming response was that it would fundamentally change the very fabric of IUMI," Ms. Littlefield said.

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