Stemming Marine Losses

Marine insurers will continue to face an uphill struggle until they make better use of the data that is readily available to them, says Grant Alderman of EMB.

How can marine hull underwriting make a profit?

We seem to have been asking this question for ever – certainly since the early 1990s. Yet underwriting deficits remain entrenched following seven consecutive loss-making years. Recent rate increases were welcome, but it will still require a benign claims environment for the market as a whole to return to profit this year. Since we have already had four major losses (the Hyundai Fortune, Queen of the North, Star Princess and MOL Initiative) this is highly unlikely to happen any time soon.

Most of the main problems will be familiar.

Competition: Despite withdrawals from the market, there is plenty of capacity around – from Europe, from New York and from Asia itself, especially Taiwan.
Diversification: There are fewer specialist marine risk carriers. Composite insurers are willing to accept a loss-making presence, relying on non-marine to make profits.
New ships: There are more of them and they are more complex, so the cost of repairs has increased.
Economic conditions: the boom in Asia means that ships are at sea more often and therefore more likely to have accidents.
Skills: It is increasingly difficult to recruit good-quality crews.
Costs: Ship repairs have become more expensive in dollar terms, partly because of the weakness of the US currency, but also reflecting the high price of steel.

Yet, despite all these adverse conditions, there are effective measures that underwriters can take to improve their figures. Marine insurance should in theory be relatively easy to write since overall losses are predictable. Of course, individual portfolios are subject to volatility on a year-to-year basis, but given time the good and bad years should even themselves out.

The reason for big losses historically has been that marine underwriters in all parts of the world have made less use of the data available to them.

It would only be fair to acknowledge that this has changed to some extent recently. Nonetheless, at a time when other classes of underwriting have become increasingly technical, marine underwriters continue to be distant from the technicians that could manage and interpret data. And, without the ability to store, retrieve and analyse data it is practically impossible to model risks and price them accurately

Whenever you make this point, you are likely to hear the counter-argument that underwriters have to compete; they have to offer rates that will win enable them to stay in business. Sure enough, companies may be willing to write certain lines at a loss for long-term strategic reasons.

Even in these circumstances, however, underwriters still need a rigorous technical framework to inform their judgements. Without such a framework, whatever the class, they will chase prices downwards to completely unjustifiable levels as happened, for example, with Liability during the late 90s. An underwriter who understands the technical price of a risk, by contrast, will be able to back his case with rigorous analysis.

Another argument you hear sometimes is that there just is not enough marine data available to underwrite in a technical manner. That may be true of some low-frequency, high-value classes such as energy, but it is not true of hull. Apart from an insurer’s own data, there is a wealth of publicly-available market information.

One way to analyse a risk is through component pricing. This practice is much more common in other classes but can easily be applied to Marine. By assessing the individual risk elements, such as vessel type, tonnage, age, class, flag and prior claims record, it is possible to build up a risk profile of each ship owner. As the fleet changes so does the exposure and the risk. Such analysis can also allow for differences in coverage, such as Total Loss and All Risks.

None of this means that marine underwriting will ever be an arithmetical, table-driven process. Many important factors cannot be measured in this way. Traditional skills, including ‘instinct’ and ‘feel’ still have a part to play. The knowledge that an underwriter gets of a particular client during the course of their relationship, such as his approach to risk management and ship safety, can be invaluable.

Important as they are, however, these softer skills on their own will never deliver satisfactory returns to long-suffering capital providers. 

This article appeared in Asia Insurance Review in July 2006