Marine Insurance – an overview
The origin of marine insurance dates back to the middle ages and is perceived to be one of the oldest forms of insurance. The practice of trade in ancient civilization gained widespread prominence and gradually land trade gave way to sea trade since water transportation became the favoured mode of commuting. The ancient Romans and Greeks adopted certain measures to insuring themselves against any kind of maritime risks in the form of loans or mutual guarantee.
“Bottomry” was one of the oldest forms of maritime insurance and this type of underwriting can be defined as “the mortgage of a ship, i.e., her bottom or hull, in such a manner that, if the ship be lost, the lender likewise loses the money he advanced on her; but that, if she arrive safely at the port of destination, he not only gets back the loan, but receives, in addition, a certain premium previously agreed upon” (Martin, 2005). The practice of marine insurance gained wide popularity in London. Besides inpidual underwriters the Lloyds Coffee House attracted large number of brokers and insurers who catered to marine insurance market. Elsewhere across the globe too the market for marine insurance witnessed rapid surge since traders engaged in foreign trade were concerned about facing huge losses at sea.
The Marine Insurance Act of 1906 defines “A contract of marine insurance is a contract whereby the insurer undertakes to indemnify the assured, in manner and to the extent thereby by agreed, against marine losses, that is to say, the losses incident to marine adventure.” Marine Insurance broadly covers two categories of insurance claims – cargo insurance providing protection to cargo, goods, hull and machinery; and protection and indemnity insurance that protects the insured against any kind of damages to vehicles or crew in case of any kind of mishaps on sea. The marine insurance acts as a shield to vessel owners and businessmen trading through sea against any kind of damages or losses that might occur during the voyage.
The Lloyds still plays a significant role in marine insurance however, the market for marine insurance has transformed greatly over the years. The increasing use of other modes of transportation in foreign trade has impacted the shipping industry to a great extent. Sea faring traders have given way to jet flying businessmen with cargoes being hauled at airports that provide faster means of delivery. Moreover, the ships being used for trade purposes are equipped with more capacity and power to carry enormous volumes of goods from one country to another.
Current market practices and trends
Globalisation of economies and liberalisation of markets have boosted the marine sectors in the past few decades. Ships are generally used to transport goods that are not perishable since transit takes a lot of time. However, this is a comparatively cost effective mode of transporting goods.
The marine insurance market is becoming more global with the entry of Asian markets that are aggressively meeting the local market demand along with an eye to cater to international business. The insurers at Lloyds are expanding to markets of Singapore and Hong Kong to meet the growing demands of this industry.
Market review report by AON for the year 2008 observes “Most businesses buying marine insurance have enjoyed yet another year of very competitive rates and can generally look forward to more of the same in 2008. This positive outlook is due to plentiful supply of capacity combined with low level of claims creating fierce competition between underwriters.” Due to rising number of entrants into the marine insurance market the consumers are paying less.
However, the hull and machinery insurance sector has not been much profitable recently and insurers are facing losses in this sector. The Protection and Indemnity (P&I) sector too remains grim and insurers are sceptical about investing in these sectors. This is mostly attributed to the increasing size of the ships, container ships, tankers, and dredgers. As the AON report claims “this magnifies the potential scale of disaster for P&I, liability and cargo insurers as well as hull underwriters.” The insurers are maintaining their profit margins through profits from other sectors where rates are still favourable and market remains competitive. The super yacht market is one such sector that is experiencing rising demand and rates for insurers are favourable. The cargo and liability market has offered the insurers with increasing returns and they have managed to remain profitable so far in the industry.
The Centre Union of Marine Underwriters Norway state in their annual report that the year 2007 witnessed, “an alarming trend with the average hull claim cost rising 86 percent over the last five years. And with claims costs likely to continue growing in the future, the industry must take further steps to manage costs without risking safety.” The marine insurance market is showing changing trends in the face of rapid changes occurring in the shipping industry that is plagued by shortage of experienced and capable crew and bigger ships creating bigger risks. The ship owners face the risk of huge losses and recent statistics reveal that losses from machinery damage are rising. The underwriters are hit more by the “quantum rather than the frequency of machinery claims” (AON marine insurance market review report 2008).
The cargo sector presents the brighter side of the marine insurance market. The cargo owners are benefiting from falling rates and underwriters are making profit. This sector is more appealing to the underwriters due to the lower level of risk involved with more marine insurers expanding into the cargo operations. The major market for this insurance sector is London accounting to its capacity to cover high risks. “Both cargo owners and underwriters are benefiting from the very low incidence of claims in the recent years” (AON market review report 2008).
Among other sectors in the marine insurance market the Protection and Indemnity (P&I) claims have raised considerably raising serious concerns on the profitability of this market segment. The total amount of claims in this segment rose to US$ 580 million in the year 2007. The primary factors behind the rise of claims in this sector are “new legislation and tougher regulation, particularly on environmental liability” (AON market review report, 2008). This generally refers to the regulations that make it mandatory for marine companies to clear the marine wreckage to prevent pollution. These clean up operations are expensive.
The marine insurance market is to a considerable degree governed by the increase or decrease in natural calamities and accidents. Advancing technology and vessels equipped with high-tech devices to combat such events have reduced the losses faced by the marine companies. “The lack of major losses means that the markets also remain attractive to capital providers. They continue to bankroll additional capacity, thereby increasing competition and exerting further downward pressure on rates” (AON market review report, 2008).
Despite such odds working against the marine insurance market conditions are still favourable at Lloyds primarily due to the focus of the underwriters on the theory “write for profit not market share” (Tolle, 2008). Ralf Tolle, the Franchise Director believes that the marine insurers can cut down on their losses and risks through bringing down their involvement in unprofitable sectors and concentrating more on secured fronts that will reap benefit in terms of greater profitability. Unnecessary expense on expanding market share should be avoided and shipping companies need to wait for more favourable times to invest in offshore operations.
Conclusion
The marine insurance market is vulnerable to the huge losses and rising prices of the ships and containers being manufactured today. Though the number of eventualities have gone down in the past few years the size of losses have increased due to these factors. Under such circumstances the marine insurers at Lloyds are concentrating more on cargo insurance rather than focussing on hull, protection and indemnity, and liability sectors.
The CEFOR report suggests “to manage rising costs, marine insurers must work more closely with ship owners, class societies and regulators to develop systems to ensure a safer industry and more effective tools to manage risk. Rising environmental and safety concerns have created an increasingly regulated industry and have encouraged industry stakeholders – from classification societies to ship managers, marine insurance providers to shipyards – to share more information.”
References:
- CEFOR. 2007. Soaring claims costs set to transform marine insurance market. Accessed on 20th October 2008 from http://www.cefor.no/news/CEFOR%20&%20Annual%20Report/CEFOR%202008%20Press%20Release.pdf
- AON. 2008. Market Review Marine Insurance 2008. Accessed on 20th October 2008 from http://www.aon.com/uk/en/industry_specialisations/marine/images/market-review.pdf
- Tolle, Rolf. 2008. Lloyds – Booming global trade: Opportunities and threats for marine insurance. Accessed on 20th October 2008 from http://www.lloyds.com/News_Centre/Speeches/Booming_global_trade_Opportunities_and_Threats_for_Marine_Insurance.htm
- Soyer, Barris. 2005. Warranties in Marine Insurance. Published by Routledge.
- Niekerk, JP Van. 1998. The developments of the principles of insurance law in Netherlands from 1500 to 1800. Published by Uitgeverij Verloren.
- University of Cape Town – Marine and Shipping Law. 1999. Marine Insurance Act, 1906. Accessed on 20th October 2008 from http://www.uctshiplaw.com/mia1906.htm
- Sayles, David. Ocean Marine Insurance. Accessed on 20th October 2008 from http://www.dsayles.com/marine.htm
- Martin, Fredrick. The history of Lloyds and of marine insurance in Great Britain. Published by Adamant Media Corporation.
- Putney, Albert. Popular law library Vol9 Bills and Notes, guaranty suretyship, insurance, bankruptcy. Section 4: History of Insurance: Marine Insurance. Accessed on 20th October 2008 from http://chestofbooks.com/society/law/Popular-Law-9/Section-4-History-Of-Insurance-Marine-Insurance.html
- Huybrechts, Marc; Dieryck, C., Hooydonk, Eric Van. 2000. Marine insurance at the turn of the millennium. Published by Intersentia.