Navigating choppy waters

The average cost of a hull claim between 2010 and 2020 didn’t change a great deal. In 2020, however, it increased by 10% — the same again in 2022. The main reasons given for the inflation were:

> The rising cost of raw materials. Steel has risen sharply in cost, which had a huge impact on the price of structural repairs;

> Covid-19. The pandemic restricted movement of ships and seafarers. That, together with quarantine and closures, resulted in heightened costs;

> The closure of China. China was always the most cost-effective place to go for repairs. Its closure meant repairs had to be done in other, more expensive, regions; and,

> Cuts in manpower. Shipowners’ efforts to reduce costs led to them cutting down on manpower. Lack of competent crew led to more accidents and more severe damage of vessels.

Due to these issues and the continued conflict in Ukraine, the prediction for 2023 is a further 15% in claims inflation.

While claims frequency has reduced, the costs of like-for-like claims are likely to have increased by 40% compared to 2020.

War And Confiscations

The Ukraine war has likely changed the market permanently. Notably, the confiscation of aircraft, while foreseeable as a risk, very much caught the market by surprise and has led to significant losses.

This led the market to look for other assets that could also be confiscated such as vessels. The reinsurance market has reacted by increasing rates, reducing (or in some cases removing) cover and demanding visibility of risks written directly and via facilities.

From a cargo perspective, Chris McGill from Ascot Group recently highlighted a collaboration with Marsh, to provide cover for grain shipments out of Ukraine. This was contemplated by the market anticipating that a safe corridor would likely open. As soon as this was the case Marsh and Ascot were able to react and offer an insurance product in a few short weeks. While this was entirely retained in the insurers in the early days, this has now become a more widespread product.

This proactive and swift action belied the media’s prediction that the insurance industry would be the last to respond, potentially scuppering any benefits of the deal.

Increased Visibility

Lack of transparency of exposures remains a sticking point across the industry, and some in the profession believe that more pressure should be put on the customers and the wider market to share their data.

Digitalisation is seen as the answer to improving the transparency issue.

Recent 1/1 reinsurance renewals have irrevocably changed the market in terms of visibility with reinsurers now demanding to know the risks associated with vessels.

It is difficult to look back and understand why we could not do that before. However, the switch has now flipped and it [1/1] will certainly change some of the facilities and how they operate.

As technology marches on, the challenge is for insurance products to keep up. Data is going to drive visibility, which will force innovation in the insurance/reinsurance product to speed up.

ESG - DATA DRIVING VISIBILITY

Many would say that signing up to the Poseidon Principles was a leap into the unknown, however, the framework is a good foundation on which to build an environment, social and governance (ESG) strategy.

The greatest challenge the industry is seeing when it comes to collating data on CO2 emissions and vessel locations, is the time it takes to gather it directly from shipowners – certainly an exercise in customers’ willingness to cooperate.

Another hurdle was the efficiency in dealing with the data and what to do with it once gathered.

Questions have been raised over the extent of regulations the insurance industry may face when it came to the carbon output of their portfolio and whether tricky decisions would have to be made on profit versus principles.

Motivations for signatories included accepting that change was inevitable. This was a good place to start and then onto a stage where measurements could ultimately help customers reduce their carbon to secure more favourable benefits and pricing.

Improvements In Insight

Better insights through digitalisation are the only way that the marine insurance market will achieve its goals of maximising visibility, vastly improving risk assessment capabilities and meeting ESG requirements.

Investments in digitised products are leading to vast improvements in the volume of meaningful data, outcomes and visibility not to mention the reliability of predictions and analyses.

Spending time lamenting the negatives facing our industry will do nothing to help us counteract the challenges we face nor ensure we are in a place to meet the future head-on. Instead, we must look at digital progressions and how they will help put our market in a stronger position. Technology must be at the beating heart of the future if this industry is to flourish.