A market in flux

Michael Nukk, Head of Marine, North America, AIG, assesses the state of the marine insurance market during this period of significant change

The marine insurance market is in an era of disruption, realignment, and most of all, opportunity. The long-term effects of the global downturn and ongoing trade disputes remain unclear. By constricting capacity, more disciplined underwriting and a renewed drive toward technology and more efficient processes, the market could be poised for more profitable growth. Recent research indicates that the global marine insurance market could grow upwards of $8bn through 2024. However, both developed and emerging risks continue to evolve and grow, with the potential to threaten sustained profitability in the market. Some of these are highlighted below.

EXTREME WEATHER AND CLIMATE CHANGE

with 13 hurricanes, of which six were classified as major. This activity has caused an estimated $60-65bn in economic damage with the insured damage in the tens of billions. Hurricanes are becoming more frequent and costly - 14 of the 15 costliest Atlantic hurricanes have occurred since 2004 and this increasing trend puts people, insurers, and governments in danger for larger and increasingly regular recovery bills.

Particularly exposed are companies that rely on efficiencies gained by utilizing warehouses in port cities to import or export goods, that insure these inventories in the marine cargo market. In addition, there are ever more expensive commercial and pleasure vessels that are damaged as these storms hit the coastline. Developments in supply chain interconnectivity over decades represent another layer of vulnerability in these extreme weather scenarios.

Since 2000, the value of intermediate goods traded globally has tripled to more than $10 trillion, delivered through ever leaner global networks. However, these efficiencies are particularly vulnerable to disruption.

A recent example is airline flights. Flights and passenger numbers are way down and with airfreight prices for cargo up 10 times, their availability is very low. Therefore, clients are looking for different ways to ship goods. Now we see very high value electronics on rail and road transport which is changing the risk landscape. As a market we need to continue developing innovative approaches and solutions enabled by data analytics, geospatial solutions and modelling capabilities to address the increase in both frequency and

“Hurricanes are becoming more frequent and costly - 14 of the 15 costliest Atlantic hurricanes have occurred

since 2004 and this

increasing trend puts people, insurers, and governments in danger for larger and increasingly regular recovery bills.’’

Michael Nukk, AIG CONTAINER STACK FAILURES

There have been four recent incidents, predominantly in the Pacific Ocean, in which 3,000 containers were lost and many more damaged.

These incidents highlight the disasters that container ships, cargo and crew could encounter because of improper lashing of containers, ship design, and incorrect stowage planning.

While containers look the same on the outside, the insides remain unknown. Thus, securing these containers to withstand all sorts of extreme conditions is critical. Combine that with ultra large vessels and there are all the makings for a large loss.

There is a great randomness to vessel incidents but the data on routing, weather forecasting and cargoes on

severity of losses attributable to severe weather. This will allow us to develop risk adequate technical pricing approaches that are sustainable and offer necessary returns for capital providers.

CARGO THEFT SHIFTS FROM PHYSICAL TO CYBER

Theft and crime in logistics is a huge problem with no borders. Theft from a facility is mainly low with warehouse security generally good. However, goods in transit often only have normal curtain sider trucks.

Better security is now available via remotely operated electronic locks and seals, or coded (GPS GSM geofence) locks attached on the inside of the container or trailer to avoid being opened before arriving at a predetermined location.

But cyber hacking is exploiting all electronic vulnerabilities. All four of the world’s largest shipping companies have now been hit by cyber-attacks involving ransomware, malware affecting a data centre and a worldwide shipping container booking system being taken down. Over the past year, incidents have intensified with USB malware spotted aboard a ship’s IT systems. Where malware gangs have done the most damage are attacks that targeted shore-based systems that sit in offices, business offices, and data centres.

These are the systems that manage ships, and are used to book container transports, create ship manifests, assign container ID numbers and monitor security. As the industry rapidly turns to more advanced technology, for everything from navigation to cargo loading and unloading, cyber threats can disrupt data transfer, equipment and hardware, or sensors critical for the operation of a ship.

board is providing us with insights on how to price these risks more accurately.

ACCUMULATION RISKS

The dramatic downturn resulted in an accumulation of both vessels and cargo at ports and storage facilities. There is cargo sitting in storage waiting for prices to go back up, and there are still cruise ships sitting idle at port. Accumulation in any one area creates more risk than contemplated. While the industry is looking to tighten reactivation procedures around vessels in lay-up, these issues could still lead to potential claims down the line.However, from a risk management perspective, substantial progress has been made in identifying vulnerable concentrations of static cargo, and measuring port accumulations using detailed insights into cargo fragility and exposure accumulation.

Insurers are now starting to collect and effectively analyse marine cargo and specie data that cannot be implemented in standard property catastrophe models. Further analysis can provide insights e.g. dwell time of specific product types and cargo seasonality of a port to understand the average and peak exposure at risk.

RISK MITIGATION VIA DATA AND ANALYTICS

Stronger engagement with clients and brokers has highlighted the importance analytics plays in monitoring risk exposure and optimising risk management, in addition to setting terms, conditions and pricing in a changing environment. But better use of pricing tools, CAT modelling, loss trend analysis and total cost of risk are necessary across all risks affecting marine, to make our product offerings better and more sustainable for our clients.