Gallagher marine hull & machinery and war risks market update – February 2021

Mike Ingham, divisional director at broker Gallagher, has said in the firm’s February update that, although the UK remained in a third Covid-19 lockdown, there at least appeared to be light at the end of the tunnel in the form of a mass vaccination programme. This is already being rolled out in the UK and around the world.

Gallagher said that it seemed far too early to predict when normality would resume, but it did not seem too unrealistic to expect some restrictions to be lifted by the spring.

Gallagher noted that ships’ crews had worked throughout 2020, “in most cases for massively extended periods due to minimal possibility of crew changes in many parts of the world”.

The broker noted that “these essential workers are rarely lauded in the mainstream media, but have been critical in keeping our fragile economies from grinding to a complete halt”.

Elsewhere, the implications of the recent change in the US administration were likely to have economic and geo-political implications, but precisely what they will be remained uncertain. Recent events “painted a picture of a polarized electorate where the first task for the Biden administration will be to find some common ground, hopefully by resolving the Covid-19 crisis, which is surely in the interests of all”.

In the UK, Gallagher observed that Brexit eventually happened “with relatively little fanfare” because most focus was on combating a resurgent pandemic.

Gallagher hoped that the agreed trade deal between the UK and the EU would “provide the foundations for a long term mutually beneficial relationship between the UK and EU”.

Amidst all this, Ingham observed that the Hull & Machinery insurance market “was strangely predictable”.

He noted that “we anticipated a continued hardening of rates due to a range of factors including increased claims from natural catastrophes, historical poor performance of the marine hull portfolio and the effects of the reduction in marine capacity”.

Gallagher said that wider market losses arising from Covid-19 had done nothing to slow down the pace of this hardening. “The rate increases which we anticipated 12 months ago have largely materialized as expected. Clean renewals have attracted double digit rate increases.”

Renewals where the loss record had been “challenging”, or in sectors where vessel type had been problematic for Underwriters, had been less straightforward to forecast.

Gallagher said that underwriters might simply decline to renew due to bad experience, or look to charge significant increases. “New participants have often looked to completely re-rate fleets, tightening conditions and pushing up deductibles”, the broker said.

The significant fact, said Gallagher was that “most Underwriters are still prepared to walk away, even from business where they have historically profited, if they are not able to achieve their required terms”.

Technical rating was generally considered to be inadequate; most initial reports suggested that reinsurance programmes which renewed at January 1st had been subject to rate increases.

“All of this suggests we should expect a continued hardening throughout 2021”, said Gallagher.

There was also some speculation of more focus on deductibles over the coming year. Gallagher said that owners with low claims incidence might look to avoid a further increase in rates by accepting higher deductibles/retention.

However, Ingham said that it was not all doom and gloom. The volatility that was seen at the beginning of this tougher market cycle appeared to have eased somewhat. “We can approach most renewals with some expectations in mind”, he said.

There was less uncertainty around which markets would continue to write marine hull insurance “and we can say, albeit cautiously, that most of the insurers writing today should be here to stay for the foreseeable future”.

One exception to this was Argenta Syndicate, which ceased writing during 2020. Gallagher reported that there were pockets of new capacity looking to increase their presence in the market. Fidelis, Convex and North all moved into more prominent positions in the marine hull space throughout 2020.

However, Gallagher said that “as is the case for many insurers, there isn’t a huge appetite at this stage to aggressively attack business as a leader, but rather to take shares selectively where rating is increasing to more acceptable levels”.

There were a number of new start-ups potentially targeting the specialty insurance sector, but Gallagher said that it was unlikely they would make “any meaningful foray into the marine hull market in the short term”.

While the marine hull market itself was largely unaffected by losses related to Covid-19, Gallagher noted that it was certainly not immune from the wider insurance market fallout. A recent UK High Court Ruling in favour of claimants against multiple insurers is expected to lead to payments totalling hundreds of millions of pounds on business interruption policies for losses occurring during the first UK lockdown. Gallagher said that these BI losses were likely to strengthen the resolve of the insurers involved to maintain hardening across all lines of business.

An exclusion clause was expected to be present on all renewals going forward.

Gallagher noted that, while it was difficult to envisage a Hull & Machinery loss related to Covid-19, the inclusion of the clause was more a requirement for Underwriters to ensure back-to-back cover with their reinsurers.

Loss of Hire is more complex. Throughout the second half of 2020, Gallagher said that it had seen some downward pressure on these rates, “especially in anticipation of a slightly different US foreign policy approach towards Iran under the new Biden administration”.

Gallagher observed that there had been a number of attacks in the Red Sea in recent weeks, as well as the seizure and detention of a South Korean Tanker in the Arabian Gulf. At the same time, while Iran has moved to stress that the detention of the Hankuk Chemi was not politically motivated, it had simultaneously demanded the release of $7bn of Iranian funds from South Korean banks, held up because of sanctions issues.

The outgoing US administration further increased sanctions pressure on Iran’s metal and shipping industries during their final weeks in office. Tension between the two countries, and the potential risks for shipping in the region, remained high, Gallagher said.

On the other hand, a number of countries in the Middle East had lifted sanctions against Qatar, which the broker said pointed to an easing of some tension in the region itself. Although the current threat level remained high, Gallagher said that the longer-term outlook might be slightly more hopeful for political solutions. It reported an improvement in rates for nontanker tonnage, especially those vessels permanently operating in Arabian Gulf.

However, over the past few weeks, Gallagher said that the market had signalled intent to charge slightly higher additional premiums for Southern Red Sea Ports, especially for tankers.

2020 also saw the most significant increase yet in respect of vessel attacks in the Gulf of Guinea and the Joint War Committee in London responded in September by extending the excluded area to cover Cameroon, Equatorial Guinea, and Gabon

Globally 135 crew were kidnapped in 2020, with the Gulf of Guinea region accounting for around 95% of that number . Gallagher observed that the pirates were “demonstrating an increasing range to carry out attacks with the furthest recorded being 200nm from shore”.

The perceived threat level had seen some strengthening of rates for vessels calling/transiting across the region.

Cyber Risk continued to be a major point of concern for many shipowners. While an increase in malware, ransomware and phishing emails exploiting the Covid-19 crisis was the primary reason behind the spike, Israeli-based security firm Naval Dome said that travel restrictions, social distancing measures and economic recession were beginning to bite into a company’s ability to protect itself sufficiently.

Gallagher said that its reports throughout 2021 would have a special focus on sustainability in shipping.

It said that sustainability in shipping was a far broader subject than IMO 2021. “The insurance industry must be there to support shipping in achieving a more sustainable future and we will enlist the help of our friends across the insurance and shipping sector to help answer some of the key questions on how this can be achieved”, said Gallagher.