IMN interview exclusive: Peter Sydenham, global head of marine reinsurance at Swiss Re

Insurance Marine News met up with Peter Sydenham, global head of marine reinsurance at Swiss Re, at this year’s Monte Carlo Rendez-vous de Septembre. He gave us his thoughts on some of the issues facing the marine insurance and reinsurance sectors today.

Economic slow-down

“We are definitely seeing less cargo shifting from Asia, out west. That has a big impact to the cargo market in particular, where the volumes are down. It also has an impact on the hull market, where shipowners are in financial difficulty due to the rates they can actually charge for freight.”

Oil Price

“The other real trend on the energy side is the piece of oil. It’s recovered a bit, it’s very volatile it’s about $50 a barrel, but it was not much more than a third of that a while ago.

Because of that low price. Many of the construction for units to get the oil out of the ground has stopped. Essentially, many of the drilling rigs are laid up. and one of the concerns there is that there is a lack of maintenance of those rigs. The crews have often been laid off, so one of the concerns is that, at some stage, they are going to come back to work and at that point the attritional loss ratio will increase. Quite simply, if things aren’t maintained, they break.

Energy insurance premiums have reduced over the past two and a half years from about $4bn to about $1.75bn. So the available premium for the insurers and reinsurers is substantially down. Exposures are down, but it’s quite difficult comparing that relationship, because there is still drilling activity going on, the amount of premium to cover the losses is down.”

Trade sanctions

“That’s really difficult for marine, because the marine market is the first one hit by trade sanctions. In January 2014 President Obama allowed the rest of the world to deal with Iran without penalty from the US, but the easing of that restriction did not apply to US citizens, which makes it very difficult for international companies such as ours, which have US citizens throughout the workforce.

The shipping business is very difficult when it comes to making sure that you don’t break an embargo. A cargo of oil could be bought and sold five times whilst it’s on one voyage. So it’s very difficult to make sure that every new owner is compliant.

“The sanctions on North Korea are probably the easy ones to deal with, because nobody deals with North Korea. But Cuba, that was a problem for our US colleagues. US law was directly contradictory to European law. Europeans were not allowed to discriminate against Cuba because it’s Cuba. But US law meant you couldn’t trade with Cuba because it is Cuba. What Swiss Re did was run all the available information through a tool, looking for key individuals named on these sanctions, looking for any hints, trying to make sure that we are compliant. And the vast bulk of our clients are doing the same, but it adds an awful lot in time and process. Part of the process is that if we ever do slip up as a market, we need to make sure we’ve demonstrated to the US authorities principally that we did have a process.  And, to be honest, I haven’t heard of anyone being prosecuted in Europe for selecting against Cuba.”

Increase in containership size

“With some containerships carrying 18,000 boxes, the potential for accumulation is huge. And I think that’s one of the key reasons for buying reinsurance.

“Working out what these accumulations are likely to be from any given port to any other port – it’s a very tough model

“The bigger issue for me is the safety of these ships in terms of the venture itself. If the ship lists by more than seven degrees, you can’t get the containers off. Another problem is, if you can get them off, where do you store 18,000 containers when a ship is in trouble? So it’s a huge problem and the claim for that would take several years to adjust.

“They are untested waters for salvagers. The answer is, the premiums should be charged to take into account these extra accumulations. But, in today’s soft market, is that realistically happening?

“And, as older vessels get scrapped, it’s still trending towards larger and larger vessels. They are cheaper to run. Of course, you will still need the smaller vessels, because you’ve got feeder services from places like this and you upload them in the major ports.”

(Editor’s note) “Mega ship” salvage challenges: The appetite for ever-larger container ships has seen cargo-carrying capacity of the largest vessels increase by over 70% over the past decade, to carry 19,000+ containers today. Two “mega ships” were grounded in February 2016, raising safety concerns about what could happen should a more serious incident occur. The industry may need to prepare for a $1bn+ loss in future. There are concerns that commercial pressures in the salvage business have reduced easy access to the salvors required for recovery work on this scale.

Cyber risk

“We are building an ever-improving understanding of cyber risk: what’s involved; the interconnectivity between computers, etc. We looking at how realistic is the prospect of a serious cyber-attack.

“In the marine world itself, computers have always been part of the policy we sell, so if a ship runs aground because it’s driving itself, that’s a standard risk at this stage. So what we are trying to look at is the new cyber-attack, such as the one we saw with Sony. That’s a real risk. What we want to do is fully understand it, make sure we have allocated an aggregate for these risks, monitor the aggregate closely and charge an appropriate premium. But one thing we are trying to make sure of is that the risks are understood. It’s a very new area, but one that we see an opportunity in the years to come.

“One of the biggest problems for us is understanding risk because most companies don’t like to report cyber-attacks. They don’t want the stockmarket knowing that they’ve been subject to a cyber-attack.

“We need to understand the risk that we are accepting. We need transparency.

As yet, it’s all theoretical in marine. We haven’t heard of anything coming through to the reinsurance side.”

Arctic waters

“It’s a much much shorter route, but it’s a dangerous route. So the ability to save a vessel up there, to get a salvage tug to it, it comes with risk. Insurers charge more for it. It’s relatively new but it does save an awful lot of time in the voyage itself.

“Most insurers cover it. They just charge more for it. Some shipowners won’t go there.

“If a vessel gets into trouble, it’s a problem. If the tug can get there, then the salvage award is likely to be very large, so it’s absolutely in the salvage company’s interest to try to save that vessel. But the degree of difficulty in doing it is huge.

(Editor’s note: There were 71 reported shipping incidents in Arctic Circle waters during 2015, up 29% year-on-year and the highest in a decade. In 2006 there were just 8 incidents. Machinery damage/failure (46) was the cause of 65% of incidents, driven by the harsh environment. The mandatory Polar Code, expected to enter into force in 2017, will help ensure more responsible shipping in such high-risk waters but safety questions remain.)

General Swiss Re aims

The rates have been reducing; coverage has been widening, and I think we need a reality check. This situation can’t go on. We would expect that the soft market is just about at the end. We

wouldn’t expect to see too many more reductions. At Swiss Re we would look to work with our clients to help them through this very difficult period. We’ve structured programs; we’ve done private transactions. We’ve done capital solutions and we’ll continue to work on these kind of solutions for our clients. It’s a really tough market out there and they need the support of companies like Swiss Re.