Past couple of years saw high number of losses: Gallagher report

Natural disasters, fires and extreme weather continued to hog the marine disaster headlines in 2018, following on from a series of natcats in 2017, reports AJ Gallagher in its February 2019 edition of the Gallagher Marine Hull & Machinery and War Risks Market Report.

Hurricanes Harvey, Irma and Maria (HIM) in 2017 were among the biggest marine loss events of the past five years and indeed feature highly among the top 10 marine losses of the past decade. The three storms in 2017 caused an estimated $1bn of insured losses for the yacht market alone, as well as causing extensive damage to ports, cargo and inland marine risks such as warehouses, buildings under construction and weather stations.

Natural catastrophes continued to generate losses for marine insurers in 2018. Hurricane Florence and Michael caused damage and disruption to several ports on the US east coast in September. Florence total insured losses were estimated at $2.5bn, while the cost of Michael was estimated at between $6bn and $10bn.

However, losses to the marine market from these events were relatively modest, notwithstanding the serious damage to factory fishing vessel North Star, which was being constructed at Eastern Shipyard in Florida and was close to completion. Gallagher said that estimates were difficult at this stage but the total marine loss was likely to be more than $70m.

Other 2018 events:

  • Typhoon Mangkhut caused damage to coastal infrastructure, shipping containers and yachts in Hong Kong and China.
  • An offshore engineering vessel Hai Yang Shi You ran aground near Hainan. Typhoon Jebi, the most powerful storm to hit Japan in 25 years, caused tanker Houn Maru to break its mooring and collide with a bridge linking Kansai International Airport to the mainland.
  • The shipyard fire at Lurssen in Germany on September 14th 2018 could turn out to be the largest pure hull loss ever. If it is declared a total loss the claim will be in excess of €620m.

Gallagher said that it was the Lurssen loss more than any other that galvanized hull underwriters, their management and Lloyd’s of London to look for higher prices and to trim back the book. “With larger and more sophisticated vessels entering the sector – and more risky trading areas such as polar waters being explored – the risk of ever larger single losses occurring is growing”, said Gallagher, noting that a loss of an ultra-large or very large vessel now had the potential to generate claims in the $1bn to $2bn space.

Attritional losses were stable but proving to be material against the backdrop of a reduction in marine insurance premium rates in recent years. Machinery breakdown (including engine failure) claims continued to be among the largest causes of loss by value and frequency.

Gallagher echoed commentaries from all corners of the marine sector, stating that claims arising from contaminated fuel continued to raise difficult questions around causation and who was liable for damage, and that this would be brought even more into focus as vessels switched to low sulphur fuels to comply with the 2020 regulations.

London Market

Following on from a string of poor marine underwriting results over many years, Lloyd’s of London demanded that participating syndicates demonstrate clear plans to return to profitability.

This overall poor performance on a number of lines of business was further exacerbated in 2017 by the major catastrophe losses which hit the market. Gallagher said that marine hull insurance was “a repeat offender in terms of results” and a number of Lloyd’s syndicates announced modifications and/or withdrawals:

  • Advent Syndicate 780 announced a complete shutdown of their marine insurance book. Gallagher said that this came amidst discussions that Advent would be merged with Brit, which is also owned by parent group Fairfax Financial Holdings. The broker predicted that it seemed likely Advent’s overall portfolio would go partly into run-off and in part be transferred to Brit.
  • Brit Syndicate themselves withdrew from yacht business, where they had been considered a substantial player.
  • AM Trust Syndicate 1861 closed their Lloyd’s marine book in its entirety, withdrawing from hull, liability and cargo.
  • Aspen Syndicate 4711 ceased writing marine hull along with a withdrawal from two other lines of business (aviation and professional indemnity). Aspen has since sold the renewal rights to Helvetia who have opened a new office in London. The Helvetia team will be Ralph Godwin and Simon Wells (both ex Aspen) and Iain McLeod (ex-Channel Syndicate).
  • Barbican Syndicate 1955 withdrew from marine hull and cargo business.
  • There is no intention to replace senior marine hull Underwriters who left Tokio Marine Kiln Syndicate 510.
  • CNA Hardy Syndicate 382 closed its marine hull book, along with other non-profitable lines of business, stating that these lines had struggled to deliver profitability, even in light of improving market conditions.
  • Standard Syndicate 1884 entered run off from January 1st 2019. Standard Club concluded that ‘current overcapacity and a weak pricing environment have made Lloyd’s a challenging environment for it to develop a profitable underwriting business with sufficient scale.
  • Channel Syndicate 2015 withdrew from marine H&M business. It will continue to write some of the book via their parent company Scor.
  • Liberty announced they would no longer write marine hull business through their Lloyd’s Syndicate 4472, but will instead renew and grow their portfolio via their company security. The above follows on from the complete marine withdrawal of WR Berkley Syndicate 1967 in 2017.

The tougher stance towards hull & machinery risks was not limited to Lloyd’s. Other London market participants indicated their intent to scale back on participation and withdraw from risks with poor historical performance or where the technical rating was considered inadequate.

RSA recently announced they would exit London Market Marine Logistics, Marine Trades, and Ports and Terminals as well as International Construction, International Freight and a Delegated Authority to Lodestar (for Fixed Price Protection and Indemnity Insurance). RSA will continue to offer Marine Hull and Hull Construction. “As is the case for much of the London market, they will be looking to secure meaningful premium increases across this portfolio in order to return to profitability”, said Gallagher.

There had already been some hardening of rates and this was expected to continue in 2019. How significant that hardening will be will depend on whether capacity enters the market in other parts of the world in an attempt to take advantage of a more favourable rating environment