The International Union of Marine Insurance (IUMI) has released its annual statistical report on the marine insurance market highlighting that global marine premiums were $28.5 billion in 2017, up by two percent from 2016. However, the IUMI says that, despite this increase, there is an increasing mismatch between income levels and covered risk when current premium levels are viewed in relation to covered risks and the impact of claims.
In the hull market, falling vessel values have, among other market conditions, contributed to an erosion of income to a degree where income is now not sufficient to allow for normal repair costs in a given year. The last 10 years' statistics show an increasing volatility in the impact of claims on underwriting results caused by the random occurrence of claims with unprecedented cost.
As vessel sizes continue to increase, this trend will not reverse, says the IUMI, and the heightened risk must be taken into account. The shipping and insurance industries will have to embrace this level of volatility and uncertainty which may impact future profitability.
The offshore energy market has also seen a substantial erosion of premium income caused by the low oil price and the consequent low activity in the offshore sector.
The distribution of the $28.5 billion global income between geographic regions remained stable, with only a one percent increase in the share of Asia and Latin America as compared with Europe. In 2017, Europe represented 49 percent of the global income, Asia/Pacific 29 percent, Latin America 10 percent, North America six percent, Middle East four percent and Africa 2.4 percent.
For global marine premium by line of business, cargo continued to represent the largest share with 57 percent in 2017, hull 24 percent, offshore energy 12 percent and marine liability (other than P&I) seven percent.
Premium income for marine cargo insurance was estimated at $16.1 billion for 2017, representing a six percent increase on the 2016 result. Cargo was the only line with an actual increase in volume and, consequently, its relative share of the overall global premium. This increase in absolute numbers was the result of an upswing in trade in combination with exchange rate fluctuations (which affect cargo premiums more strongly than other sectors).
2014-2016 showed an extraordinary increase in loss ratios, primarily caused by the impact of outlier and national catastrophe (nat-cat) losses. Seen in the context of increasing accumulation exposure and climate change, the IMUI says that this might indicate a "new normal."
2017 continues this recent trend and is expected to be affected more than average due to a number of nat-cat events including hurricanes, the Mexican earthquake, flooding in Bangladesh and the Californian wildfires. Underwriting year results always deteriorate due to the lag in registering and paying claims. When all claims attaching to the 2017 underwriting year are known, a final gross loss ratio of around 80 percent is likely to be reported.
The hull sector recorded a global underwriting income of $6.9 billion representing a decrease of 2.3 percent on the 2016 result. Exchange rates exert less influence on the hull market due to the global nature of the hull portfolio. The downward trend in global hull premiums appears more severe when compared against world fleet numbers and vessel values. Whilst the global fleet continues to grow in numbers and in average vessel sizes, the average insured values have reduced year-on-year since the financial crash of 2008. This, together with depressed freight rates, is affecting overall premium income. 2017 saw a slight rally in vessel values in the bulk market and 2018 is likely to see values increase for the offshore fleet but, in the main, IUMI's figures show an increasing mismatch between fleet growth and premium income.
There continues to be a long-term downward trend in the frequency of hull claims in general and for total losses specifically. The frequency of total losses seems to have reached its possible minimum with a recent fluctuation between 0.05 - 0.1 percent. The reduction in vessel values increases the probability of constructive total losses as the cost of repair is more likely to exceed an accepted percentage of the reduced vessel value.
Major losses have not significantly impacted the sector for some years, but as the annual statistics released by The Nordic Association of Marine Insurers (Cefor) in April 2018 illustrate, the most costly one percent of all claims account for a minimum of 30 percent of the total claims cost in any given year. Moreover, the risk of a single major loss incurring unprecedented cost remains significant in light of larger and more sophisticated vessels entering the market and new, more risky trading areas such as polar waters being exploited.
The rise in loss ratios clearly shows an increasing gap between a declining income and expected claims cost, even without the impact of costly major losses. This is a significant cause for concern, says the IUMI.
Global premiums for the offshore energy sector reached USD 3.5 billion in 2017 representing a five percent reduction on 2016. The reduction from 2016 to 2015 reached 21 percent. The majority of business in this sector is transacted in U.S. dollars, so exchange rate fluctuations have very little impact. The strong decrease in income from 2014 driven by the falling oil price now appears to be flattening out as the oil price begins to rally.
Losses in this sector, particularly from hurricanes, have been modest in recent years with 2017 recording just two upstream losses valued at more than $1 million.
Note from the IUMI
The IUMI's total world-wide premium includes data from all relevant marine insurance markets including Asia, Latin America and Africa. Care should be taken when making comparisons with earlier figures as data coverage varies in different years and a number of figures will be updated retrospectively. Similarly, "global" loss ratios for hull, energy and cargo do not encompass all regions, and underwriting year results do develop over a couple of years due to a time lag in claims reporting and payments. Since 2017, the IUMI has been able to show accounting year loss ratios originating from major Asian and Latin American markets, in addition to the underwriting year loss ratios reported from primarily major European marine insurance markets. When interpreting statistics, caution should always be applied regarding what the data actually relates to. The aim of the IUMI is solely to provide data as available and raise awareness for the importance of a critical evaluation of the risks covered.