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Now is the Time to manage the “Unthinkable” Risks: IUMI President

IUMI President Dieter Berg

Chennai:

Port Wings News Network:

Opening this year’s International Union of Marine Insurance (IUMI) annual conference on 17 September 2018 in Cape Town, South Africa, IUMI President Dieter Berg impressed on delegates the need to manage “unthinkable” risks.

He highlighted a series of losses that, until recently, would have been assessed as “unthinkable”, these included: Deepwater Horizon (insured loss US$6bn), Costa Concordia (insured loss US$1.5bn) and the Tianjin port explosion (insured loss $2-3bn). Nat-cats were also creating large losses such as hurricane’s Katrina and Rita in 2005 (total insured offshore energy/marine loss US$12.57 bn) and last year’s hurricanes Harvey, Irma and Maria which resulted in more than US$1bn in yacht losses.

According to Berg, “unthinkable” risks would become more commonplace and underwriters must adapt to manage them effectively.

Dieter Berg said: “Growing accumulation of risks at sea and ashore is of increasing concern. On large containerships where around 20% of boxes are empty, we are likely to see a combined cargo and hull value of around US$1.5bn, and that doesn’t include any wreck removal or pollution costs. In ports and terminals, the values are even higher as was seen at Tianjin.”

“Climate change will continue to influence risk profiles. Earthquakes and wind storms are not the real issue, unless you are an offshore energy underwriter. But flooding and storm surges can create massive losses.”

Dieter Berg stated: “The political landscape is also changing with an increase in sanctions and disruptions to trade agreements. Certain regimes are entering trade wars that has led to increased protectionism. The impending Brexit is causing instability within the Eurozone and is also likely to impact our industry.”

“And we mustn’t forget digitization. Shipping is lagging other logistics modes and technology will soon impact heavily on maritime supply chains as there becomes a more urgent need to optimise trade flows and streamline port operations”.

Emerging and unquantifiable risks were of increasing concern to marine underwriters but Berg was confident that the sector would step up to the challenge. “By identifying, monitoring, reacting and being innovative we can manage the unthinkable”. He said.

“Cautious optimism on the horizon for offshore energy underwriters”

Although global premiums for the offshore energy insurance sector dipped by 5% in 2017, signs of recovery are on the horizon.

Speaking at this year’s International Union of Marine Insurance (IUMI) conference in Cape Town on 18 September, IUMI’s Offshore Energy Committee Chair, James McDonald, explained: “Oil prices have steadily risen by 40% since last year’s IUMI conference and this is starting to drive activity in the oil and gas sector. Capital expenditure in the sector is forecast to grow by around 6% each year with the lion’s share of the growth being in North America, Africa and Latin America. We are also expecting both production and consumption of oil to continue to rise for the foreseeable future. Here we need to apply some caution as the margins between supply and demand are thin but these small margins can create volatility in the market. OPEC and Russia’s ongoing discussions could impact the price of a barrel of oil significantly as could geopolitical considerations in countries such as Venezuela and Iran. That said, there are enough positive factors for offshore energy underwriters to view the immediate future with slightly more optimism that they have been able to do for the past two or three years”.

In 2015 and 2016, large losses (those greater than US$100 million) significantly eroded market premium, although the number of large losses in 2016 was just three (10 in 2015). Large loss frequency in 2017 was also low (three), probably as a result of the reduced offshore activity. However, when attritional losses were included, claims continued to outstrip the premium base and this was a concern. In the future, the frequency of claims was expected to rise in line with increased fleet utilisation and offshore activity in the high risk sectors of exploration and offshore construction.

The increasing risk of cyber-security was also highlighted as a particular issue for underwriters and one that would have to be seriously considered when pricing risk in the future.

“We are seeing a slight uptick in the oil and gas sector and this will filter through to the insurance market as the oil companies increase their exploration and development activities. An increase in activity is good for our top line premiums but this is likely to be tempered with an upswing in attritional claims One concern however is that the cost-savings that the oil companies have made could have a negative impact on the risks we face”, said McDonald.

“Global ocean hull premiums down 2.3% but general risk profile and trading conditions showing some improvement”

At IUMI conference in Cape Town, Chair of the Ocean Hull Committee, Mark Edmondson, highlighted a continuing deterioration of premium income against the more positive picture of an improving risk profile. However, the international market has shown signs of improvement during 2018, although continuing volatility and uncertainty in many sectors remained a concern.

“Whilst the shipping industry in general is showing some positive trends and the claims climate remains relatively stable, particularly for total losses and major partial losses, there does not appear to be any direct correlation between that and overall underwriting performance”, he said.

“However, we estimate around USD100 million of capacity has been removed from the market over the past year due to very low start-up activity and the withdrawal of a number of high profile hull insurers. Facilitisation would appear to be under increasing pressure due to worsening performance and heightened regulatory scrutiny. Overall the deterioration of underwriting results, over what has been a considerable period, has appeared to have triggered a brake in the decline in market conditions.”

An enhanced risk profile stemming from better quality tonnage and greater regulatory influence has encouraged a consistent improvement in the frequency of major casualty. However, the ocean hull market is still being buffeted by lower asset values, reduced utilisations, year-on-year erosion of premiums and ever present volatility.

The sector continues to come to terms with the potential impact of cyber exposure (both malicious and non-malicious); incoming environmental regulations and their impact on hardware and operations; autonomous vessels; bunker contamination; and the accumulation of risks that quickly build as containership continue to grow both in size and capacity.

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