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P&I Premiums Expected To Be Under Pressure At 2016 Renewals

Despite P&I Clubs announcing that they are trying to achieve on average 2% increases in premium, ship owners with good records can look forward to reductions in premiums for protection and indemnity (P&I) insurance at the 2016 renewals, according to Willis Group Holdings.

"The International Group (IG) market has announced an average general increase of around 2%, with two or three clubs at zero, the majority around 2.5% and one club at 5%," noted Willis in its P&I Review 2015/16 report. "It is almost certain however that market forces will prevail and lower actual renewal results will be widely achieved. In the continuing challenging shipping market, we expect ship owning members to be pressing for the lowest renewal proposals in the 2016 renewals."

The report also highlighted a generally positive picture for P&I Clubs, noting that the International Group [of P&I Clubs] is in the healthiest state in its history. "Claims remain volatile and investment markets fragile, but a relative slowdown in number of major claims has allowed the IG market to make its first overall underwriting surplus since 2010." This, noted the report, is off the back of a 4% increase in total market premiums and a 3% reduction in net incurred claims. 

Willis has historically advocated for a decrease in release calls – a one-time charge incurred by ship owners who wish to be released from a P&I Club. Willis therefore welcomed the continued decrease in average level of release calls from 10% of total annual premium in 2012 to around 6.8% of total annual premium today. However, Willis also noted that there is still room for improvement.

"It is pleasing to note that releases have again improved during 2015. This follows the pattern over the previous 6 years and the hope is that this trend will continue," the report stated. "With a near doubling of the free reserves in the market since the last period of wide-spread unbudgeted calls, the market should now be in a stronger position. In such an environment, there still seems room for improvement on a 6.8% market average release call level."

Ben Abraham, Head of Willis's Marine division, said: "We are seeing the P&I market picking up with the first surplus since 2010/11 and nine out of 13 clubs reporting an increase in underwriting results. Nevertheless, the industry faces challenges: investment market returns have reduced compared to the previous year (down 2.9% from 3.7%), and claims remain volatile. The 2016 renewals will likely prove contentious as general increases come under pressure from ship operators looking to reduce costs in challenging freight markets whilst a number of underwriters sit on healthy underwriting surpluses."

He added: "The reduction in average levels of release calls highlighted by the Review is also encouraging. Over the past decade Willis has advocated for a decrease, questioning whether some clubs view release calls more as a commercial penalty rather than calculating a reasonable estimate of future exposure. We are now seeing some traction in this space as average release call levels have come down to a reasonable level, though there is still some room for improvement, within certain clubs."

 

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Shipping Losses Decline, Emerging Risks Pose Serious Challenges To Marine Industry And Insurers

  • 94 large ships lost worldwide in 2013, down 20% from last year, with foundering most common cause.
  • Piracy focus shifts away from Somalia to new hotspots: Indonesia and West Africa.
  • Indonesia attacks up 700% in five years. Evolving piracy tactics present new challenges.
  • Mega ships, Arctic shipping and alternative fuels create new industry risks.

Shipping losses continued their downward trend with 94 losses reported worldwide in 2013, coming in below 100 for only the second time in 12 years.

Losses declined by 20 percent from 2012 when there were 117 reported losses. The 2013 accident year also represents a significant improvement on the previous 10-year loss average with total worldwide shipping losses declining 45 percent since 2003.

“More than 90 percent of global trade is carried by sea so the safety of international shipping vessels and routes is critical to the health of the global economy,” said Tim Donney, Global Head of Marine Risk Consulting. “While the long-term downward trend in shipping losses is encouraging, there is more work to be done to improve the overall safety of these vessels as well as their cargo, crew and passengers, especially in Asian waters. As an insurer we are always concerned about recognized issues such as training and safety management, - human error is not something we can ignore and lack of skilled workforce is still an issue - but we also need to be alert for new risks as the industry continues to develop.”

Asia saw highest number of marine losses and continues to be an area of focus According to the report, more than a third of 2013’s total losses were concentrated in two maritime regions. As in 2012, the South China, Indo China, Indonesia and the Philippines region saw the highest number of losses (18 ships), closely followed by the seas around Japan, Korea and North China (17 ships).

More than two years after the Costa Concordia disaster, improving passenger ship safety continues to be a priority, with 2014 likely to see the 100th loss of a passenger vessel since 2002. Asia remains a hotspot for passenger shipping losses, especially for smaller passenger vessels and ferries as demonstrated by the sinking of the ferry St. Thomas of Aquinas as a result of a collision with another vessel off Cebu in the Philippines in August 2013, with the loss of at least 116 lives.

“We have to ask how some Asian ship operators measure safety and quality, particularly when speaking about domestic trade shipping in South East Asia,” said Captain Jarek Klimczak, Senior Marine Risk Consultant at AGCS. “The understanding of quality and standards can sometimes appear 50 years behind Europe – maybe even more.”

Around the world, more than a third of the vessels lost were cargo ships with fishery and bulk carriers the only other type of vessels to record double-digit losses. The total loss of two bulk carriers in Asian waters in 2013, Harita Bauxite and Trans Summer, highlighted the importance of proper cargo handling and stowage of bulk cargoes. AGCS experts believe high moisture content and subsequent liquidization, leading to free flowing instabilization of the cargo to be the primary cause of the accidents. The most common cause of losses in the past year was foundering (sinking or submerging), often driven by heavy weather, accounting for almost 75 percent of all losses, which was a significant increase from both 2012 (47 percent) and the previous 10-year average (44 percent).

For the first time the report includes not only total losses but also the total number of shipping casualties by region. The East Mediterranean and Black Sea region is shown to be a casualty hotspot, responsible for 464 casualties (18%) out of a worldwide total of 2,596 during 2013, including the year’s oldest ship to be a total loss:

the 108 year old Hantallar which grounded off Tekirdag, Turkey. This region combines busy shipping routes and a reputation for weaker safety management practices with a regional fleet that has a higher proportion of lower quality older vessels. The report also shows that over the past decade the British Isles have been the location of the most casualties, while January is the worst month for all casualties (including total losses) in the Northern Hemisphere.

In the Southern Hemisphere it is July. Piracy attacks still a concern – different models pose new challenges In 2013, piracy attacks declined 11 percent to 264 reported incidents worldwide according to International Maritime Bureau statistics - 106 of these occurred in Indonesia, which has seen a 700 percent increase in attacks since 2009.

Most of these attacks remain low level opportunistic thefts carried out by small bands of individuals but one third of incidents in these waters were reported in the last quarter of 2013, and there is potential for such attacks to escalate into a more organized piracy model unless they are controlled.

An emerging piracy hotspot with more organized crime is the Gulf of Guinea with 48 incidents in 2013, accounting for 18 percent of all attacks worldwide. Piracy attacks in Somalia have declined dramatically with only seven incidents in 2013 compared with 160 attacks in 2011. The report suggests the piracy model could be broken in Somalia in a couple of years if naval patrols continue.

Emerging Risks

An increasingly difficult operating climate for ship operators has forced a number of innovations, including larger ship sizes to capitalize on economies of scale, the use of alternative fuels and changes in ship designs. At the same time, more economical trading routes are fast appearing in Arctic regions during the summer months, but these present their own set of challenges.

Emerging risks identified include:

Vessel size: Last year marked the arrival of the largest container vessel on record, over 400 meters long and boasting capacity in excess of 18,000 teu. This trend is set to continue. AGCS estimates capacity grows by around 30 per cent every four to five years, meaning the arrival of 24,000 teu carriers can be anticipated around 2018.

“The claims arising out of maritime emergencies of these ‘mega ships’ can be huge. For example, just think of the business interruption of ports and terminals if an accident was to block the entrance,” said Dr. Sven Gerhard, Global Product Leader, Hull & Marine Liabilities, AGCS. “In addition, salvage might require unprecedented efforts and complex operations – in some cases it may take many months, or possibly a year or longer, to remove all the containers, particularly if the accident were to happen in a remote location. The large loss potential has increased for events which are not extraordinary on these big ships. And these are unchartered waters for salvors.”

Rise of LNG[1]-fueled vessels: Use of liquefied natural gas to power ships is expected to dramatically increase by 2020. There are safety concerns however, as the industry will see the rise of ports that have never previously handled LNG providing bunkering stations on dock.

“We need to ask what risks LNG-fueled ships will present to the industry. The concern is storing the LNG as fuel and handling it onboard. LNG expertise is not easily available – there needs to be a change in mindset and training,” said Capt. Rahul Khanna, Senior Risk Consultant, Marine, AGCS. Arctic trading routes: Shipping casualties in Arctic Circle waters have increased to an average of 45 per year during 2009-2013 from only 7 during 2002-2007. Damage to machinery caused a third of these incidents, higher than the average elsewhere, reflecting the harsher operating environment.

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