Marine insurance - Aon

1 Aon Risk Solutions Marine insurance market update Ship owners face testing times as freight markets and asset values languish. Q4 2012 The persisting soft phase of the Marine insurance market cycle however, is helping control some costs Contents Overview Overview Shipping markets have been in the doldrums Rather like the shipping market itself, the chief The evolving Asian since the onset of the global financial and characteristic of the Marine hull market is that Marine markets economic crisis. The Baltic Dry Index peaked the supply of underwriting capacity exceeds close to 12,000 in 2008, but since the crash the demand for it, though perhaps more Aon Benfield releases has only occasionally flirted with territory dramatically in the case of the hull market.

2 Monthly catastrophe report north of 4,000 and currently it languishes in Aon places the world's largest Marine hull the area of 1,000. The other dry bulk indexes risk, a value in excess of billion, so we Aon launches 2012 show a similar pattern. While the reduced know there is at least that much capacity in P&I market cost of shipping dry bulk cargoes is probably fact our market surveys reveal there is much ..and unveils P&I positive in terms of macroeconomic recovery, more. If the average commercial cargo vessel updates website it is of course not good news for vessel is presently worth less than USD50 million operators, many of whom are enduring a (maybe rather less), theoretically the supply of perfect storm of reduced asset values in some hull insurance capacity is at least 30 times the cases leading to negative equity, combined demand for it, given how hull risks are placed.

3 With marginal or unprofitable trading, as operating costs often match or even outstrip High capacity freight income. Of course not all markets will write, much less lead, all classes of hull business, but it Focus on costs remains a fact that for most risks there is an The situation seems unlikely to improve in abundance of capacity. Accordingly, market the near term. It is reported that the world's forces have created a situation where hull shipyards currently have hull orders worth rates currently are at all time low levels in real USD300 billion on their books. While a fair and probably absolute terms and overall on chunk of this is construction for the offshore a technical basis the market loses money.

4 In energy sector, the majority is cargo vessels of fact, according to statistics delivered by Astrid various types. Vessel scrapping is on the rise, Seltmann to the 2012 IUMI meeting in San up from less than 1% of the world fleet in the Diego (see for further details), the boom years to something of the order of 3% to global Marine hull market lost money in 16. 4% more recently; but the supply of tonnage consecutive years up to and including 2011. seems set to continue to grow even while the So entrenched is this loss-making position, demand for it is stagnant or even reducing. apparently, that it is rumoured plans are already being made to celebrate its silver It is not surprising therefore that vessel jubilee at IUMI 2021.

5 Operators are scrutinising all controllable costs. One of these is insurance to some Joking aside, it is understandable that hull extent, at least. While the hull markets underwriters are trying very hard to improve continue in the main to offer very good value, this position, in the London market especially. P&I costs are set to be on the rise pretty London is still the leading global hull market For more information, please contact sharply at 20 February 2013 (see back page) by premium volume and increasingly in 2012. Mark Cracknell London hull underwriters have been trying Global Broking Centre, London to force through small increases, even on Marine clean business.

6 +44 (0)20 7086 4222 (continues overleaf). Aon Risk Solutions | Global Broking Centre | Marine >> Marine insurance Market Update, Quarter Four 2012 page 1. Overview (continued). They have been patchily successful, it is P&I clubs are required these days to perhaps fair to say, although the true effect demonstrate a level of capital adequacy that has probably been to stop the rot, as they see is not inconsistent with what is required of it, rather than to drive any actually meaningful their commercial market cousins, and this rate increases. It has also cost the London is substantially the purpose for which their market some business, as vessel operators surplus funds are earmarked these days.

7 With and their brokers source the cheaper capacity investments at best an unreliable source of often still available from other markets. income, the clubs are heavily dependent on the performance of the technical account, Time will tell what this all means for London's and claims are rising faster than premiums. position in the global hull market, and for Whether by (the likely general increase the overall profitability of the class; but if mean), though, and whether this rising cost is London tries to move out of step with other fairly attributable to all members, will be part markets the result could be lasting damage of the renewal negotiation process as usual.

8 To the former with no real change in the but P&I premiums will increase overall and it latter perhaps the worst of all outcomes. is unlikely any particular club will significantly The 1 January reinsurance renewal season, sacrifice market share as a result something of expected to herald significant rises in the cost which hull underwriters must be rather jealous. of reinsurance programmes, especially in the wake of Sandy, could very well further harden Cargo market sentiment in the London market in particular; Conditions There is no global cargo market in the same in the Marine but the difficulty is how to pass this on to way as hull or P&I. Wholesale markets, such customers when they have so much choice.

9 insurance market as London or Singapore or New York there are a greater number tend to focus on are varying from P&I market complex and specialist risks, with domestic sector to sector The P&I market's direction of travel in pricing markets more than able to take care of most terms is of course much easier to track, and plain vanilla risks. That is not to say the it is relentlessly higher. Currently leading the wholesale markets would not write those upwards charge is Britannia, with a general risks, or could not be competitive, but that increase that aims to put a shade over they are less likely to see them. on estimated total call rates, before these are further adjusted for the certain and likely very IUMI 2012 reported worldwide cargo significant increase in the cost of the group's insurance figures that show a market pretty excess of loss reinsurance programme.

10 The much balanced on the edge of profitability. combined effect could mean average rate The slight recovery in the general economic rises of 25% or more. From a club that is environment in 2011 was reported as traditionally one of the best reserved this the main reason an increase in premium does seem extraordinary, even considering volumes, especially for commodities that decisions on such matters are made by and stock programmes, but factors such the ship owner directors of what is, like every rising reinsurance costs following natural other International Group mutual, a not for catastrophes and more General Average profit organisation. claims indicate a lower threshold of profitability.