S&P Reports Marine Hull Insurance Rates Set to Peak in 2005

Standard & Poor’s reported that rates across the global marine hull insurance market look set to peak in 2005, a year later than previously expected. It noted, however, that although this promised a “respite to a beleaguered market, it remains uncertain whether just two more years of rate increases will be sufficient to return the market to profitability.”

“Profits in the marine market have been constrained by lower-than-expected rate increases in marine hull business at the 2003 renewal, despite the cost to the industry of a number of major losses in the fourth quarter of 2002,” stated S&P credit analyst Rowena Potter. “Stronger increases are expected at the 2004 renewal and, although uncertain, there is still a chance that by 2005 the market could be operating at a sustainable level.”

The problem, according to the rating agency, is the “continuing competition for prestigious fleets and newer ships,” which has kept rates at an uneconomic level. Around a 35 percent hike would have assured a return to pricing equilibrium, but during the recent renewal season 25 percent hikes were more the norm.

“Some insurers’ ability to undercut the competition — in some instances by as much as 30% — has hindered the recovery of the market, but the 2004 renewal promises further material increases, as well as further improvements in terms and conditions,” Potter noted. Help could come from the withdrawal of some reinsurance capacity from the sector – “particularly proportional treaties, which have historically been used as a source of contingent capital by many market participants,” said S&P. “The diminution of this source of financial flexibility, when coupled with the fierce competition for capital across the non-life sector as a whole, may extend the duration of the hard phase of the current cycle beyond historical norms.”

There have also been some rather significant hull losses that will tend to strengthen efforts to increase premiums. Potter indicated that “Loss events tend to be less predictable in the marine market, making pricing more challenging. Furthermore, there is some lack of transparency in the market, as reliable loss ratios are not always available, making technical underwriting hard to control. Nevertheless, the loss of the Diamond Princess, Hanjin Pennsylvania, Hual Europe, and Tricolor (among others) in 2002 will be reflected at the next renewal, with underwriters taking a much harder line.”

Rates have actually been rising since the February 2001 renewals in the protection and indemnity (P&I) market. “Shipowners have recognized the need for very significant increases, but they have been unable to absorb them at once, resulting in a three- to four-year time horizon for pricing levels to reach an economic level,” Potter observed.

“The outlook for the P&I market is now somewhat brighter, given the rolling premium increases, with rates having been on an upward trend for two and a half years. There has been little sign of an increase in claims frequency, although claims costs are on the rise. It is expected that, by the end of the current policy year, most if not all P&I players will have returned to profit,” S&P’s report concluded.