Marine Underwriters See Economic Slowdown Cutting Into Shipping Activity

Marine insurers are sailing rough seas this year, as the global economic recession cuts into shipping activity, driving down demand and feeding a growing piracy problem in the poorer areas of the world.

Delegates at the International Union of Marine Insurance conference in Bruges, Belgium heard a litany of warnings related to the worldwide economic slowdown.

Deidre Littlefield, president of the IUMI, warned that free trade must not be impeded as that could have a negative impact on the global economic recovery. According to Littlefield, in 2008 world trade had experienced the worst slump since 1984, and was looking at a contraction of 1.4% in 2009. She pointed out that too many ships were chasing too little cargo and that due to a glut of vessels, ship builders have to face up to the fact that some of the planned builds could be delayed or even cancelled.

She warned the marine insurance market needs to look at events carefully.

Dieter Berg, a member of the IUMI's facts and figures committee, said the financial crisis had been the worst since the Great Depression of the 1930s, and that although some commercial areas seem to be seeing a recovery, the crisis is not over and the insurance sector will be affected by a time lag until it feels the impact of any recovery.

According to Berg, over the next year the hull, cargo, liability and offshore energy insurance markets could see rising marine loss ratios, whilst the yacht and protection & indemnity markets might see lower loss ratios.

Berg said that a range of influences could impact marine insurers, including the cost of capital, ratings and regulation; economic factors such as competition, capacity and investment returns; as well as environmental factors such as the impact of climate change and pandemics.

Underwriters will have to look at what they do carefully, especially as future economic bubbles will eventually arrive, said Berg.

Berg said there are different economic dynamics in the United States, Europe and Asia, meaning any trend that might emerge from the market seems to be uncertain and fluctuating, depending on the region involved.

In addition, Berg said the slowdown in world trade has badly hit the shipping industry, with as much as 10% of global shipping volume currently inactive due to a lack of demand. That figure that could rise over the next few months.

The hull and machinery insurance market is facing a 12th straight year of losses, according to Peter McIntosh of the IUMI's Ocean Hull Committee. McIntosh said the outlook for the hull and machinery market is ?fairly bleak? and that underwriters are struggling to make a profit.

According to McIntosh, 2008 was the second-worst year for losses in the past 15 years, and 2009 is not looking good so far. He said there has been a ?dramatic? rise in the late reporting of claims, which is consistent with the arrival of a recession.

Up to 40% of losses in this area came down to machinery failures, with total damage coming to about $100 million (68.5 million euros), or around $100,000 per claim, he said.

McIntosh said hull and machinery underwriters are unable to achieve a balance between exposure and actual claims costs. He said a lack of leadership in this area is to blame. He added that although the world fleet has continued to grow over the past decade, at the same time large losses were up 150% and that loss costs are rising.

Pirates Proliferate

Piracy is a growing source of concern for marine insurers, as economic conditions in some of the world's trouble spots are leading to an upsurge in attacks on shipping.

Karsten von Hoesslin, from Denmark-based Risk Intelligence, said at the conference that hijackings and attempted hijackings made up a substantial percentage of the attacks that have been reported worldwide so far in 2009, with April seeing a spike in the Gulf of Aden and the Somali Basin off eastern Africa. According to von Hoesslin, pirate attacks have seen a success rate of around 22% this year, with one of the possible reasons behind the rise in attacks being a shortage of currency in Somalia.

Looking at Southeast Asia, the number of attacks there remain lower than in previous years, but with unemployment rising in Malaysia, there has been a greater focus on possible piracy around the nearby Riu Islands. Von Hoesslin said large criminal syndicates are still operating in the Singapore Straits and off the coasts of Johar and Vietnam, with up to 25% of attacks possibly involving seamen on board the affected ships.

Pirate activity off the coast of South America remains scattered, von Hoesslin said, but there had been a rise in incidents near Venezuela in the wake of the radical nationalization of oil assets there.

Von Hoesslin also said the Niger Delta in western Africa is a trouble spot, where local ethnic and political tensions have led to a rise in the number of incidents in the area. This year has seen more piracy in the area, but with a local amnesty in place for pirates and other political moves taking place in oil-rich Nigeria, the number of attacks might have peaked.

Mohammed Souri, chairman and managing director of the National Iranian Tanker Committee, said that 55% of recent attacks off Somalia have taken place in the Gulf of Aden, with 35% reported off the coast of Somalia and the remaining 10% out to sea in the Indian Ocean.

Souri pointed to a rise in the number of attacks in this area, 114 so far being reported in the first six months of 2009. The total for all of 2008 came to 111. According to Souri, the southwest monsoon is currently dying down, which will probably lead to an increase in the number of attacks as the end of the monsoon will mean calmer seas and less chance that the small boats the pirates use might get swamped.

According to Souri, the NITC has found that basic security measures such as travelling at more than 15 knots, staying well out to sea, training crews in anti-piracy drills, keeping in contact with friendly naval vessels, installing barbed wire around access points and locking doors that lead to essential areas like the bridge and engine room, could help to lessen the chances of an attack succeeding.