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Marine Insurance Issues in a Depressed Shipping Market. Presentation to NYMAR January 17, 2012 (amended). Martin McCluney U.S. Marine Hull & Liabilities Practice Leader. Agenda. Comments on the Marine Insurance Market - Hull - Protection & Indemnity
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Marine Insurance Issues in aDepressed Shipping Market Presentation to NYMAR January 17, 2012 (amended) Martin McCluney U.S. Marine Hull & Liabilities Practice Leader
Agenda Comments on the Marine Insurance Market - Hull - Protection & Indemnity Charter Party Management in a “Depressed” Shipping Market Marsh Marine Practice
A few comments on the Hull market (International Market – Blue Water Vessels)
The Hull market – A continuing “buyer’s “market” Recommend focusing on: -Security -Terms -Stability -Best Fit
Hull Market Comments Supply / demand imbalance – challenge to underwriters: - “….w/w capacity to write $2bn of risk but excluding high-cost cruiseships and LNG carriers, an average value $25m…” • Changed market dynamics • Traditional “market” discipline is long gone • Verticalization of placements – can seem like ‘everyone’ is a leader • Avoidance of any hint of underwriters’ collusion….
Selected Press Bites from the I.U.M.I. Conference PARIS, SEPTEMBER 2011SOURCE : TRADEWINDS, SEPTEMBER 28, 2011 “…..just because an owner has a good record it does not will not be claims,” “Understand your risks and don’t commoditize the product. There is no way an 18.000-teu containership is a commodity and the insurance shouldn’t be either,” “The market may be losing money but not everyone is in this situation…” “Deductibles haven’t moved for years….” The conference heard of advancing marine technology including 18,000-teu containerships, LNG¬fueled ships and even nuclear propulsion on the horizon. “We have done such a bad job with relatively simple technology so goodness know what we will be doing in the future…”
P&I and FD&D2012 General Increases and Changes in Deductibles P&I Average ETC increase 4.3% Continuing increases on (very) modest minimum deductibles FD&D Average Increase 5%
Review of Information being released by the clubs • Increased incidence of claims at all levels • Retained losses higher on all measures: • But UK, London and WOE seem to be bucking this trend…. • Pool and Group Reinsurance • RENA had been the only 2011/12 claim - excess of US$125m • Now COSTA CONCORDIA most likely…. • 2011 /12 Severity • 2010/11 Deterioration
Review of Information being released by the clubs January 2012 • Group Reinsurance Rates • Base rates down – all categories • US surcharges reduced (approx. 30%) • Pool Structure • No changes in Pool and Excess Reinsurance attachment points • Amendment to the inter-club balance adjustment protocol to be promote faster ‘pay-back’ from clubs producing losses within the Pool
Or is there significant downside potential left?Baltic Dry Index – January 12, 2012 – 11:00 a.m.Source: Bloomberg
And to what extent should you be protecting your revenue stream? • Insolvency is a recurring problem • Refixing can reduce or eliminate profits • Margins are already under pressure • Aggregation of exposure • The global economy …
Traditional Credit Insurance: Fit for purpose?
Traditional Credit Insurance • Insurance policy bought to compensate the insured when their counterparty fails to honor an invoice due to insolvency • Limitations: • Single trigger • No cover for incidental expenses • Retrospective insurance, no cover for ongoing losses • Often short term • Policies of indemnity – based upon proven loss
Needed: Better Solutions There are now products aimed at SHIPOWNERS with a conscientious risk management policy. These insurances are not a method of transferring risk when the writing is already on the wall.
New Trade Credit Insurance - Key points • Risk evaluated is largely the named charterer – not the owner. This has to be precise and reflect charter party contract. • Partnership requiring full transparency and disclosure around ongoing payment performance • Underwriters are as interested in understanding shipowner– seeking best practice and commitment to loss mitigation • Excludes Losses where Charterer is solvent and has a legitimate grounds for not paying hire including: • offsets allowed in the CP • and Force Majeure events
Option 1: Charter Default Insurance – Marsh Exclusive(Enhanced Trade Credit Insurance) General Summary – Full Details Available on Request Triggers : • Insolvency, and • Charterer’s failure to pay hire when solvent but not honoring an arbitrator’s award • Rolling short term policy (18 months) – renewable after 12 months • Cancellation terms: NON-CANCELLABLE EXCEPT FOR NON-PAYMENT OF PREMIUM • Automatic Termination following termination / expiry of declared charter • Indemnity for 18 months from the “Date of Loss” (the beginning of the default) • Subject to a 180 day “Waiting Period” • To allow short term irregularities to be resolved with involving the underwriter in a claim • Reimburses: At expiry of the “Waiting Period”, • Either (subject to underwriters prior agreement) • (a) Hire unpaid from the “Date of Loss”, up to 180 days, and Mark to Market for a further 360 days, or • (b) Shortfall between a Compromised Settlement with the Charterer and Sum Insured • and Charter’s Additional Costs (unpaid and undisputed expenses for Charterer’s account • Self-Insured Retention: Minimum 25% - warranted not insured elsewhere • Obligation for Loss Prevention, Mitigation & Recovery in cooperation with underwriters • Principal Exclusions: • Traditional Marine Market “War”, Cyber, Nuclear & Bio / Chem weapons, RACE • Currency fluctuations, illegal acts, and lawful cancellation of the CP due to non-performance of the ship / owner
Charter Default InsuranceWhat makes an insurer like a risk? • A good Self-Insured Retention (‘skin in the game’) • Fundamentals • Asset cushion • Recent financials • Transparency • Relationship between owner and charter • Recent defaults • Prompt payment record • Information supplied by credit agencies • Owner cash management procedures • Type of vessel and values of cargoes carried
When the Insurance Market does not provide a solution: An alternative .. From a bank
Option 2Fixed Recovery Guarantee • Charterer must be listed entity or have debt traded on local markets - otherwise not possible to rate cost • Trigger – insolvency alone • Pays out immediately • Bank can offer up to a 10 year policy • Shipowner able to select a value of payout over the time period
Option 2Fixed Recovery Guaranty - FRG Identification of Bank: Available on Individual Request Advantages • Longer term protection • Profit potential • No need to prove loss • Automatic reimbursement • Disadvantages • Costs • Single (insolvency) trigger • Availability
Fixed Recovery Guarantee – Indicative Example Example for a 10 year contract of affreightment paying US$10m a year paying 50% of balance on bankruptcy of charterer
The future of Charter Default insurance • Will follow the economic cycle • Of Interest to: • Owners : • As part of a responsible risk management strategy • To reduce the risk to a specific charterer or geography • To obtain better lending rates • Lenders – to protect a mortgage/portfolio • Financiers – to attract support for the launching of a bond/debt instrument
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