Low rates, not rough water, hurting insurers

Sensational images of the Costa Concordia being righted and the whopping $1.7 billion insurance price tag aren’t sinking marine coverage – it is insurance investors feeling the pinch of low interest rates.

Marine

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Sensational images of the Costa Concordia being righted and the whopping $1.6 billion insurance price tag aren’t sinking marine coverage – it is insurance investors feeling the pinch of excess capacity, heavy competition and low interest rates.

“Investors are looking for a home to put capital, and they deem insurance to be a reasonably safe sector to deposit capital,” says Ron Eldridge, senior vice president of Marine at Marsh Canada. “Some of the big claims have fallen on the Protection and Indemnity clubs. Being not-for-profit insurers, they are struggling to underwrite to balance, and are not making sufficient investment returns with interest rates being at historically low levels. Historically they were getting 6 to 8 per cent and on total premium of about $2 billion annually, the investment returns were very meaningful. But those days are behind us.”

The concept of P&I coverage is to protect the ship owner’s interests against claims from third parties and to indemnify the owner in case he/she is liable to compensate third party losses.

“You need investment returns of 6 to 8 per cent to subsidize historical underwriting deficits,” Eldridge told InsuranceBusiness.ca. “P&I is designed so that the investors can sit on that money, as the claims are paid out three or four or five years later. But that return simply isn’t there anymore.”

Marsh Canada’s Marine clients’ coverage can be broken down into three main sub sectors: hull, cargo and liability. (continued.)

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“We’re very significant players in all three sectors,” says Eldridge. “across the  country , we are the largest from a staff count and  premium handled perspective. Because of our size and volume, we have good feel and understanding for what is happening in Canada and globally.”

Aside from the challenges faced by investors from low interest rate returns, Eldridge points to a common threat faced by  insurers  in  Canada and globally.

“Capacity is the single biggest issue we have in the marine sector,” he says. “Specifically, excess capacity versus a shortage of capacity. There are constantly new players signing up and existing players expanding their capacity; and because of that there is an awful lot of competition for business.”

The tight economy continues to plague the marine industry – and by extension those insurance carriers. Compounded by the ongoing uncertainty on the political world stage, says Eldridge, that contributes to the reluctance of investors to put their money into shipping.

“The economy at large continues to be a major factor in decisions being taken by business leaders, influencing   shippers, receivers and ship owners,” he says. “They are reluctant to spend money because of the uncertainty globally – both financially and in the political sphere – which creates an element of doubt and uncertainty.”

Marsh does a lot of business with the large commodity players including mining and gas , and in each of those sectors, commodities shipments and values are down. (continued.)

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“This is having a negative impact on insurance premiums, and therefore premiums are down,” he says. “Volumes are down because of the uncertainty, of what is happening globally.”

Despite this, says Eldridge, investors are still looking for a home to put capital, and they are coming back to insurance after years of recession.

“Generally in the last three to five years capacity has increased, and it has ramped up incredibly in the past couple of years,” he says. “People are looking for a home to put capital, and they deem insurance to be a reasonably safe sector to deposit capital, notwithstanding the horror stories that make the headlines – such as the Costa Concordia for example.”

The Costa Concordia was salvaged last week – an expensive process that has been valued at $$800 million (the total liability claim being estimated at $1.1 billion) – and made more expensive by the environmental restrictions placed on salvage operations today, says Eldridge, ballooning the costs of insurance for such wreck removal operations.

“There is no question that the Costa Concordia will be the single biggest payout that I have seen in my working career,” he says. “Having said this, a year and a half ago it was thought the claim would cause substantial ripples in the insurance community. It did not. There was a payout of about $500 million on the hull, and it barely made a blip on the market. The third party liability claim of $1.1 billion, is affecting the P&I clubs and some of the big global reinsurers.”

The high cost of salvaging the Costa Concordia is attributed to the requirement to salvage the ship on site whole – instead of using the far less expensive method of cutting up the hull into pieces for removal, but creating a potential for an environmental hazard in the process, says Eldridge.
 

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