Supply Chain

Marine Insurance: A Tale of Two Coverages

Climbing reinsurance rates and high expenses of removing wrecked vessels are adding to marine liability costs.
Caroline McDonaldApril 5, 2013

CFOs of shipping companies, or, for that matter, companies that ship cargo or clean up after shipwrecks, should take note: A convergence of circumstances has led to a split in the marine insurance market, with hull and machinery coverage softening and protection and indemnity (P&I) skyrocketing. 

That leaves companies that own vessels of any kind to deal with the fallout at renewal time. Martin McCluney, a managing director within the broker Marsh’s marine practice in New York, explains the predicament between the property side, which is hull and machinery; and the liability side of marine insurance, which is generally covered via P&I clubs. These are mutual associations operating on behalf of members to provide them with coverage.

“It’s two different stories,” he said, explaining that most ocean-going vessels are entered into P&I clubs. The exposures covered can include, for example, the liability of a ship owner a cargo-owner for cargo damage to cargo, liabilities to third parties after a collision, and environmental pollution. More than 90% of ocean-going vessels are entered in a P&I club, McCluney said. 

With P&I insurance, underwriters are focusing on the rapidly increasing costs of the removal of shipwrecks. The broker explained that whether they are container or cruise ships, vessels have become “significantly larger over the past 25 years, and the cost of removing them has gone up geometrically.” This is coupled with increased regulatory pressure internationally to remove these wrecks from where they occur, he says.

To complicate matters, the technology available to remove wrecked ships has advanced. “Fifty years ago if it had sank in 200 feet of water you wouldn’t have to remove it,” he observed. “But now, because you can – and to mitigate any pollution or toxic hazard – local authorities are requiring removal.”

These elements work together to create “a cluster of increased costs,” which affect the cost of P&I coverage. McCluney explained that once a vessel is a wreck and is declared a total loss, hull underwriters pay the agreed value on the vessel and the P&I club indemnifies the owner for the costs of removing the wreck.

P&I clubs also must buy insurance to protect themselves against mega-catastrophes. During their own recent insurance renewals, the clubs were slapped with “a significant increase” by the reinsurance market, which has been hit with large losses.

P&I clubs passed along these increases to all its members, but more to cruise lines than any other segment. While 25 years ago oil tankers were seen to be the high-profile risks, “for the moment it’s the passenger ships because of their size and complexity,” McCluney says.

On the hull and machinery side, things are much brighter for corporate buyers. Except for a very small percentage of ships, especially the largest cruise ships – there is an overabundance of capacity. “There is an abundant supply of highly rated security for hull and machinery risks – multiples of what most vessels are worth,” the broker said.”

For example, a very large, new container ship might be valued at $120 million, “but there is more than 10-times the capacity to write that ship, so there is a lot of competition.  McCluney observed. “This is depressing rates: It’s good for owners, not so good for insurance underwriters,”

Hull and machinery covers physical damage – for the ship and all the equipment on the ship. That includes the engines; all gear, such as gear for unloading the ships; all the equipment on the bridge and all furniture for the crew and passengers. Most hull and machinery is placed in the commercial insurance market, which includes Lloyd’s and other British companies, continental Europe, Scandinavia, Japan, and Korea and a small market in the United States. 

A Very Good Year
Overall, however, the rapidly hardening marine liability market is making for difficult insurance-renewal negotiations. Gordon Adams, chief risk officer for Tri Marine International Inc., a company that sources, processes, and supplies tuna and tuna products for canneries and brands in the United States and globally, described the company’s insurance renewals as a major endeavor. “All told, we have 60 or 70 policies of all types and kinds, with various renewal dates that I administer.”

Adams said the company renewed its P&I coverage earlier than normal, in December, because P&I clubs were talking about minimum increases of at least 5%, to as much as 12% in the year to come. “If you had a bad record you could be looking at another surcharge and so forth, [but] we had a very good year,” he said.

Waiting longer meant a possibility of losses. “So in renewing early we managed to maintain at an increase of 4.5%, which we thought was pretty good,” he said.

Founded in 1971 and based in Bellevue, Wash., the company has additional offices in San Pedro, Calif.; Latin America, Asia, Oceania, and Europe. Adams, who works out of a company plant in Terminal Island, Calif., reports to the CFO. The two executives have an agreement that, “I handle each renewal and do it early enough that we can talk along the way,” the CRO said. He considers the company’s broker, Shorepoint Insurance Services, a specialty broker heavy in the marine and cargo areas as an “extension” of the company’s will during insurance negotiations. 

Tri Marine is a unique company in the fishing industry, he contends. “We do pretty much everything, from catching the fish, to processing the fish, selling to major canneries and we’re going into retail.” The company also acts as a vendor for its ships. “We are our own oil company – trying to take it from cradle to grave. The whole point is to keep costs down,” Adams explained.

While the firm has traditionally been risk averse and carried low deductibles, “that philosophy is changing. My philosophy is to never trade dollars with an underwriter,” Adams explained. “My experience is that to do so results in a handling loss on each transaction of somewhere around 20%.” Higher deductibles and self-insurance programs help halt “dollar swapping,” he added. “My philosophy is slowly being accepted by the company.”

Richard Rabs, vice president, insurance and risk of Veolia Environment North America, an energy, water and environmental services group, also encountered tough sledding in the marine-liability market. The company renewed its P&I insurance in February and saw a rate hike, even though he felt it was undeserved.

The company belongs to a mutual ship owners group, the Protection & Indemnity (P&I) club, which announced a 10% rise in rates for marine insurance. But because of the company’s “excellent experience,” their rate hike was only 6.7%, he said.

While that takes away some of the sting, “it’s still an increase and we have never cost them a dime,” he said. To deal with the increase, the company is looking at taking a higher deductible, or limiting the amount of liability coverage on marine vessels.

Rabs explains, “Our boats are small, passenger ferries on a small section of the Savannah River and are not a big exposure. That’s what we’re trying to educate the club on, which you would do for any risk on any cover – try to educate the underwriter.”