The Impact of Major Losses in Marine Hull Market: Part 2
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This is Part 2 of 2, read Part 1 of the newsletter here.
Distribution of Probability of Major Losses in China Market
Causes and Vessel types of Major losses
Major losses in marine hull insurance are traceable for a certain period. ?Observation of the causes and vessel types that had frequent losses would provide the insight to underwriters to manage their own portfolios. ?
The causes of major losses in marine hull insurance can be classified into several categories, each of which may be associated with different types of vessels or environmental conditions. Most of the losses are typically rooted in a combination of perils at sea, human factors, and technical issues.
Causes:
Navigational issues are a major source of losses, with occurrences like sinking, grounding, and collision.
Navigational issues are a major source of losses, with occurrences like sinking, grounding, and collision. These incidents can be due to human error—such as crew negligence or poor decision-making in adverse conditions—but may also be influenced by environmental factors like typhoons, or fog.
Latent defects, particularly related to machinery, represent another significant cause of losses. These are often less predictable and may not be immediately apparent, sometimes resulting from substandard manufacturing or wear and tear that has not been detected or addressed during maintenance.?
Since 2011, there has been a noticeable trend of costly machinery-related incidents, with claims surpassing USD 5 million occurring with some regularity. The trend further escalates with claims that exceed USD 10 million, which have been reported in four of the last ten years.
Cargo-related problems are more specific to certain types of vessels. For instance, container ships are particularly vulnerable to fires caused by undeclared or mis-declared dangerous cargo. The complex and dense packing of containers also makes firefighting efforts difficult, increasing the impact of such incidents.
Source: IUMI. Information reorganized with permission from IUMI.
The Lloyd's List Intelligence data covering the period from 1990-2021 confirms the findings of other organizations like Cefor and Allianz Global Corporate & Specialty (AGCS). Navigational losses of vessels being collision, wrecked or stranded, with machinery damage/failure are outstanding obvious losses in marine hull insurance.
?The additional causes listed by Lloyd's, such as hull damage with water ingress, crew labor disputes, missing vessels, piracy attacks, war losses or damages during hostilities, seizures and arrests, port state control detentions, and various miscellaneous incidents, provide a broader scope of the challenges that the shipping industry faces. These factors contribute to the complexity of marine hull insurance.
Actions according to the causes:
Based on above causes observed, underwriters should take actions for the coverage of collision liability related with navigation risks. For example, they may consider imposing a ? collision liability cap which caps the liability at up to ? hull value, cover RDC (Running Down Clause) only but not FFO (Fixed or Floating Objects), and consider excluding the indirect losses, to avoid any extension of the collision liability coverage scope or cap limit which may potentially increase the frequency of major losses.
As for cargo-related risks, like nickel ore and logs, they are occasionally excluded from bulk carriers' hull insurance as underwriters might perceive the insured carriers as lacking seaworthiness or the ability to conduct due diligence in carrying the cargo. Similarly, dangerous cargo carried by containers, such as electric vehicles (EV) carried by Ro-Ro, are cautiously appraised by underwriters.
Similarly, dangerous cargo carried by containers, such as electric vehicles (EV) carried by Ro-Ro, are cautiously appraised by underwriters.
Expensive machinery losses are always related to vessel value and complexity of equipment. An example is the passenger vessel, and potentially in the future, the dual fuel machinery losses could be even more expensive too. Given that machinery losses could also lead to total losses as well, underwriters should be cautious when providing marine hull and machinery coverage. ?
Vessel Types
The top 3 vessel types with the most number in use are Tanker, Bulk Cargo Carrier, Container Vessels and Tankers. Different vessel types show different major loss patterns:
Bulk Cargo Carriers: These vessels consistently showed the highest percentage of claims, which is likely due to factors such as the frequency of sea journeys to narrow water territories, the nature of their cargo like nickel ore etc., and operational risks exposure of very old vessels.
Container Vessels: Claims related to container ships are seen to be growing in recent years. This trend could be associated with the increasing size of container ships and the complexity of managing vast numbers of containers, which can lead to fires and stowage issues.
An example would be the MOL Comfort[6] container vessel where hull and cargo losses reached USD 60 million. The losses were related to design deficiencies.
Source: IUMI
General Cargo Vessels, Tankers, Yachts, Car/Ro-Ro: Losses related to these types of vessels have been relatively severe in volatility.
Supply/Offshore, Passenger, and Fishing Vessels: These categories experience volatility in the number of claims, which might be due to the operational environments, the specific nature of the voyages, and less predictability in their routes or management.
Source: IUMI. Information reorganized with permission from IUMI.
Marine hull insurers should adjust their risk assessments, pricing models, and underwriting strategies to accommodate the changing landscape of marine risks.
With the insight into major losses in global market, we can find out the clear correlation between major losses with vessel types. Different vessel types of major loss are rooted in a combination of perils at sea, human factors, and technical issues of these different vessel types and their carried cargoes.
If we review a particular market for the major losses, their vessel type exposures and navigation territories, we may find out why the frequency and severity of major losses are correlated with the vessel types and the territories.? This correlation allows us to better understand the relationship between vessel types, causes of losses, and portfolio performance by observing the distribution of probabilities.
Terms and Conditions:
During the soft market cycle, there is increased competition in the insurance terms and conditions. In addition to marine hull insurance premium rate competitiveness, insurers have been seen in the past extending additional coverage to include risks such as implicit third-party liability under Professional &Indemnity coverage besides RDC and even FFO. War or piracy coverage are also extended and agreed to cover territories in conflicts.
The Marine Insurance Act 2015[1] had very important ramifications on the constructive total loss (CTL). Most importantly, the materiality of warranties and breach clauses have been exhaustively discussed in the last decade. The direct impact on claims would be that any market implementing this approach would be expected to see an increased number of claims and incurred amounts when claims materialize.
It's important to bear in mind when pricing that the CTL is triggered once a potential repair reached the 75-80% of the agreed H&M value. Both the inflation increasing and hull value reducing, could potentially help to trigger the CTL easily.
We have received feedback from shipyards and ship-repairers that steel prices have increased a stunning percentage between 2020 and 2023.
We are moving away from a period of low/constant inflation and into a period of higher economic inflation, coupled with disruptions in global supply chains and longer waiting times. Should the deductible stay the same, frequency of attritional losses may increase due to inflation of partial losses.
Total Losses:
Source: IUMI. Information reorganized with permission from IUMI.
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Average Ship Values and Ages
*** Depreciated value is calculated in linear manner, based on new built valuation as a function of GT, useful lifetime of 30 years, and 15% remaining value
Source: IUMI. Information reorganized with permission from IUMI.
The comparison of the number of total losses and average ship value between the regions shows a lower average value and more total loss numbers occurring in Asia Pacific. Therefore, total losses contribute more to the volatility in the region of Asia Pacific than other territories.
China Marine Hull Book Major Losses:
The China market shows a similar major loss model and soft cycle. With rapid economic expansion and increased maritime activity, China has become a major player in global shipping and marine insurance. However, the historical insured values and complexities of risks might be less compared to European markets, possibly due to a different market structure, regulatory frameworks, and stages of development in the insurance industry.
China Market major losses severity
Given the market premium size is relatively lower than the Cefor market, with loss numbers over USD10 million being much less than in the European market, we observe that the underwriters would normally adopt a lower threshold of major losses in the China Market, being around USD1.5 million (around RMB10 million) as the major loss threshold in China market.
The adjusted threshold for major losses, set at RMB 10 million (around USD 1.5 million), reflects the differing market dynamics and insured values within the region.
Key points from the data:
The average loss among the 172 hull losses over RMB 10 million recorded between 2010 and 2023 is RMB 46 million.
A significant majority (68%) of losses are contained within RMB 41 million, 95% losses are within RMB195 million, and 99% of the losses are within RMB300 million, which sheds light on the upper boundaries of typical losses in the market.? ?All major losses in the market are within RMB300 million (around USD43 million), indicating that while major losses are not uncommon, most do not reach very high amounts.
The historical peak loss is RMB 427 million (around USD 65 million), which is still moderate when considered within a global context.
The frequency and severity data indicate the following characteristics of major losses in the China marine hull insurance market:
?The losses over RMB70 million (around USD10 million) are around 20%. With a frequency of 2.57 of each year, it tells that there is no big difference of the impact by major losses in China market.
The aggregation possibilities of major losses below RMB35 million (around USD5 million) are around 64%. ?It has the highest frequency in the market. contributed by those vessels sailing within Southeast Asia territory, with high vessel age, and poor management.
One factor may be the vessel type in the market, with most of the vessels being bulk carriers. The relatively low value of bulk carrier brings less volatility of major losses. There are fewer special vessels with very high value than in the European market, there are lesser yachts in the region which probably brings less impact in event losses too. However, the situation is changing with cruise vessels being delivered, and high value dual fuel containers and Ro-Ro vessels on the way to delivery.
Summing up these major losses in UW years 2010-2023, the amount of these major losses brought to the market is around RMB600million each year. Based on the average market premium is about RMB5.5billion each year the major loss ratio is about 12% in average in each year.? It is close to the European market which is around 13% major loss ratio in average around the same period. With a lower threshold, the severity of the major loss impact is a bit lower in the China market.
4 of the 8 losses over RMB195 million was builder's risk. 2 of the 8 losses were from wind turbine installation vessel.? This reflected that most severe losses were due to exposures to special vessels and builder's risks, it is a specific exposure for China market which seems different from other markets in the world.? It makes sense that builder's risk exposure is higher since it is the top builder's risk market, contributing 40% or even more builder's risk market share.? This contributed to the most severe losses historically and will likely continue to be the concern of underwriters.
Marine builder's risk has always been the most concerning risks globally besides China market.
Other matters:
Analyzing the severity distribution, we gain insights into our marine hull major losses, typically reflecting an average loss ratio of 10-20%. However, the volatility of hull major loss is closely linked to vessel types as well as the associated causes. Different markets perform differently based on their portfolio exposure. ??
There is high volatility exposure to ocean-going project vessels like dredgers, wind farm installation vessels, mega containers and builder's risk in China market, and probably in Korea and Japanese market as well. These types of vessels are leading the marine hull market volatility.
In soft market cycle with high attritional loss period, major losses have a compound impact, affecting various aspects of the market, including underwriting philosophy, personnel, reinsurance capital, and terms. ?
Given the inflationary impact on repair costs and the higher frequency of losses, the attritional loss ratio has increased. ?It is recommended that deductibles should be adjusted according to inflation to reverse the increase in loss frequency.
Similarly, the decreasing hull average value drives losses more easily up to 80% of the hull value, triggering total losses issues. Increased value insurance (IV ) coverage should be considered as increased value only additional to the hull replacement value instead of being part of it to avoid easily triggering constructive total losses during a soft market cycle.
To maintain a book and underwriting sustainability, particularly during a soft cycle, it is crucial to control exposure to high volatile business especially those associated with special vessel types and builder's risks. Slowing down the pace of premium growth can aid in overall volatility control.
Conclusion:
In conclusion, understanding the interplay between maximum loss capacity, attritional loss ratios, and the potential severity of major losses is imperative for crafting a resilient risk management strategy. This approach ensures that one's marine hull insurance portfolio remains robust and adaptable to unforeseen challenges, maintaining financial stability and sustainability in the face of a dynamic and unpredictable market and risk landscape.
Therefore, the following actions to improve marine insurance portfolio performance and resilience may be considered:
The above may help underwriters ensure that their marine insurance portfolio remains robust and sustainable, while providing competitive and reliable services to their customers. Please contact us if you have any questions or feedback.
Swiss Re
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[i] "2023 Half- Year Hull Trend Report", Cefor,
[ii] "Global Marine Insurance Report 2007",IUMI, https://iumi.com/statistics/public-statistics
[iii] "Global Marine Insurance Report 2018", IUMI, https://iumi.com/statistics/public-statistics
[iv] "Cefor Fire Trend Analysis", December 2021, Cefor, https://www.cefor.no/globalassets/documents/statistics/nomis/2021/cefor-fire-trend-analysis-per-december-2021.pdf
[6] “MOL Comfort Accident: The Worst Shipping Disaster in History”, Traderiskguaranty, 17 July 2019, https://traderiskguaranty.com/trgpeak/mol-comfort-worst-shipping-disaster/
[7] An Act to make new provision about insurance contracts. https://www.legislation.gov.uk/ukpga/2015/4/pdfs/ukpga_20150004_en.pdf
Vice President - Head of Marine Asia Pacific at Allied World
3 个月Great article Wang Xing