INSURERS HOPEFUL FOR BETTER NEWS ON 2008 CASUALTIES

19 March 2009

• Early Trend of Reducing Total Losses
• Tonnage Lost also Down
• Fall in Serious or Partial Losses
• 2008 a Severe Year for Offshore Energy Losses

Marine insurers are cautiously optimistic that the savage downturn in the shipping industry is translating into an overall reduction in casualty experience.

That was the message in Miami when the International Union of Marine Insurance met there for the spring meetings of its executive and seven technical committees. IUMI represents marine underwriters worldwide.

New statistics released today (March 19) confirm there was an increase in total losses in 2007 – 106 against 92 in 2006 (all figures relate to ships of 500 tons gross and over). This came after the total loss graph showed an improvement over the previous three years, and brought the level back to that of 2003.

However, total tonnage lost, although remaining at a high level, dropped from 720,669 gt in 2006 to 600,412 gt in 2007. Discussing the early estimates for 2008, Cédric Charpentier, chairman of IUMI’s facts and figures committee, said there was reason to be somewhat optimistic. The number of total losses for the calendar year was currently down from 82 to 74, a 10% decrease, at this very early stage.

“Thus, we might expect an ultimate figure of around 95 if we apply the normal deterioration factor because of late reporting, roughly comparable to the 2006 and 2005 years,” he said. There was also encouraging news in terms of tonnage lost: 372,000 gt in 2008 (so far), a 22% decrease compared to the figure reported for 2007 at the same time last year. A normal trend of late reporting figures could bring the 2008 total to about 470,000 gt, which would be the second best year in the period 1980-2008.

Considering the huge increase in the world fleet last year, said Mr Charpentier, the improvement in total losses and tonnage lost, if maintained, is seen as even sharper. Weather continues to be the major cause of total losses, representing about 42% for 2008 losses to date.

Serious Losses

When it came to serious or partial losses the likely outcome for 2008 was more mixed. Updated figures for 2007 confirm it was an exceptional year: from a total of 247 in 1998 to 515 in 2005, 725 in 2006 and a staggering 975 in 2007. However, as for total losses, 2008 experience so far was showing an improvement, the total of 748 representing an 18% decrease.

“Eventually,” said Mr Charpentier, “if we expect a total of around 800, this will be a quite high level compared with experience prior to 2007. Taking into consideration fleet growth, it could be considered comparable to 2005 and 2006.” Machinery damage continues to be the primary cause of major serious losses (35%-plus of the number of incidents during the past five years), followed by collisions (26%) and groundings (22%). Twelve months ago today, IUMI reported dramatic increases in total and partial losses in its preliminary estimates for 2007, said Mr Charpentier.

The outlook today was therefore more positive, and hull insurers could be in a fairly sanguine mood about 2008 figures to date. But the true picture of the cost of claims for major serious losses was dependent on repair costs which remained high in 2008. Although it was extremely difficult to get a global view on this, the facts and figures committee was hoping to factor something into the equation at IUMI’s annual conference in September.

Cargo Insurance

Regarding cargo insurance, which accounts for roughly half of all marine insurance premium, Mr Charpentier (chief underwriting officer – cargo, AXA Corporate Solutions) said that after a number of exceptional years the 2009 outlook was looking “scary.” After five years of massive increases, world growth was projected to fall to half of onepercent in 2009, its lowest rate since World War ll.

Advanced economies were projected to be almost all in recession, and while emerging countries were still showing high growth, there were significant reductions compared with 2008. The severe downturn of the world GDP had caused a collapse in demand for manufactured goods from western countries. This, combined with a trade credit shortage, had resulted in a similar collapse in international trade of goods. Between the last quarter of 2008 and the last quarter of 2007, there had been a drop of 45% in world trade values.

Premium Income to Fall

Mr Charpentier added: “All these factors clearly demonstrate a shrinking of insurable values that will have a direct and massive impact on world marine insurance income. We still face an uphill battle, therefore, and premium income will fall dramatically as the economic crisis reduces fleet values and cargo volumes, thus negating the encouraging decrease we are seeing on the claims side. The net result will have a significant negative impact on the bottom line at a time when there is no investment income to bolster results. “However, helped by continuing efforts by governments to ease credit as well as adopting strong monetary policies, the IMF believes that the global economy will experience a gradual recovery in 2010 with growth picking up to 3%.”

Safety Culture

Addressing the final sessions in Miami, IUMI president Deirdre Littlefield (senior vice president, director of business development & field office management, Starr Marine Agency Inc) referred to remarks made in February by the IMO’s Efthimios Mitropoulos at the inaugural session in London of the IMO sub-committee on fire protection, who expressed his hope of seeing an improvement in shipping’s safety record this year in the face of an “unacceptably high level” of marine casualties in 2008.

The IUMI president said: “We fully agree that a high level of casualties is unacceptable at a time when the industry is embracing a whole new safety culture led by IMO initiatives. However, our statistics indicate that 2008 casualty experience is going to result in a softer landing. If so, it will be good news for shipping and good news for underwriters. “While it is true that the 2008 outcome may be helpfully spiked by the greatly reduced number of ships in service and, at last, an increasing amount of old tonnage heading to the breakers’ yards, there are encouraging pointers that the safety culture is taking firm root.

“We agree with Mr Mitropoulos that compromising safety by, for instance, deferring essential maintenance work or postponing crew training could have catastrophic consequences. “Like everyone else, ship operators are being buffeted from all sides in the growing economic crisis. But to cut corners on maintenance or training can only have one result in the long term – more casualties, higher claims on insurers, and higher premium and deductible levels for shipowners.”

Offshore Energy

After 2005 (Hurricanes Katrina and Rita) and two years of a relatively small number of claims, 2008 proved to be a dramatic year for offshore energy underwriters. In addition to a relatively high frequency of attritional claims, Hurricane Ike severely hit the Gulf of Mexico, and the number of claims over $1m. could reach 40. As far as total claims are concerned, 2008 will be severe with a grand total just below $1bn, mainly attributable to incredible day rates which reached $193,000 (up 27% on 2007 and 196% since 2004) and utilisation rates reaching 85% for almost all types of units.

Although there is a huge amount of newbuilds still to be delivered this year and in 2010, a severe downturn is expected thereafter, and hardly any new contracts are being placed.

The statistics also deal with changes in the world fleet, where the size of the container fleet rose in 2008 to a whopping 7,385 vessels; the construction order book – although China still trails South Korea, it accounts for the highest number of vessels, 3,635; demolition, which remained very low in 2008 but now presents a fast-changing scene; freight rates; and commodity prices. -ENDS-

NOTE
The statistics released by IUMI are based on information from a number of authoritative sources, including Lloyd’s Marine Intelligence Unit, Clarkson, Rigzone, Willis and the International Association of Drilling Contractors. All the statistics and accompanying graphics can be found on www.iumi.com

IUMI currently has 54 national associations as members, protecting and advancing their interests. It also provides an essential annual forum to discuss and exchange ideas, information and statistics of common interest. Some 500 marine underwriters and other marine professionals attend the annual conference each year. IUMI’s roots date back to 1874.

International Union of Marine Insurance