The cargo insurance business finds more money chasing “risk” and this means smaller margins for insurers and rates trending downward.
In its annual overview of the insurance market, the global insurance and reinsurance brokerage Willis, the world’s oldest and third largest insurance broker, predicted cargo rates worldwide this year will at best be flat and likely to fall another 10%. This mimics the same analysis of the past few years. Those in the industry point to many reasons for this softness: a global economy that still isn’t firing on all cylinders, diminished demand for goods in China, fewer piracy concerns. But topping the list is what the trade terms “insurance capacity.” Simply put, more money is chasing shippers for their insurance business. As they look for better investment yields, hedge funds are pouring capital into both insurance and reinsurance, either investing in existing companies or, more commonly, creating new ones. This adds up to a bigger pool overall of available capital willing to take on risk. Margins are pared. Premiums are reduced. “There are new players in the market every year and more people want to write premiums on their books,” said Chris Bhatt, Willis’s global sales director, marine and transportation. “The competitive pricing is fierce.” While it’s hard to get an accurate assessment of the cargo insurance market, one estimate pegs the ocean cargo insurance market alone at about $17 billion. A decline in rates comes despite some countervailing trends in claims. “Over the last 15 years, cargo insurance rates have been very soft, very competitive, very low,” said Richard Bridges, vice president at Roanoke Trade, a customs bonds and marine cargo insurance specialist and subsidiary of Munich Re. “There’s a downward sloping even though the costs of individual claims are going up.” According to FreightWatch International, average U.S. freight loss in the first quarter of this year due to theft jumped 26% and now averages about $250,000. Divergent Paths While insurance on the ships themselves is also experiencing a softness in rates, these two halves of marine insurance can follow very divergent paths. “Vessel and cargo insurance is unrelated in the main,” said Bhatt. For starters, cargo insurance doesn’t track with condition or supply of vessels and carriers or with shipping rates now being charged because of vessel competition. “There’s no linkage at all,” said Colin Fraser, senior vice president at Starr Marine, part of Starr Insurance Holdings, when asked about an oversupply of vessels, low transport rates and cargo insurance rates. “What it costs to ship isn’t relevant.” Neither, say those in the industry, is the size of a vessel a factor in determining rates. The use of supersized container ships, for example, “is only important because now there can be an aggregation of risk,” said Fraser. “An underwriter might be concerned about the number of clients shipping on the same vessel, with a lot more exposure. But that’s a question of how to manage that exposure.” On the other hand, Bridges said, newer vessels are better built and more technologically advanced, and their owners are more willing to invest in sophisticated systems, such as weather tracking software. Yet, said Bhatt, “we don’t see insurance claims based on poor maintenance.” Standards What sets cargo insurance apart from hull insurance, and most other forms of property insurance, is a lack of regulated standards. “Every account in our view is unique,” said Fraser. “No two accounts are exactly alike.” “It’s one of the most confusing lines of insurance,” said Bridges. “It can be a daunting experience to someone who doesn’t have guidance.” According to Bridges, the industry has witnessed an uptick in cargo claims since the global financial crisis of 2008. On the trucking side, he reports more armed hijacking of tractor-trailers. An increase in damages claims, Bridges believes, is at least in part a function of sacrificing quality of packing, handling and carrying for cost savings. This is especially true, he said for smaller shippers who lack dedicated traffic managers but who choose not to go with top-shelf third party logistics firms. For example, rather than shipping point to point or through airfreight, these shippers and their brokers cut costs by using a hub network, which results in multiple carriers. “Three or four different trucks increases the opportunity for damage,” he said. The marine insurance industry has responded by paying close attention to clientele, their needs and their vulnerabilities. “More risk modeling is going on,” said Fraser. “As analytics get better and better, more of that is coming into marine insurance.”