Cargo insurance rates remain low and will likely stay that way, at least for a while.By Peter A. Buxbaum, AJOTThe cargo insurance market is soft has been so for a number of years. While the insurance industry has been predicting—hoping for, might be the better word—a hardening of the market, there is little indication of an appreciable trend in that direction. A soft market means that rates are low and/or dropping. Cargo insurance rates have plummeted by 50 percent or more over the last five years. But what has caused this phenomenon? According to one theory, an influx of capital has meant that too much money is chasing two little business, driving down prices. But another story has it that rates are low because insurers are making a comfortable profit, allowing them to pass those benefits on to customers. “The soft market is continuing. Some people are thinking it might be the new norm,” said John Gambino, a divisional vice president at Great American Insurance Group, a New York-based insurer. “We have been hoping for a turnaround but there is not enough blood on the balance sheets. For three years we have been predicting a hardening of the market but new capacity keeps on coming in and people switch companies. Logic dictates a turning of the marketplace but the amount of extra capital in the overall business is just too much.” Gambino is at a loss to explain to explain the motivations of the new entrants to the market. Many of them, he said, are based in Bermuda, or are backed by Bermuda companies. Drew Feldman, a manager at Chubb Marine Underwriters, has a different perspective. “There is softness in the market and rates are generally low,” he said, “but that is because the insurers are turning a decent profit.” He noted also that the terms and conditions of insurance contracts also correlate with the softness or hardness of the market. “In soft markets insurers tend to offer broad terms and conditions along with the lower,” said Feldman. “In hard markets the terms and conditions can be quite restrictive. They may not cover all perils or all geographies.” Feldman hesitates to predict a turnaround in the current soft market. “I don’t see this changing in the near future,” he said. “But with the increase in piracy and the payouts expected in the wake of the Japanese earthquake there is the possibility of a more measured market going forward.” Piracy could contribute tho a hardening of the market because of the availability of coverage to vessels and cargo transiting high risk areas such as the Gulf of Aden. “Insurance contracts often contain clauses that can provide payments resulting from the hijacking of vessels and cargo,” said Feldman. “The amount of traffic in the Gulf of Aden and the high value of the commodities, such as oil, being carried, could contribute to increased losses to insurers resulting from piracy. Historically, however, this has been minor component of marine insurers losses.” The Japanese earthquake of March 2011 could also result in major losses to marine insurers. “Japan has a strong maritime sector and there will be losses paid for cargo in transit as well as for vessels in port,” said Feldman. “These claims make for lower profits and if there is less profit it becomes more difficult to reduce rates.” In other words, claims increases resulting from piracy and the Japanese earthquake could have the effect of stabilizing, if not increasing, cargo insurance rates. Gambino is skeptical of the effect of the factors which Feldman cited on the potential for increased rates. “Some people think that $100 billion in capital needs to be sucked out of the market for there to be a turnaround,” he said. “That equals three Japanese earthquakes.” Economic and trade trends can also influence the cargo insurance market. The negative side, for Gambino, continues to be the overcapacity in the market place and the softness in rates that follows from those conditions. He frets that many insurance customers are buying from companies that d