Cargo insurance premiums and deductibles drop some more By Peter A. Buxbaum, AJOT It’s become a yearly ritual. The cargo insurance market remains soft—meaning that rates are low and/or dropping—as it has a number of years, but industry experts say, “Wait ‘til next year.” Meanwhile, next year—insofar as a hardening of the market—never comes. This year is no different, at least according to the recently released Willis Marine Market Review. Cargo insurance rates have plummeted by 50 percent or more over the last five years and there’s no end in sight. In soft markets insurers tend to offer broad terms and conditions along with lower premiums. In hard markets the terms and conditions become more restrictive, not covering all perils and all geographies, while premiums increase. Shippers “continue to enjoy the benefits of a soft market, with reductions in both premium and deductibles and increases in limits at little or no additional cost,” said the Willis report. But good news for shippers means bad news for insurers. Several years of reductions in premium and deductible levels are now being reflected in their profits. Natural disasters in Australia, Chile, Japan, and Thailand also put a dent in profits “but a relatively mild hurricane season in the United States provided some relief,” said the report. These conditions would normally signal the bottom of the cycle with a move toward a harder market. “But these have been anything but normal circumstances,” said Willis. What is causing the persistent soft market? According to one theory, an influx of capital has meant that too much money is chasing two little business, driving down prices. Another story has it that rates are low because insurers are making a comfortable profit, allowing them to pass those benefits on to customers. Recent results would seem to contradict the second theory. The Willis report comes down firmly on the side of an access of capital in the market. “Despite dwindling returns,” the report notes, “competition remains fierce amongst insurers, driven through over capacity fueled by a flurry of new entrants to the marketplace.” Among the new entrants, Alterra, Apollo, Channel, Flagstone, Pro-Sight and WR Berkley have started writing cargo as Lloyd’s syndicates in the ƒƒUK. Aviva and Northern Marine, which previously limited themselves to domestic U.K. business, and NIPPONKOA, which operated strictly in the Japanese market, have started writing international accounts. ƒIn ƒAsia, Korean Re and Samsung have both started to expand their international portfolios, while in ƒEurope, Swiss Re has announced it will be establishing marine insurance offices in Genoa and Zurich to write primary risks. In the ƒƒU.S., the Ascot syndicate has announced its intention to write cargo accounts. At the same time, shippers have begun to show signs of emerging from the worst effects of the credit crunch with an increase in both shipped values and volumes. “The increase in oil prices, resumption of construction projects, and continued economic growth in the BRIC countries are contributing directly to an increase in premium volumes for the cargo market,” noted the report. “In view of this, we see no end to the soft market condition for the foreseeable future.” For the insurers, “a harsh economic environment, together with an increase in commodity prices and consumer demand for the latest electronics, can only lead to one direction for the cargo market–increased losses,” said the report. The cargo market was affected by natural disaster losses in 2011, compounding losses for insurers. These include flooding in Australia and Thailand as well as the Tohoku earthquake in Japan. “Many clients’ global supply chains were badly affected as a result,” said the report. “This same impact was also seen in the floods that hit Thailand, with manufacturers closing factories as a result.” Many of the flooding losses in 2011 were covered by marine insurance with “the movement of storage risks out of the traditional property markets a