Rougher Seas Expected For Ocean Marine

Last year, Mr. Decker said, when commodity prices were high, demand was at an all-time peak. With freight rates up, there were commitments to build new vessels–he noted it would take four years and $504 billion in capital just to complete vessels on order as of a year ago.

However, with the slowdown in international trade, all of these new ships are not needed, said Mr. Decker–who added that even if they were, financing would be hard because of tightening credit markets.

Mr. Marvin said this creates a "unique situation," as shippers wonder what to do with the glut of vessels, noting that some of them are sitting in port for extended periods.

From an insurance standpoint, Mr. Marvin said, the problems afflicting the shipping industry have led to a drop in premiums.

Aside from that, Mr. Decker noted that ocean marine insurers are seeing an increase in loss activity–and not all necessarily due to the economy. Part of the problem is developing losses from prior years. Additionally, he cited some large losses this year from Hurricane Ike, as well as a collision on the lower Mississippi River that caused a fuel spill.

All of these factors combined could lead to a hardening market in 2009. Mr. Decker said while there is plenty of capacity and competition, "we are probably seeing the end of the soft market in marine insurance."

Rich DeSimone, president of Travelers Ocean Marine, also sees signs pointing to a hardening market, but warned it is "dangerous" to make predictions with so many factors at play that underwriters have little control over–such as stress in the market, balance sheet issues and the credit crisis.

Recalling a quote attributed to baseball Hall Of Famer Yogi Berra, he said: "It's tough to make predictions, especially about the future."

But Mr. DeSimone said some feel certain the market will tighten in 2009, and he discussed factors supporting that notion. He said market players are repositioning themselves by reducing exposure, with companies beginning to walk away from bad business, or at least seeking improvements.

Speaking about the individual classes within ocean marine, Mr. Decker said cargo–the largest class worldwide–has been extremely competitive for the last few years and remains so, although the market may have bottomed out.

But cargo business, he noted, is written account by account. Those with poor experience, he said, are likely to see increases, while accounts with good experience should still see preferred rating.

Mr. Marvin said cargo is just now beginning to see an improvement in terms, at least from an underwriter's perspective. He said he is "just getting the sense that the softest part of the cycle may be over."

Mr. DeSimone said coverage terms such as "stock throughput"–where cargo is covered from the warehouse to the retail shelf–are not being mentioned as much now compared to a year ago.

That coverage is still available, Mr. Decker noted, but buyers "may find that terms and conditions have tightened."

The hull class within ocean marine saw high levels of competition a year ago, despite steadily rising losses. Mr. DeSimone told NU last year that hull business "hasn't had a really good run of profitability in a long time, and there seems to be a level of competition there that doesn't make any sense at all, so that's being driven more by market forces than by logic."

Now, he said, competition is dying down a bit. Rates are not dropping the way they were a year ago, Mr. DeSimone noted, and underwriters are able to get corrections on problematic accounts.

Another historic problem in the hull class has been the increasing size and quantity of vessels due to global demand. Last year, Mr. DeSimone cited the strong economies of China and India as contributing to global demand. Today, he mentioned the cooling off of the Chinese economy as a factor in decreasing the demand for new vessels.

While it would seem that a lower demand for vessels might reduce overall hull losses for insurers, Mr. Decker said that is not necessarily the case. When there was a high demand for vessels, and shippers were getting great freight rates, he explained, vessels would stay out at sea for long periods of time. Now, he said, more ships will come in for maintenance, which will increase claim activity.

Of course, even though a lot has changed over the last year for the ocean marine market, many of the same challenges remain. Experts interviewed by NU all cited continuing issues with untrained crew operating vessels.

Mr. Decker noted the average age of qualified crew is still creeping up. He cited analyses of maritime losses that found human error is often a proximate cause. That, combined with newer crews that are not properly trained, "doesn't paint a pretty picture," he said.

Jim Craig, president of the American Institute of Marine Underwriters, pointed to cargo theft as an ongoing problem.

Mr. Marvin said this issue has heightened over the last several years, speculating it may be worsening because vessel owners are paying ransom, which encourages more pirate activity. In addition, he said the military has not done much about piracy.