Overcapacity Puts Damper On Marine Market

NU Online News Service, Dec. 1, 12:00 p.m. EST

The marine market has seen improvements compared to last year as shipping has picked up after the economic crisis of 2008, but both insurers and the shipping industry continue to suffer from overcapacity, according to a report from insurance broker Willis.

In its 34-page report, "Marine Market, Where Next?" Willis said insurance rates continue to be soft and fresh capacity is waiting to enter the market "almost in defiance of logic."

The industry, Willis continued, "has shown tentative signs of recovery. Last year, Willis noted the shipping market was "deeply depressed" and the marine insurance market was stable. Since then, the number of laid-up vessels has been reduced, freight rates "are slowly increasing," and ship values are no longer falling.

As the economy plummeted, orders for new shipping were either cancelled or renegotiated. There will be some new ships being delivered next year, but over all, the supply is waiting to catch up with demand. As far as scrapping some ships, the price of steel has not made the venture worth pursuing.

"Marine underwriters' business plans for 2011 should make interesting reading as even the most optimistic capital providers are unlikely to be impressed by a promise to 'lose less money than their competitors,'" the reported observed.

Willis said piracy remains a huge concern, with claims exceeding $300 million, and "it is hard to see any solution in the short term."

Willis noted that protection and indemnity (P&I) insurance results have been "very positive," as underwriting almost broke even and investment income saw improvement from a loss of close to $840 million in 2008-2009 to revenue near $680 million for 2009-2010.

Reviewing liabilities and special risks coverage, Willis noted that there has been an increase in the number of large claims, most notably the loss of the Deepwater Horizon in the Gulf of Mexico. The result may well be an increase in reinsurance premium at the next renewal. However, surplus capacity could damper any increase.

"At present, the market is only able to apply rating increases selectively and is still soft in certain respects," Willis observed. "The situation may change toward the end of 2010 once reinsurance renewal costs have been established."

Losses have affected marine packages that include property cover in both pricing and capacity, and insurers are seeking to reduce "their aggregate exposures in potential earthquake zones."

Package programs may require more insurers to compete in earthquake zones as insurers more closely scrutinize property coverage in a marine program.