Samuel Casey
We have lived through “unprecedented” lockdowns, endured “unprecedented” constraints on our way of life and watched on as governments dole out “unprecedented” rescue packages…
To the list of apparently unprecedented events of recent times can be added the dramatic blockage of the Suez Canal by the vast containership Ever Given.
For six fraught days, images of the ship were plastered across the media, as tugboats (and one valiant little digger) worked non-stop to rescue the vessel.
Vessels piled up at either end of the crucial waterway, which transits more than 10% of global trade and prevents the need for a long voyage around the Cape of Good Hope.
Now, the ship’s owners and its insurers have the mother of all arguments on their hands.
Ever Given has been detained by the Suez Canal Authority and is floating in the Great Bitter Lake, while the canal demands $916mn in compensation, including a $300mn charge for reputational damage and a $300mn “salvage bonus” levy.
There is unanimity among market sources that costs of this nature should not be borne by the insurers, and the ship’s P&I insurer, the UK P&I Club, is disputing the “largely unsupported” claim.
Few signs point to a swift or simple resolution, but I shall leave the evolving situation to the lawyers and claims handlers.
What interests me is what this incident tells us about the marine insurance market more generally, its loss exposure, and where this fits into a market which is starting to bear the fruits of long-term remediation efforts.
A quick canvass of market practitioners suggests the Ever Given fiasco was not unprecedented at all. Indeed, this type of exposure has been warned about for years, and Suez could be seen as something of a near miss.
Significant cargo damage is not anticipated, especially given the ship retained power, therefore protecting refrigerated goods. There was also no loss of life.
The importance of the grounding’s location clearly caused disruption on a scale that would be seen in few other places globally, but containership groundings are reasonably commonplace, and growing more concerning as ships increase in size.
Marine market veteran Peter Townsend, who runs Ensign Consultancy and previously headed up marine at AmTrust and Swiss Re Corporate Solutions in London, told me the shipping industry had “dodged a bullet”.
“It’s not a black swan unforeseeable event,” he said. “There will certainly be a situation when we are not so fortunate and cargo will be required to be discharged from a vessel away from ports with the necessary infrastructure, possibly from a vessel with a list.”
He added that there was no equipment which could perform such a task efficiently, and the gap between what shipowners require and what salvors could provide had widened.
Allianz Global Corporate & Specialty warned as far back as 2016 that ever-larger containerships presented increasing risks.
In a shipping safety report of that year it modelled a potential $1bn loss from an incident with a mega containership, envisaging a $200m hull loss, a $532mn cargo loss and a $300mn claim for a removal of wreck, caveating that this aspect could be significantly larger.
What would such a claim mean for mariners?
Given ongoing loss activity and the position of a market still recovering from years of softening, this is a question undoubtedly on the minds of C-suite executives and active underwriters.
For years, marine stuck out as one of the most poorly performing lines of business in London. And come 2018, when Lloyd’s began its ambitious Decile 10 remediation plan, the marine market came under serious pressure.
There has been an exodus of capacity in lines of business including hull and cargo, and remaining underwriters have strengthened their resolve.
Rates have increased year after year and healthy double-digit increases are expected to keep on coming. But losses keep on coming, too.
Whether it is the Golden Ray deteriorating to $788mn, the $300mn+ Dell cargo loss in Q2 last year or the recent ONE Apus and Maersk Essen containership accidents, there is ample evidence of large, ongoing claims activity.
Dell in particular highlighted the vulnerability of the cargo market, even at current pricing levels, pushing the Lloyd’s loss ratio for cargo to 179% in Q2 of 2020.
Meanwhile, the stage of the market cycle is causing certain carriers to flex their muscles.
After years of declining prices, year-on-year double-digit rises have made the class more attractive and prompted some carriers to increase their involvement in marine.
Fidelis notably upped its book of marine business in 2020 and has backed Clive Washbourn, one of the market’s most successful underwriters, with $100mn of capacity to launch an MGA through its Pine Walk vehicle.
Convex is also a significant new player to join the fray since the market nadir of 2018, and has appointed a top underwriting team.
Brokers, especially in the cargo market, report an uptick in competition since the beginning of the year, particularly for carriers looking to land new business in order to hit ambitious growth targets.
There are questions over whether the influx of new capacity could derail rating momentum at a time when there are still serious questions about the risk adequacy of pricing.
Prices, especially in hull, still do not match historic highs and Scandinavian markets continue to offer competitive terms to pick up business.
Deductible levels have remained relatively unchanged for decades despite burgeoning exposures, although there is speculation that pressure on them will increase this year. It remains to be seen whether a meaningful shift will occur.
Throw in a mega loss from a containership, or a freak incident on the scale of the Costa Concordia disaster, and the optimistic mood of the market could easily shift.
Does the mere likelihood of such an event call into question the very nature of long-term adequate pricing in the class?
There is now certainly better money to be made in marine for those who build their books carefully and manage their exposures. But is current pricing enough to sustainably rebuild the coffers for a future where exposures and the loss potential are rising fast?
Admirable strides have been made to turn around the struggling marine sector, but ongoing market-wide discipline is required to ensure the product returns attractive and sustainable underwriting results.
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