Marine insurance market is softening
There is a slowdown in the growth of shipping insurance costs, which in previous months was influenced by the “war risk uncertainty” factor that has already been consumed. As a result, the impact of ship and freight insurance on the operating costs of shipowners will be minimal, the Drewry analytical agency estimates. There is, however, an important exception. These are shipowners who repeatedly enter war zones and decide to incur short-term additional insurance costs for this purpose.
In the so-called renewal of ship protection conditions issued on 20 February of the current year, the so-called P&I clubs (which insure the liability risks of the shipowner or broker) announced that they are striving for an average increase in P&I by 6.5 per cent (range from 5 to 7.5 per cent). However, they did not reach this level, Drewry reports. And positive, indicative financial results of clubs for 2023-2024 years “perhaps allow for some flexibility regarding the assessment of contributions this year”.
This is also supported by a slight decrease in reinsurance costs transferred to club members. In each class of vessels they decreased by 1-2 per cent, except for passenger vessels (an increase of 12.5 per cent) and the so-called dirty tankers (+7.5 per cent), where, however, significant reductions were observed. This element of the overall membership fee applies both to the ceded reinsurance programme exceeding 100 million US dollars – which generally provides coverage for very large or catastrophic losses – and to the so-called retained pool exceeding 30 million US dollars. Therefore, the recent improved experience over the last two years with retained pool losses will also moderate commercial reinsurance rates somewhat.
Loss ratios
Loss ratios have improved over the last six to seven years, both due to premium increases and greater emphasis on insurance fairness. During the 2020-2022 COVID pandemic, this trend “was far from clear but as global trade recovered, recovery efforts had a positive impact and the frequency of claims was an additional positive factor for both insurers and ship operators,” Drewry states.
The new capacity ships entering the market this year will start to put pressure on insurance rates but may also lead to greater competition among insurers as they try to gain a greater market share. Also, London insurance underwriters who lost market share during the period of interest rate adjustments may now seek to regain it. Opposing trends may result from inflation in loss estimates and increases in reinsurance costs. Perhaps the H&M market (hull and machinery insurance, which are not compulsory insurance), which has not applied inflationary increases, will not allow the improvement in insurance balance to result in a flat or reduced premium at renewal.
War risk
The big unknown is insurance for cruises in war zones or terrorist threats, although they have managed to change from week to week as conflicts escalate or decrease. In 2022-2023, insurers generally achieved good profits on this class of insurance but with Houthi attacks in the Gulf of Aden and the Red Sea, premiums have increased significantly.
This caused many shipowners to make a commercial decision to avoid conflict areas and take a longer route around the Cape of Good Hope, which will significantly reduce market revenues. Not only did the cost of primary war risk increase but this uncertainty also affected the costs of charterers.
Drewry’s opinion
The situation in the P&I market has reversed and is now “softening”, Drewry comments. Business cycles typically last for two to three years, except in unusual circumstances. Currently, “we see a return to general increases but at a low level”. With these increases, P&I clubs now want to cover “pure inflation” of claims as well as “social inflation”, i.e. expectations of investments by insurers and the shipping market’s expectations of low premium increases.
The result of these circumstances is Drewry’s forecast. “We expect that marine insurance costs will increase by 2.5 to 5 per cent in 2024 and 2025,” analysts estimate. They also assume the prospect of further capital returns or revenues “for more resilient clubs when performance and capital levels allow”.