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At the beginning of this year there was a mood of short-term optimism in the marine insurance sector that was summarised by Aon's Annual Marine Insurance Market Review that predicted the industry would experience a continuing run of favourable insurance premiums in 2008, despite facing higher risks.
Moreover, Aon said that the cargo and liability markets would offer a 'win-win' scenario to ship and cargo owners who were paying less and to underwriters who remained in profit due to fewer claims - for the time being, at least.
The expectation was that rates for well-managed risks would continue falling throughout 2008 by up to 10 per cent, due to a plentiful supply of capacity combined with a low claim level creating fierce competition between underwriters.
Furthermore, the relatively benign claims environment was a reflection on major advances in recent years in ship design, cargo handling and general maritime safety.
However, Aon was certainly not as optimistic for both the Protection and Indemnity (P&I) and the Hull and Machinery markets saying the tide was turning for P&I, the clubs having announced big rate increases for 2008 in response to a surge in the size of large claims.
Furthermore in Hull and Machinery, losses were beginning to impact the accounts of many insurers, although not as severely as in P&I. Affirmation of this mixed picture came last week from the UK P&I Club that said the high level of large claims seen in 2006 continued into 2007 except for those related to oil pollution that had been at their lowest for five years.
The Nordic marine insurance association CEFOR is also pessimistic about the overall future of all types of marine insurance following 2007 figures that demonstrated an alarming trend with the average hull claim cost rising 86 per cent over the last five years.
With claims costs likely to continue growing in the future, the association has expressed concern that the industry must take further steps to manage costs without risking safety.
Within different segments of marine insurance, the picture remains distressingly consistent and the members of the International Group of P&I Clubs are currently faced with a considerable increase in costs of their pooling arrangement, covering claims in excess of USD seven million. Indeed, the severities of large claims is showing record highs.
The present situation has been precipitated by several contributory factors, both internal and external to the maritime industry - and on the internal front the issue of manning is very relevant.
For some time now the International Maritime Organisation (IMO) has expressed concern regarding the growing shortage of skilled and experienced seafarers to man a growing and increasingly technological fleet.
Such is the price for a current shipping boom with resources being stretched by demand but this shortcoming is now impacting directly on insurance claims with an alarming indication of increasing human error statistics as significant contributory causes of marine accidents!
Cost increases
Externally, the current rises in costs of raw materials and services have also been a direct cause of price increases for all claims cost factors and the entire scenario has been adversely affected by the weak US dollar, add to this the increasing complexity of environmentally-aware processes of salvage and wreck removal, then cost increases are being further exacerbated.
Such are the forces that will undoubtedly determine the rises in premium prices that are now set to befall the ship operator and with little change expected in the external factors at play it will be incumbent on the industry as a whole to contain the situation as far as it can.
This must be by internal improvement to reduce the number of insurance claims; otherwise the costs may become exponential.
Such a solution is, of course, easier said than done but is symptomatic of the many fundamental flaws that are present within the global industry where the 'good-guys are carrying the bad guys' - this goes for operators, Flag Administrations and classification societies alike. Until management of risk is properly contained across the entire operational spectrum, the costs will be payable in lieu!
The writer is UAE-based marine consultant.
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