Kevan Gielty Chairman - IUMI Cargo Committee Report September 17, 2001 Genoa, Italy. Good morning,

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1 Kevan Gielty Chairman - IUMI Cargo Committee Report September 17, 2001 Genoa, Italy Good morning, I d like to congratulate our Italian host association and the organizers of this year s Partners in Commerce Conference for staging another first class event. I would also like to compliment our President and his Executive for selecting such a timely theme for this year s gathering. Shipping remains one of the world s most competitive industries. Insuring the cargo they carry is no less so. While the fundamentals of cargo remain the same transporting goods over a relatively small number of ocean and inland lanes technology continues to revolutionize the industry. Every new step in this revolution means new challenges for cargo underwriters. Increasingly we are seeing partnerships stepping up to share these challenges. It s a growing trend, and one that I shall return to later in this presentation. We recently had a chance to reflect on how far the transport of cargo has traveled in the last 35 years with the sad passing of Malcolm McLean on May 25 th. 1

2 The Economist described Mr. McLean as the pioneer of the container ship and the inventor of the greatest advance in packaging since the paper bag. The invention of the container ship was as great a technological leap in 1956 as was the introduction of steam propulsion in Malcolm McLean was shipping s Man of the Century, and it would have been inappropriate to present the 2001 report of the Cargo Committee without first paying tribute to his genius. It has been another tough year for cargo underwriting. The hardening of most markets has been tempered by poor cargo results overall. Profits are suffering and consolidation continues to reshape the industry. Following my remarks, the Cargo Committee will report on several unique and current issues in our customary presentations. These topics include: Leather A Fascinating World Dangerous Goods, to be presented by Mr. Carlo Franchini of the Cargo Committee. Icebound Ports Danger to Cargo, will be presented by Mr. Peter Cullen. And finally, Mr. Andre de la Beij of the Cargo Committee will deliver a paper on the Distribution of the Euro. In less than four months the 2

3 single largest currency conversion in history will be complete with the introduction of European coins and banknotes. You will notice in the Conference Program that a joint workshop by the Cargo and Cargo Loss Prevention Committee has been replaced with an Open Forum. This Forum will take place on Tuesday afternoon, and shall be split into two sections. The Cargo Committee has arranged the first session titled, Maritime Leprosy The Castor. Denying access to ports of refuge for salvors and the Owners of ships in distress is a recurring problem in the shipping industry. The circumstance and consequences of the problem were highlighted again this year when authorities in several Mediterranean ports denied The Castor entry. Mr. George Tsavliris of Tsavliris Salvage International Ltd. will detail the story of this incident, which took the entire month of January to enfold. Mr. Ben Browne of the law firm of Shaw & Croft will explain the legal aspects of the issue. Mssrs. Browne and Tsavliris will be joined by Mr. Quentin Prebble of the Liberty Syndicate at Lloyds, who shall highlight points of concern for cargo underwriters. 3

4 The second session is just as timely: Evaluating and underwriting CAT-Risks. The first container (TEU) sailed on April 26, 1956 from the Port of Newark, New Jersey, carrying 58 individual 30-foot containers to Houston in the Gulf of Mexico. The container drastically reduced shipping costs and revolutionized the shipping industry. It also added exposure to risk for underwriters since the design of container ships enabled shippers to deliver cargo to undeveloped as well as developed points. Today we have ships carrying 5,000 to 6,000 TEUs. Within 5 years, this is likely to increase to 9,000 TEUs. There are Naval Architects who believe it can go as high as 15,000 TEUs. In addition to size, the industry is also looking at speed. Consider for a moment the prospect of a super-sized container ship, with a combined hull and cargo value of $1 billion, hurtling across the North Atlantic at 35 knots. At least one American company is looking at moving sea-going cargo into the jet age using ships powered by a marine version of Rolls Royce Trent engines. 4

5 Canadian Pacific the largest transatlantic container line has already expressed interest in these 1,700 container high-speed vessels. What does this mean to underwriters? Quite apart from the hull and cargo value in the event of sinking, you will also have to consider the impact on a specific production system and how even a delayed arrival may negatively affect such a system. The challenge, of course, is the aggregation of values and how underwriters can assess and properly manage these exposures. Evaluating and underwriting CAT-Risks has been arranged by the Cargo Loss Prevention Committee, and will feature remarks by Mr. Thomas Loster of Munich Re, and Mr. Ivo Menzinger of Swiss Re. Now onto the Cargo Committee report itself: Our traditional questionnaire was distributed to all member associations. 41 responded to the following questions: What have been the major trends, factors or problems in the past 12 months within your market? Overall cargo results in most markets are poor Hardening markets with a few exceptions 5

6 Hardening reinsurance costs and larger retentions Consolidation of insurers, brokers and clients Continued internationalization leading to demand for global and multi-line/multi-year policies Hardening property market leading to brokers trying to include more storage elements under marine cargo policies Increasing theft of hi-tech goods, particularly mobile telephones Demand for political risks, war on land Shortage of experienced underwriters Reluctance to charge overage additional premiums High number of water damage claims due to hatch cover deficiencies Notable increase in frequency of containers washing overboard Abandonment of voyage by substandard vessels is becoming more frequent. 6

7 Have any new concepts, policy forms or clauses been developed in your market during the past 12 months? Institute Classification Clause ( ) Premium Payment Clauses (London) German Cargo Conditions DVT-Cargo 2000 COMTRANS Freight Forwarders Liability (Morocco) Storage War Cover, Land transit Clauses (Czechoslovakia) Finalizing of the Antwerp Insurance Policy (Belgium) New Finnish Cargo Insurance Conditions New Swedish Cargo Insurance Conditions New Land Transit Clauses (Lebanon) Container Clauses (Romania) Does your market track third party recovery? If so, please provide average results as a percentage to paid losses. The most common response indicates that while there are no market statistics recorded, most individual underwriters generally pursue 7

8 recoveries. A number of associations estimated what they believed to be the average recovery percentage. This ranged from 5 per cent to a high of 30 per cent. I d like to thank Bengt Humble of the Cargo Committee for his work in summarizing the replies, and also our friends at the American Institute of Marine Underwriters for their assistance with administration. Before I move on to a discussion of Partners in Commerce, I d like to point out that the Cargo Committee has also experienced several personal changes during the past 12-months. Mr. Jean-Louis Bodin of France replaced Mr. Thierry Salmon. Mr. Tomotaka Urata of Japan replaces Mr. Yasutoshi Konnai. Finally, Ms. Joyce Webb replaces Mr. John Spicer representing the Lloyds market. I would like to take this opportunity to thank my outgoing colleagues for their contributions and support, and to extend a warm welcome to our new members. They join the Committee at an exciting point in the evolution of our practice. Partners in Commerce As I noted earlier, the shipping industry has set a course for dramatic technological change. The movement and handling of cargo is going to be supported by bigger and faster ships. 8

9 Roll-on, roll-off systems have the potential to replace cranes and significantly reduce loading and unloading time. At the same time that the world is shrinking, the risks for underwriters are becoming larger, and more complex. It is absurd to think that in this era of unprecedented change, that it remains business as usual in cargo underwriting just the opposite. In his book, Origin of the Species, Charles Darwin wrote: It is not the strongest that survive, nor is it the most intelligent, but the most responsive to change. Part of the process of change in underwriting is making certain that we nurture the relationship with our partners: 1. Clients; 2. Re-insurers; 3. Brokers; and, perhaps the most neglected group of partners, 4. The shareholders and stakeholders in our companies. 9

10 As partners, each of these groups are expected to share in the risks and profits of cargo underwriting. Unfortunately, it appears that we have perfected the former, but have come up remarkably short on the latter. There are several reasons for this. In the past, underwriters have seemingly had the protection of the phenomenon known as the hard market. In such a market, a rising tide would lift all boats. Such a lift would be supported by consistent and disciplined underwriting practices that would ensure that strong profits flowed to the bottom line. Instead of a universal rising and lowering of tides otherwise known as a hard and soft market today s industry more closely reflects the varying water levels of a series of canal locks along an inland shipping channel. Increased globalization and deregulation of insurance markets has decentralized the influence of traditional insurance centres with increased autonomy at regional levels. Underwriting practices have become just as fractured, with discounting to grab market share placing downward pressure on profitability. some statistics on profitability 10

11 This is further evidenced by reports from markets around the world. While circumstances differ, the lack of profitability from market to market remains alarming. A recent study by WIS Research Ltd. & City University Business School in London, reports that aggregate worldwide marine insurance spending fell by 24 per cent from a peak of US$20.9 billion in 1994 to $15.9 billion in Cargo insurance is estimated to account for approximately 60 per cent of the total premium. Yet, during this period of record growth in international trade, cargo rates are estimated to have fallen by 30 per cent. Such figures can put a strain on any business relationship, especially those that include shareholders and other risk-sharing partners. These are, after all, the partners who supply the system with capacity and expect us to carefully navigate their investment through periods of overcapacity such as the one we are experiencing at present. We must respond to this expectation and rebuild our relationship with our equity partners by tightening up our approach to the market place. 11

12 This will involve meeting the changing demands of our clients while avoiding wasting our capacity on practices that have little or no underlying business value. Not only will this help restore the confidence of shareholders and stakeholders, it will go a long way in strengthening our relationship with our other partners. In closing, I d like to quote from Against the Tide: Charting the Course Back to Profitability. This report by CNA Re, talks about the property and casualty insurance industry in general. But it also contains valuable lessons for cargo underwriting: While renewed emphasis upon core underwriting values is unlikely to ever completely blunt the competitive ebbs and flows of our market place, it will go a long way toward keeping our business off the rocks and on course toward a brighter, more consistently profitable future. Thank you. 12