Marine Insurance. Marine Insurance Types and Their Characteristics

Transcription

1 Marine Insurance Marine Insurance Types and Their Characteristics Marine insurance is rather small in volume, accounting for only about 2% of the global non-life premium (deduced from global premium volumes as in [8, 15]). At the same time, it is highly specialized, representing a variety of risks and accordingly specialized types of insurance covers to match them. Usually the term marine is used as umbrella for the following subtypes: (1) Hull, (2) Cargo, (3) Marine Liability, and (4) Offshore. Seen from a different angle, what are the actual risks one runs in the marine business? These might be classified as follows: (A) (B) (C) (D) Damage to or loss of the insured object as such (partial or total loss), be it a ship, an oil platform, cargo or whatever might fall into the scope of marine. Any type of liability (collision, environmental, port, crew, etc.). Loss of income due to the insured object being out of order for a period of time after an accident recoverable under marine insurance (see Loss-of-Profits Insurance). Expenses occurring in connection with an accident recoverable under marine insurance (like salvage or wreck removal expenses etc.). Again, these potential losses can be caused by different perils (see Coverage). Roughly spoken, they are usually covered under a standard marine policy when originating from something called a peril of the sea. A peril of the sea may be characterized as any peril inherent to the shipping business like collision, grounding, heavy weather, and the like. (see e.g. ITCH [7]). In addition come other perils like war or terrorism, often covered via special schemes or insurance arrangements like, for example, The Norwegian Shipowners Mutual War Risks Insurance Association, established originally at the outbreak of World War I to provide cover against losses caused by war and warlike perils. Now again (A) to (D) can befall the ship builder (when occurring during construction phase), the ship owner and/or manager, the mortgagee, the cargo owner, the crew, port authorities, the scrapper, and so on. For all realistically possible combinations of (1) to (4) with (A) to (D) and the named perils and interests, a variety of insurance covers do exist. To try and list all would go out over the scope of this article, but let us comment on some of the most important. Ad (1): Hull is usually used as an umbrella term for covers related to the vessel or the marine object as such. The major insurance type is Hull and Machinery (H&M), which covers the vessel and machinery as such, but normally also any equipment on board other than cargo necessary to the vessel to do what she is supposed to do. Liability is usually limited by a maximum sum insured (see Coverage) matching the vessel value. One speciality of hull insurance is, however, that it usually also covers collision liability as well as expenses like salvage or wreck removal expenses up to a certain percentage of the sum insured. Thus, the hull policy is a combined cover for risks under (A), (B), and (D), such that the insurer may be liable for up to maximum three times the sum insured for the combined risk (the exact factor may be less than three and depends on the set of clauses applied, see, for example, [4, 7, 10, 13]). However, any liability originating from a cause not specifically defined under the hull policy or exceeding the sum insured will have to be insured otherwise and usually with the P&I clubs. Other specific insurance covers coming into the scope of hull are not only for total loss, increased value, and other special covers, but also for Loss of Hire (LOH) insurance designed for risk (C). A detailed introduction to all types of coverages is given, for example, in [4]. For organizational purposes, hull is often divided into Coastal Hull and Ocean Hull, the latter also called Blue Water Hull. The main features remain the same, but while Ocean Hull has a clearly international character referring to vessels trafficking any part of the world, coastal hull refers to vessels trafficking areas near a coast and often within a certain national area. Coastal hull will thus include a greater number of smaller vessels like fishing vessels, coastal ferries, coastal barges, and the like, but there are no clear limits between ocean and coastal hull and a number of vessels will qualify under the one as well as the other. Ad (2): Cargo insurance is any insurance for almost any object being transported from a point A to a point

2 2 Marine Insurance B at some point in time, with a number of different covers to match all needs. Ad (3): Any liability exceeding the one covered under the hull policy or any standard policy will usually be handled by the P&I clubs. As there are only a handful of P&I clubs worldwide operating with very similar clauses and conditions, detailed insight may be gained by studying a version of these rules, available from the club s websites (e.g. or see Standards & Rules ). Ad (4): Offshore or Energy insurance was originally part of engineering insurance, but moved into the marine underwriting scope when oil production moved out to the open sea. Eventually, not only the platforms and supply vessels but also anything else connected to oil production on shore, fell under offshore and accordingly marine insurance. As can easily be understood, this is a highly varied and specialized area with all sorts of risks and enormous sums exposed, and as such, again a highly specialized field within marine insurance. Accordingly insurance covers are most often individually tailored to the needs of each individual oil production unit. The limit between offshore and hull is floating as well, as a number of objects like supply vessels or the increasingly popular floating drilling units might come into the scope of the one as well as the other category. When it comes to insurance clauses worldwide, probably the most widely used clauses are the Institute Times Clauses Hull (ITCH) in their 1995 version, as well as other Institute Times Clauses [7]. A new version was issued in 1997 and another one is currently under review. Apart from that, a variety of countries including Norway [13] developed its own market clauses applicable to international as well as national clients, and which are reviewed and updated regularly. Very roughly, different market clauses may provide similar coverage, but one has to be very alert regarding differences as to what is actually covered or excluded, like for example, the named perils principle dominant in the English clauses as opposed to the all risks principle in the Norwegian clauses (some details are given in, for example, [1, 4]), or the use of warranties. Similarly, common standard cargo clauses were developed and are under continuous review in a number of markets. Offshore policies are rather tailormade to match the individual demands of each production unit and the enormous complexity of this business. Major Markets and Their Characteristics Historically as well as in the present, the major marine insurance market is the London market, which represented in 2001 about 18% of the worldwide global gross marine premium (comprising hull, transport/cargo, marine liability other than P&I, and offshore/energy insurance). The London market is represented by two different units, the Lloyd s syndicates on the one hand, organized in the Lloyd s Underwriters Association (LUA), and the insurance companies on the other hand, organized in the International Underwriting Association (IUA, The second biggest marine market volume is produced by Japan with 16% of the world volume, followed by the United States with 13% and Germany with 9%. However, the picture becomes much more differentiated when looking at the different types of marine insurance. On the whole, in 2001, hull accounted for about 26% of the global marine premium volume, cargo/transport for 58%, marine liability other than P&I for 7% and offshore/energy for about 9% (see also Figure 1). In the hull market, London remains the clear leader writing about 20% of the world wide hull premium, followed by Japan (12%), France (10%), the United States (9.6%) and Norway (9%). For cargo, however, Japan stands for 20% of the world wide premium, followed by Germany (14%), US (10%), UK (8.5%), and France (7%). When it comes to offshore, the market becomes extremely unbalanced with London alone writing 56% of the world wide offshore premium nowadays, followed by the United States (26%), and Norway (7%), and the rest spread in small percentages over some markets. All the above percentages are deduced from 2001 accounting year figures in USD as reported from the national organizations. The figures are collected for the International Union of Marine Insurance (IUMI, by CEFOR each year and presented as the global premium report at the annual IUMI conference in September. For anybody interested in the evolution of the marine markets, figures dating back

3 Marine Insurance Accounting year Global hull Cargo Liability Energy Total Source: IUMI / CEFOR 2003 Figure 1 Global marine premium , as reported, in US$ mio to 1995 are available from Also the P&I world premium distribution by fiscal domicile as well as by operational location is obtainable from the same source. Most local marine insurers are organized in and represented by their national organizations, which again are organized in the International Union of Marine Insurance. In its committees and at the annual conference, all matters of supranational concern to the marine insurance industry are discussed. A detailed presentation of the history of IUMI and accordingly, of marine insurance through 125 years is given in [9]. Typical Features of Marine Insurance Marine insurance and especially Ocean Hull show many similarities to non-life reinsurance rather than to other types of direct insurance. Firstly, it is a highly international business. It starts with the vessel being built in exotic places and not necessarily completely at one site. When set afloat, she may traffic any part of the world, with owners, managers, classification society and insurers placed in various other parts of the world. In addition, her flag will more often than not reflect a country other than the owners home country or the area she traffics, and the crew is a mixture of different nationalities. Secondly, vessels classifying as Ocean Hull often have high insured values such that usually several insurers, often in different countries, share the risk. Accordingly, Ocean Hull nowadays is nearly a hundred percent broker-assisted business, with the broker guiding the shipowner to find the best insurance match in an international market, regarding conditions as well as price, and taking administration off the hands of the insurers. Here also, one speciality, being very common in the Norwegian market, should be mentioned, called the claims lead principle. Contrary to the usual understanding characterizing the lead insurer as the one setting the premium conditions to be valid for all other insurers sharing the same risk, the insurer here takes a leading position in claims settlement. Once a probably recoverable accident occurs, this insurer will not only hopefully pay his share of the claim, but from the start assist the insured in all possible matters to get the damage surveyed and assessed, find the best repair yard, and last but not the least, calculate the total claims amount payable and inform the other insurers sharing the same risk. A third parallel to non-life reinsurance is that insurance policies other than one-voyage covers are usually issued for a period of one year at a time. Policies covering three- to five-year periods do also occur, but their frequency, same as in reinsurance, is often closely connected to market down- or upcycles. Fourthly, not the least as a result of the previous point, the business is highly volatile (see Volatility), especially with regard to premium cycles. And the claims situation is volatile as well. Apart from natural random variations in accident occurrences, factors like variation in deductible amounts and increasingly higher values at risk come in together with changes in international legislation and risk exposure.

4 4 Marine Insurance Premium cycles naturally have a strong correlation with the current competitive market situation and capacity, in addition to or even more than with market results. One should also mention here, the speciality of hull insurance again, in that it features an element of liability and thus constitutes a mixture of insurance types. P&I is also extremely international, but with all P&I clubs being mutuals and renewing membership at the same date each year, premium adjustments seem more reasonable and less volatile than for the hull business. Coastal Hull on the other hand is more locally oriented comprising fishing boats, local coastal ferries and the like, such that it will, in many cases, prove most convenient to insure it in the same country and fully with one insurer. Statistics, Premiums, Deductibles, Claims, and Inherent Challenges for Actuaries When not mentioned otherwise the following will concentrate on hull, but a lot of the statements will also be true for other insurance types. Statistics The success of any actuarial analysis is dependent on having sufficient statistical data at hand, both at a certain point in time as well as over a historical period of time. In addition, underlying conditions should not have changed too much to possibly render the historical information worthless or unadjustable. One of the arguments in discussions about the usefulness of actuarial studies in shipping is that together with the volatility of the market and a continuous change in underlying frame conditions, marine insurance by nature comprises relatively different individual objects. In addition, marine insurers often are rather small and highly specialized units. However, there is a keen and steadily growing demand for good statistics for the purpose of advanced risk analysis to support the underwriting as well as the loss handling and prevention process. So what to keep in mind? Statistics in marine insurance most often are produced on underwriting year basis, which enables to set the complete ultimate claims amount originating from one policy in relation to the complete premium paid under the same policy. This makes sense as marine can be classified as short- to middle- tail (hull) or long-tail (P&I) business, meaning that it may take up to a number of years until claims are verified and paid in full. On the other hand, premium cycles are strong and deductibles change over time, such that only the underwriting year approach will show whether the premium paid at the time of inception was adequate to match the ultimate claim. Further arguments and considerations of the underwriting year versus the accounting year and accident year approach, together with explanations and examples are given in [12]. On pitfalls of statistics also see [11]. To gain good statistics the analyst otherwise has to group the business into sensible subgroups rendering each with as much meaningful information as possible, but leaving enough objects within one group to be of statistic value. In marine insurance, one will usually want to group ships by their age, size (tonnage), type (like bulk, tank, passenger, etc.), classification society, and flag. In addition, claims will be grouped by type or cause (like fire, collision, grounding, etc.) to identify problem areas under the aspect of loss prevention as well as of allocating the adequate premium. Furthermore, one might want to carry out analyses by propulsion types, hull types, navigational aids, or whichever special vessel characteristic might prove to be of interest under certain circumstances. An example of an engine claims analysis is [5], a more recent one was carried out by CEFOR. Some market statistics for the London market (IUA, LUA) are available from or To obtain adequate statistics, one can subscribe to regular vessel detail data updates covering more or less the whole world fleet above a certain size. This data can electronically be linked to ones own insurance data, thus rendering the possibility of very detailed analyses and claims studies. Publicly available examples of statistics thus derived for the Norwegian hull market are [2, 3]. Premiums Ways of determining the adequate premium will vary with the type of marine insurance. However, regarding hull, one will usually study the individual fleet statistics and risk profile and set this in relation to available premium scales and claims statistics for a matching vessel portfolio, thus combining qualitative with quantitative analysis. Historically, there existed

5 Marine Insurance 5 a number of national or regional hull cartels where all members accepted a common premium set by the accepted leader on the risk. These cartels do not exist any more in a free competitive market, but some did develop premium scales for certain vessel portfolios. Being too outdated to be of help in determining the actual premium, however, they may still sometimes come of use as reference values. But, as elsewhere, there is a steadily more technically oriented approach to derive technically correct premiums matching the expected claims under a policy, by using actuarial methods to ones own or market data. For usual actuarial methods of premium calculation based on historical claims or exposure profiles, I refer to the general actuarial literature. However, various other factors like the shipowners risk management processes, changes of and compliance to international rules, vessel detentions after port inspections, and current developments will have to be taken into account when granting coverage. Deductibles An important element inherent in pricing is the adjustment of the adequate deductible applicable to a policy. Usually, marine hull policies have a basic deductible applicable to any claim, plus possibly additional deductibles applicable to engine claims, ice damage, or other special types of accidents. Historically, not only premiums, but also deductible amounts, have undergone market cycles, which have to be taken into account when analyzing historical claims data for premium calculation purposes. As claims below the deductible are not paid by and thus usually not known to the insurer, substantial changes in hull deductible amounts, as at the beginning of the 1990s, lead to substantial consequences for the insurance claims statistics. On the other hand, the deductible is a means of adjusting the premium, as a different identical cover with a higher deductible should normally produce less claims and will thus require less premium. This again has to be analyzed by vessel type, size, and other factors, as there may be substantial differences in usual average deductible amounts for different types of vessels. In addition, vessel sizes are on the increase thus triggering higher insured values and higher deductibles accordingly. Claims As earlier mentioned, hull may be characterized as a short- to middle-tail business with payment periods of up to about seven years, whereas P&I, because of its liability character must be regarded as long-tail business. Both thus require an estimation of outstanding losses for the least mature underwriting years. In hull, the maximum possible loss is usually limited by the sum insured of the insurance policy, or as explained before, by maximum three times the sum insured. So when calculating expected outstanding losses for Incurred, But Not yet (fully) Reserved claims (IBNR) and Covered, But Not yet Incurred claims (CBNI) (see Reserving in Non-life Insurance), it may make sense to separate the so-called total losses and constructive total losses from partial losses. Total losses do occur when the object is lost and beyond repair, a constructive total loss is a kind of agreed total loss where repair costs would exceed a level deemed to be a limit to make a repair seem sensible (the exact level varies with the set of clauses applied, see for example, [7, 13]). When a total loss occurs, the complete sum insured is payable in full. What characterizes such losses is that they most often are known shortly after the accident, and as the claim cannot become worse over time, being limited by the sum insured, will show a different development pattern than partial losses. Partial losses are losses where a repair is carried out and will usually develop over time when the claim gets assessed, and repairs and accordingly payments are made. Methods of IBNR calculation like Chain-Ladder, Bornhuetter Ferguson and others as well as their combinations and derivatives are extensively covered by the general actuarial literature. An overview of some commonly used methods is given in [14], whereas a connection to marine insurance is made in [6]. However, any methods based on average historical loss ratios should be applied carefully, if at all, as loss ratios vary greatly because of the market cycles (see Figure 2). When wanting to apply such methods one might consider substituting the premium with something less volatile such as the sum insured or the size (tonnage). But also results of the chain-ladder and related methods should be checked carefully to detect any trends or distortions in the claims data, for example, originating from a change in deductible amounts, measures to improve loss prevention, claims payment patterns and the like. In addition, it is well known that any unusual occurrence of claims in the most

6 6 Marine Insurance (%) Source: Central Union of Marine Underwriters Norway (CEFOR) Figure 2 Actual incurred loss ratio for Ocean Hull, Underwriting years , per recent year may lead to distortions when applying the historical average claims development factor to this year without adjusting the data first. One should also keep in mind here that underlying insurance clauses originating from different countries differ as to what they actually cover, such that the same accident may create a different claim amount under different sets of conditions. Recent Market Development and Actuarial Potential Connected to That Any changes in international regulations initiated by, for example, the International Maritime Organization (IMO, or the International Union of Marine Insurance (IUMI, together with general developments in seaborne trade and the shipping industry will have direct or indirect implications on marine insurance as well. In the wake of major accidents like the Erika or the Prestige and also September 11, a strong focus recently has been put on security and safety matters and better risk management procedures to reduce the number and severity of accidents. Together with steadily improving data access, today there is great focus on risk analysis at all stages, thus creating interesting potential for actuaries and analysts in the marine industry. References [1] Brækhus, S., Bull, H.J. & Wilmot, N. (1998, revised by Bjørn Slaatten). Marine Insurance Law, ISBN , Forsikringsakademiet (Norwegian Insurance Academy, a Division of the Norwegian School of Management), Oslo. [2] Central Union of Marine Underwriters Norway (CEFOR), Oslo, Norwegian Marine Insurance Statistics per (Annual Publication of Ocean Hull Market Statistics), [3] Central Union of Marine Underwriters Norway (CEFOR), Oslo, Norwegian Marine Insurance Statistics (NoMIS) in CEFOR Annual Report 2002 (issued each year), [4] Cleve, A. (2003). Marine Insurance Hulls, Forsikringsakademiet (Norwegian Insurance Academy, a Division of the Norwegian School of Management), Oslo, [5] Hernkvist, M. (1998). Swedish Club, Gothenburg, [6] Hertig, J. (1985). A statistical approach to IBNRreserves in marine insurance, ASTIN Bulletin 15(2), pdf. [7] Institute Time Clauses Hull (1995). and other clauses, download available from e.g. insurance/hull/hull clauses.asp. [8] IUMI 2003 Sevilla, Report on Marine Insurance Premiums 2001 and 2002 (September 2003 at the Annual IUMI conference in Sevilla), available from no. [9] Koch, P. (1999). 125 Years of the International Union of Marine Insurance, Verlag Versicherungswirtschaft GmbH, Karlsruhe. [10] Mellert, W. (1997). Marine Insurance, Swiss Reinsurance Company, Zurich, 12/ en, com (Research & Publications: Property & Casualty). [11] Mellert, W. (2000). PEN or the ART of Marine Underwriting, Swiss Reinsurance Company, Zurich, R&R 10/ e, Order no en, com ( Research & Publications ). [12] Mellert, W. (2002). The Underwriting Year in Marine Insurance and Reinsurance, Swiss Reinsurance Company, Zurich, UW 1/ en, Order no en, (Research & Publications: Property & Casualty).

7 Marine Insurance 7 [13] Norwegian Marine Insurance Plan (1996). Version 2003, Copyright Central Union of Marine Underwriters Norway (CEFOR), Oslo, eng/index.htm. [14] Swiss Re (2000). Late Claims Reserves in Reinsurance, Order no en, (Research & Publications: Property & Casualty: Technical Publishing). [15] Swiss Re, Sigma 6/2002, World Insurance in 2001 (updated annually), (Research & Publications, sigma e). (See also P&I Clubs) ASTRID SELTMANN