Marine

review
riding the waves
november 2009

Willis Airline Insurance Insight August 2009

Willis Airline Insurance Insight August 2009
 Contents
Foreword ...................................................................... 2
Introduction - Marine Market Summary........ 3
Hull and Machinery . ............................................... 4
Protection and Indemnity .................................... 6
Marine Shoreside....................................................... 8
Cargo ............................................................................. 10
Letter from Singapore ......................................... 13
Piracy ............................................................................ 14

Willis Airline Insurance Insight August 2009 Willis Marine Review November 2009 1
 foreword

This time last year Lehman Brothers had just collapsed, AIG had
been rescued, and the banking crisis was in full swing, but had yet
to seriously impact on the marine industries.

Shortly afterwards, in the closing months of 2008, the shipping boom

came to an abrupt halt as freight markets and commodity prices
collapsed. Today, sadly, once again we find marine underwriters
hoping to put up prices just at the time their customers need to
cut costs.

At Willis we have ridden these waves before and are well prepared for
the challenging negotiations ahead. Meanwhile, my colleagues and I
are pleased to offer you this latest Willis Marine Market Review.

Alistair Rivers
November 2009

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Marine Market

The marine insurance market is inevitably linked to the
fortunes of its clients and there are few, if any, who have
not suffered due to the dramatic economic downturn in
the last year.
Prior to the financial crash last autumn, shipping had
enjoyed a super boom for several years. However, the
onslaught of the global recession significantly reduced
international trade. The sudden slowdown and drop in
demand meant the shipping industry suffered massive
losses. Many ship-owners facing losses also had new
buildings on order. In fact, there was a record order book
equivalent to over 50% of the existing world fleet. The
combination of these factors has led to cancelled or
deferred orders, lay-ups of the existing fleet, and other
cost cutting measures.
The exception has been the P&I market where the mutual
clubs managed to achieve a second year of rate increases
following underwriting losses.
In early 2009 it was anticipated by many that the marine
market would shift and that the economic crisis would mark
the end of the soft market. These attempts to talk up prices
failed because of the simple economics of supply
and demand.
At the time of writing, although demand for marine
insurance has contracted the remaining over-supply in the
market means that no dramatic price rises are imminent.
This is just as well as the shipping industry is still suffering
and struggling to cut costs.

Insurers have also suffered. Their problems include stalled

capital markets and a fall in investment returns. This has
led to underwriters being far more cautious in their
approach to underwriting. This caution has not however
had a dramatic impact on rates. Although the reinsurance
market hardened, the direct market did not follow suit.
Actually, in most marine classes the increase in rates has
been minimal for those with a good loss record. This is
partly because there has not been a significant contraction
in the direct marine underwriting capacity. While there is
still surplus capacity in the market, rates are unlikely to
rise dramatically.

"The marine insurance market is inevitably linked to

the fortunes of its clients and there are few, if any,
who have not suffered due to the dramatic economic
downturn in the last year."

Willis Airline Insurance Insight August 2009 Willis Marine Review November 2009 3
 hull and MaChinery

It has been a fairly mixed year for the hull market. Initially, the
London market adopted a tough approach with renewal increases
being demanded by insurers on all lines of business. As the year
progressed, the firmer trend faltered due to the surplus capacity in the
market and the threat of competition both internationally and from
other London underwriters.

We have seen a marked distinction between renewal requirements

for business producing underwriting profits and those that do not.
Modest increases of around 2.5-5% have been universally applied to
good performing accounts and far heavier penalties have been applied
to poorer performers.

A further complication has been the effect of the slump in world trade
on vessel values and earnings. During the boom years ship values
increased and although some additional premium was generated,
technical rating levels generally fell.

As we write, ships have been laid up to an extent not seen since the
1970s and understandably owners expect to enjoy reduced insurance
premiums in respect of a vessel no longer trading. Unfortunately for
many there is little scope for return of premium as technical rates are
already less than the level underwriters require for laid up tonnage.

We anticipate that the increase in the laid up fleet may also see a spate
of outstanding claims being presented by ship operators who may
previously have preferred to defer them in the boom market.

In spite of this, capacity in London has remained relatively stable,

though there have been some personnel changes. Swiss Re recently
lost almost their entire marine team to Montpelier Re. Swiss Re in
turn brought in Aon’s Peter Townsend and Lee Bright. Ian Henstridge,
the senior Hull underwriter at the Catlin syndicate, is moving to the
Amlin syndicate. David Vale departed Allianz for the Brit Syndicate
and was replaced by Brian Cheney from Gard. Potentially, these
moves may result in changes to the underwriting philosophy of
these insurers.

Of all the international markets, the USA seems the least enthusiastic
about international blue water business. The American Hull Syndicate
continues to review their strategy. Navigators have shown an interest
in being the lead on some business but only when it fits in with their
independent underwriting philosophy. Other insurers, notably
AIG and CV Starr have been prepared to consider shares, following
markets such as London.

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The Scandinavian market has experienced major changes
this year, losing both Bluewater and Nemi. The Norwegian
Hull Club has had a firm approach to renewals and
consequently they have lost business. Although Gard
have also adopted this approach, they have proved more
flexible, especially when offered the position of claims
leader. Swedish Club have analysed their existing business
and undergone a process of rationalisation in an attempt
to improve their financial results. Gerling continue
to accept and write business that fits their individual
underwriting approach.
Surprisingly, following the recent demise of Bluewater and
Nemi, it appears new capacity is emerging in Scandinavia.
WR Berkley is opening a new marine operation, taking on
many of the personnel from Nemi. Additionally, Amlin have
begun to provide some underwriting capacity to Vega, who
had previously failed to attract sufficient capital to start
underwriting themselves.
The rest of Northern Europe has remained relatively stable.
AXA are capable of writing significant shares of business
when they so choose. They maintain tight control of their
operations however, with all business referred to their
head office in Paris for prior approval. Other significant
European players are Generali, Groupama and Allianz.
All of these underwriters can provide substantial capacity
through their multi-centred underwriting operations.
In contrast, some hull markets, such as Italy, tend to focus
primarily on the local business that they were formed
to serve. Italy, however, has long held ambitions to grow
internationally, especially as their domestic business
is declining.
"As we write, ships have been laid up to an extent
not seen since the 1970s and understandably owners
expect to enjoy reduced insurance premiums in respect
of a vessel no longer trading. Unfortunately for
many there is little scope for return of premium
as technical rates are already less than the level
underwriters require for laid up tonnage."
Willis Airline Insurance Insight August 2009
Perhaps the most interesting development in the
international market has been Amlin group’s acquisition
of Fortis Corporate Insurance. Fortis have grown their
international book substantially in recent years but have
remained focused on specific classes such as shipbuilding,
general marine construction and tug and barge type
business. Fortis have built a formidable position in some of
these specialised sectors. Thus, it will be interesting to see
how Amlin Corporate Insurance, as they are to be known,
intend to build on this.
The Singapore market, which serves many Asian ship-
owners, has continued to grow and remains competitive.
Some underwriters however have now rapidly expanded
and more moderate rates may result. Asia is still seen
by insurers as an area of opportunity. To this end,
underwriters’ operations continue to be bolstered by
additional personnel: Richard Young is the most recent,
he has moved from Atrium’s Lloyd’s syndicate to their
Singapore office.
Also worthy of mention is Marine Shipping Mutual (MSMI),
one of the few truly ‘mutual’ providers of hull insurance,
they too have had to take tough decisions on rating levels.
Previously, they provided a very stable alternative to the
more traditional markets. Thus, MSMI developed a loyal
following but as a mono line insurer it will be a challenge
for them to maintain adequate premium levels in the face
of global competition. Lastly, we should mention British
Marine, who are no longer a mutual, but continue to provide
a valuable alternative for smaller vessel owners
and operators.
Overall, it seems that despite a firm stand from some
underwriters, for those with a good record, rates have only
marginally increased. Unless there is a significant reduction
in capacity, we expect this to continue in 2010.
Willis Marine Review November 2009 5
 proteCtion and indeMnity (p&i)
renewal at 20 february 2009 –
overview
The build up to the 2009 renewal season was
overshadowed by the substantial unbudgeted calls
forced on almost half the market. Faced with sizeable
investment losses, six of the 13 Clubs saw no other option
but to recapitalise at the expense of their Members.
The majority of Clubs announced general increases
between +12.5% and +17.5%. The market average was
+16.5%. Although the announced general increases did
not vary significantly, the actual final results did.
Generally, those Clubs that had maintained their
budgeted deferred calls tended to be firmer at renewal. By
contrast, the Clubs that had requested unbudgeted calls
from their Members were considerably softer in their
renewal negotiations. Consequently, the stronger Clubs
were much more effective in achieving their announced
general increases, whereas, the weaker Clubs almost
certainly fell well short of their targets.
"generally, those Clubs
that had Maintained
their budgeted deferred
Calls tended to be
firMer at renewal.
by Contrast, the Clubs
that had requested
unbudgeted Calls
froM their MeMbers
were Considerably
softer in their renewal
negotiations."
Renewal discussions tended to be much more
confrontational than usual and often agreements were
not reached until the last moment. The combination of
these factors led to the widest range of results seen for a
decade. Across the market, we estimated that the average
actual increase achieved was close to 11% on mutual
P&I. However, the range of actual increases applied to
individual accounts was extensive.
Considering the background and tone of the renewal,
there was less movement between Clubs than might
have been expected. Despite anger and annoyance at the
unbudgeted calls, ship-operators largely resisted moving
Clubs. There were a number of individual reasons for
this, but two relatively common themes behind ship
owners’ rationale became apparent. The first was the
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barrier to movement represented by the penal levels of
release calls set by a number of Clubs. The second factor
was the continuing uncertainty about the market as a
whole. Naturally ship-owners were concerned that after
recapitalising one Club, if they moved they might have
to do the same with the new Club the following year.
Consequently, most movements as usual were only of
partial fleets, rather than wholesale shifts. As would be
expected the underlying trend was that ship-operators
generally favoured Clubs with greater financial security.
The Clubs which gained the greatest number of winning
movements in the market were the Standard Club and
North of England. Steamship and Skuld also fared well.
Net losers of tonnage included the UK Club, West of
England and the American Club.
finanCial results for 2008/09
It was expected that investment losses for 2008/09
would be substantial; unfortunately the final figures
are even worse than originally feared. The combination
of the equity market losses, exchange losses, and little
assistance from the bond market led to a combined
‘Non-Technical’ loss to the International Group (IG)
market of just over USD 840 million.
In contrast to this, the market actually recorded the
first underwriting surplus since 1994/95. The reported
combined underwriting surplus, of just over USD 612
million, is misleading however as this figure includes
nearly USD 540 million of unbudgeted calls debited or
accrued in the 2008/2009 financial year. Despite this,
the underlying figure, excluding the unbudgeted calls,
is still a significant USD 74 million positive result for
the market.
The unexpected feature of this underwriting result was
the extent to which the incurred claims result improved.
The combination of an overall reduction in paid claims
(-5%) with several Clubs appearing to have reduced their
estimated outstanding claims materially, led to nearly an
-11% reduction in incurred claims across the market.
Even including the unbudgeted calls, the underwriting
surplus only partially offset the huge investments losses;
consequently the final 2008/09 result showed an overall
market deficit of just over USD 230 million.
The great irony of the results is that because the
weaker Clubs were forced to balance their individual
results with unbudgeted calls, the market deficit is
shared only by the stronger Clubs. The stronger Clubs
therefore became slightly financially weaker over the
last reporting period, while the historically weaker Clubs
were largely unchanged.
Current year and early expeCtations
for february 2010

At the time of writing, we are just over half way through Thus, assuming no dramatic change in the claims trend,
the 2009/10 policy year. At this mid point, the majority we would expect general increases announced at renewal
of Clubs are reporting that claims levels are progressing 2010 to be substantially lower than we have seen in the last
positively. However, even if the current claims trend two years. 2010 may well represent the turning point from
continues throughout the autumn and leading to renewal a hard to a softer market, but we would expect most Clubs
2010, we expect two main messages from the Clubs. to publish general increases in the range of +5% to +10%.
Firstly, the claims performance of a single year, in a
A full analysis of the market will follow in our P&I Review
recession, will not be a clear indicator for the future when
2009 to be published later this autumn.
the shipping market begins to recover. Secondly, Clubs will
be anxious to rebuild reserves following the investment
losses of 2008/09. As touched on above, this second
argument will only really have any validity for Clubs that
did not charge unbudgeted calls.

IG MARKET IG MARKET
2008/09 Overall Surplus/Deficit - 2008/2009 Overall Surplus/Deficit -
Individual Clubs Excluding Unbudgeted Calls
(Including investment income) (Including Investment Income)
35 40
40
19
20 20
7
2 3 2 3 3
0 0
-6 -6
-20 -20 -16
USD (millions)
USD (millions)

-28 -28
-40 -35 -40 -35
-42
-50
-60 -50 -60
-59 -59

-80 -80
-59 -82

-100 -100

-120 -120
-122 -122 -122

-140 -140

-160 -150
-160
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IG MARKET IG MARKET
Percentage Underwriting Surplus/Deficit Percentage Underwriting Surplus/Deficit
(2008/09 year) (2008/09 year) Excluding Unbudgeted Calls
Incurred Technical surplus (or deficit)/Premium

40.00%
25.00%

20.00%
35.00%
15.00%
30.00%
10.00%
25.00% 5.00%

20.00% 0.00% Underwriting

Underwriting
Surplus/Deficit
Surplus/Deficit -5.00%
15.00%
Market Average
Market Average -10.00%
10.00%
-15.00%
5.00%
-20.00%
0.00% -25.00%

-5.00% -30.00%
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Willis Airline Insurance Insight August 2009 Willis Marine Review November 2009 7
 Marine shoreside

Generally referred to as ‘Marine Liabilities’, this area specializes in

those marine activities that are essentially shore based. Such risks are
often unique and require bespoke policies that address the potential
losses faced. These include:

 Terminal and Port Operators including stevedores

and wharfingers
 Ship Repairers and Constructors
 Non-Crew employees that work on or around vessels
 Marine Construction companies
 Vessel Charterers

The market has evolved to provide insurance and risk management

services that cover not only the clients’ third party liabilities but also
physical damage to their owned property.

In the case of a Port Operator or Port Landlord, the owned property

can often be worth hundreds of millions of dollars. Consequential loss
of income must also be taken into account. This can be as a result of
blocked approach ways, navigable waterways or damaged buildings.
These liabilities significantly increase the potential losses.

This is a highly specialized class in which European-based markets are

strong. This type of cover combines both third party liabilities and first
party property damage. Underwriters approach the two types of risks
very differently.

"the Market has evolved to

provide insuranCe and risk
ManageMent serviCes that
Cover not only the Clients’
third party liabilities but
also physiCal daMage to
their owned property."

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"Another factor pushing up premiums was the alleged
lack of capacity in the non-marine market. This led
to an increase in premiums for Property and Business
Interruption risks in the first half of this year. "
Third Party Liabilities
Rates remain relatively stable for the primary exposures,
which range from simple care, custody and control of cargo to
complex ship repairs. In recent years there has been an influx
of capacity into the market which has meant that premiums
have remained relatively stable and underwriters have been
able to grant small reductions to those with good records. This
trend is unlikely to change in 2009 and may well continue
through the first half of 2010.
Excess Third Party Liabilities
In contrast, rates have hardened for the higher Excess/
Umbrella market. Few capacity risks, requiring limits of up
to USD 500 million or more, are renewing at expiring terms.
This shift was obvious in the first quarter of 2009, although it
has softened in recent months. Clearly underwriters no longer
wish to offer massive limits of liability at minimal premiums.
Property/
Business Interruption Coverage
These risks are separated into two distinct groups: risks in
areas that suffer catastrophic perils such as Quake, Wind
and Flood and risks in areas that do not. Those that do not
suffer such perils are termed Non Catastrophic areas. Non
Catastrophic areas have enjoyed a flat market with stable
premiums. There is still a relatively high level of capacity
in the market which means that despite the carriers’ loss of
investment income, rates have not hardened.
The opposite is true of areas that are prone to Catastrophic
Perils. Ports, Shipyards and Terminals are, by their very
nature, on the waters edge and first to suffer in a catastrophe
in areas such as the US Gulf Coast. The capacity for such risks
has certainly diminished this year. A number of London based
insurers have already committed their capacity and are no
longer able to provide any additional cover.
Willis Airline Insurance Insight August 2009
Another factor pushing up premiums was the alleged lack of
capacity in the non-marine market. This led to an increase
in premiums for Property and Business Interruption risks in
the first half of this year. It seems that the perception of the
market’s capacity was not the reality. In other words, there was
more capacity available than originally thought. Earlier this
year, insurers took a hard-line on rates but in the latter half
of the year their approach has slightly relaxed.
Personnel
Within the London market there have been some recent
moves: the Marine Liability underwriter at Catlin moved to
Ascot and the underwriter at Allianz left to join an underwriter
who has moved back to the UK from Singapore and is likely to
focus on Ports and Terminals.
We have also seen the departure of the whole underwriting
team from ITMU who are moving to the Kiln Syndicate
in Lloyd’s. As a result of this departure ITMU closed its
doors for new business on August 31. They will continue to
service accounts they currently write until natural expiry.
Conclusion
Marine Liabilities is a specialized area within marine.
On some risks such as Ports and Terminals, non-marine
underwriters will compete for the business. If not handled by
a specialist broker, this can often lead to gaps in cover such as
Vessel Impact and Blockage of Channels etc. Unfortunately,
such gaps are often only discovered at the time of a claim.
In summary, the market attempted to increase premiums in
the first half of 2009, particularly for high level capacity and
Catastrophe prone property coverage. Now, it seems such
increases have stabilized. Although there is a chance that 2010
may bring further increases, the market is currently stable.
Willis Marine Review November 2009 9
 Cargo

it’s still a buyer's Market

We are deep into a global recession with huge reductions in trade
volumes, low commodity values, companies consolidating or closing
down - yet there has never been a better time for those purchasing
cargo insurance.

The increase in global cargo underwriting capacity and the perceived

profitability of the sector has created a competitive market place. Not
only is the market very competitive on price but insurers are willing
to negotiate and provide wider coverage, deductible buy-downs and
long term deals. Insurers hope that this will differentiate them from
competitors and grow their business.

buyer beware
It should be noted however that such a competitive environment can
create its own problems. The pursuit of low priced deals can lead to a
compromise on the quality of security, not only financially but also in
terms of service and approach to claims.

The pressure on brokers and agents to deliver on budgets, can lead to

those less attentive to regulation and compliance cutting corners and
compromising standards.

Market confidence has been boosted by the lack of any single major
catastrophe in recent years. However, the last 12 months has seen
a noticeable increase in the number of reported losses, not an
unexpected development in a recession.

The increase in attritional losses will undoubtedly have an impact but

initially the effect will be account specific, especially on those policies
where the risk has been transferred from the balance sheet to low
priced insurance.

A noticeable development has also been that manufacturers and

distributors have attempted to transfer more risk into the supply
chain by way of specific contracts with forwarders and carriers.

Over the last 12 months we have witnessed an extremely volatile

commodity market with prices peaking in August 2008 and then
dropping off dramatically by the end of the year. The demand for
cargo insurance, however, has achieved a greater profile as financial
institutions become more risk averse.

COMMODITY PRICE INDEX 2005 = 100

(Includes Fuel and Non-Fuel price indices)
205.0072

193.6726

182.3380
Index Number

171.0034

159.6688

148.3342

136.9996

125.6650

114.3304

102.9958

91.6612
Nov-08

Jul-09
Jun-09
Jan-09

Apr-09
Aug-08

Mar-09
Oct-08

Dec-08
Sep-08

Feb-09

May-09

The above chart represents a Commodity Price Index of 100 in 2005:

the index dropped by almost 100 points between August 2008 and
February 2009.

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Commodities Cargo Clauses
In January 2009 new Institute Cargo Clauses were
Oil
released, although the 1982 clauses are still available
There has been a significant drop in trading activity which
and in widespread use. The only clauses revised to date
has led to lower premiums and difficult renewals. In 2008
are the general cargo clauses, (ICC(A),(B), (C)) and
oil peaked at an unprecedented USD 147 and a few months
relevant War and Strikes Clauses. Specialist Clauses
later hit a low of USD 38. The price is likely to remain
(Frozen Food, Frozen Meat, etc.) are to be reviewed over
around USD 60 to USD 80 for the foreseeable future,
the coming months.
resulting in lower shipment and storage values.
There have been many improvements to the clauses
Metals
enhancing cover, updating outmoded phraseology and
The metals market has also suffered a downturn but
correcting anomalies. None of these changes should be
it has not been as volatile as oil. For some metals, tin,
detrimental to the assured. Full details of the changes are
lead and nickel, the prices have actually been higher
available on request.
in 2009. Overall premium levels have been relatively
stable because although shipments and sales are down,
Rotterdam Rules
companies are increasingly storing metals as they wait for
This UN Convention was signed in Rotterdam on
an upturn.
September 23, 2009. It will not take immediate effect.
Soft Commodities Once 20 countries have ratified the convention it will
Certain major crops such as grain and coffee have officially come into force.
dropped in price, whereas cocoa and sugar have seen
The essence of the Rotterdam rules is to provide a
their price increase in the last 12 months. The price of soft
consistent door to door liability standard, in contrast to
commodities is determined not only by demand, but also
the current variety of contractual terms. The scope of this
weather conditions and the resulting crop.
convention is wider and will therefore include operators
The placing and pricing of cargo insurance for such as stevedores and road carriers. It is not clear how it
commodities is largely unaffected by the economic will work with other international conventions (CMR).
downturn. The cargo market is specialized due to the
The underlying financial liability is higher than Hague
varied nature of the products covered and also because
Visby at 875 SDR per package or 3 SDR per kilo as
claims tend to be frequent and often protracted.
compared to 666.67 SDR per package and 2 SDR per kilo.

Major Losses The Convention is complex and offers fewer defences to

The cargo market has enjoyed a relatively quiet claims the carrier. Lawyers will need to be involved in providing
period during the past 12 months. advice, guidance and eventually claims litigation.

The automotive sector has been the exception with a
large hail loss in the United Arab Emirates. The claim is
currently estimated to be in excess of USD 70m; the risk
was largely reinsured in the London Market. There have
been further million dollar losses in France, Germany and
Holland due to windstorm and hail.
The most important single element of this convention is
contained within article 80 “volume contracts” which will
allow freedom to contract on a more restricted basis of
liability. The implication of article 80 is expected to
be profound.
It is anticipated that when the new convention is
enforced there will be a considerable impact on shippers,
forwarders, NVOCCs, terminal operators, stevedores,
and carriers.

"The most important single element of this convention

is contained within article 80 “volume contracts”
which will allow freedom to contract on a more
restricted basis of liability. The implication of
article 80 is expected to be profound."

Willis Airline Insurance Insight August 2009 Willis Marine Review November 2009 11
 CARGO — THE MARKETPLACE
U.K./Europe
In the UK the market continues to grow and Catlin
headed by Ryan Godfrey and his team formerly from
Allianz are the latest entrants. In a tactical move, AXA
have relocated senior underwriter Mathieu Daubin from
their Paris Head Office to London.
Zurich has announced its intention to strengthen its
market presence starting with the employment of Lee
Meyrick as Global Marine Practice Leader. They have also
just secured the services of Darren King, John Gibson and
Rod O'Malley from Allianz.
Montpelier Re has entered the Cargo market headed
up by Gordon Fry previously of Swiss Re. Marketform
has followed suit, led by Nick Holding formerly of
Factory Mutual.
In Europe the acquisition of Fortis by Amlin has provided
some welcome stability to the market. RSA continue
to expand their marine specific operations in Europe;
they are already established in Belgium, France, Germany,
Holland and Spain.
Americas
Despite the issues surrounding AIG (now rebranded
Chartis) the North American market is undeniably stable.
Marine Cargo remains profitable. Most of the traditional
carriers such as Allianz, Firemans Fund (now rebranded
Allianz), XL, ACE, Travelers, Navigators and Starr Marine
are expanding by aggressively seeking to retain and
regain their domestic accounts and by extending coverage
to include risks such as stock and processing and
retail locations.
In Brazil the liberalisation of the market is presenting
its own challenges. The opportunity to access overseas
markets is proving very attractive to a growing economy
and the influx of investment by overseas capacity has
begun in earnest.
Asia
Underwriting results continue to prove favourable for
most cargo underwriters and according to the monetary
authority of Singapore the gross loss ratio for domestic
business in 2008 was 50%.
Premium income has been affected dramatically by the
falling commodity prices, the global demand for consumer
goods and competitive pricing which has had the effect
that the newer and more opportunistic underwriting
operations are reviewing their strategy in the market.
There is regulatory legislation in the pipeline to offer
some protection to local insurers against competition
from overseas markets.
Middle East
The Middle East continues to be an important marine hub
for shipping movements between Asia and Europe. There
is however an inevitable slow down in the development of
Willis12Airline
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Insurance
Marine Insight
Review August 2009
November 2009
the region’s cargo markets due to the substantial drop in
cargo premiums and reduced commodity prices. In recent
years many insurers have selected Dubai as a location
of opportunity but there is also an increasing awareness
of cultural issues. Examples of this include the first
dedicated retakaful company, Takaful Re, and Creechurch
Underwriting forming the first Lloyd’s syndicate to be
managed in accordance with Islamic Shari’ah principles.
personnel
In addition to the personnel changes already mentioned,
the following show that the movement of staff in the
global cargo arena continues at a rapid pace:
In Singapore
Judith Finlay of QBE transfers from London, Scott Sykes
of Argenta transfers from London, Colin Robinson moves
from Marsh to Watkins, Said Kahn leaves Watkins for
Amlin, Phil Webster returns to Singapore with Allianz,
David Burns leaves Alba for AXA and Ian Pettican leaves
Allianz for Willis.
In London
Penny Gray leaves Marsh to take up an underwriting
position at CV Starr, Richard Costain leaves CV Starr for
Liberty, Glyn Caley left Markel and is now with Swiss Re,
Geoff Wilkinson moved to Swiss Re from Novae.
Outlook
The increase in premiums generated by the commodity
sector last year provided a buffer to underwriters from
the underlying downward trend in rating levels, however
in recent months following the reduced commodity
prices and trading activity the position has changed with
underwriters now seeing a significant shortfall on their
2009 budgets.
This has resulted in underwriters focusing attention
on profitability and their non-commodity portfolio and
a recognition that cargo rates need to stabilise going
forward, although at the time of writing there seems little
evidence to support this.
In an ironic twist we have a climate where stock levels
are generally dropping (with a reduction in the demand
for capacity) and a world cargo market capacity that
is increasing, a by-product of this is the accelerating
trend towards domestic placements where the levels of
capacity offered are now more than sufficient. Although
it is believed that many of these risks are being written
at an unsustainable level and we expect that these risks
will once again return to the Specialist Global markets in
Continental Europe, London the United States and the
regional hubs of Asia and the Middle East.
To summarise, the Cargo market continues to offer cover
and capacity at historically low rates and is predicted to
continue this way (catastrophes permitting) at least in the
short term.
letter froM singapore
In Asia there seems to be a growing divide I truly believe this is a natural process a
between owners who are confidently ‘gearing maturing market must face…underwriters
up’ for the future and those who are simply who commit resources and capacity over the
struggling to tread water. Media reports long term to the region will benefit hugely as
of new venture capital here are equally the Asian markets recover.”
matched by ones of asset seizures - and
This faith in the Asian market is also held by
certainly several high profile operations
many other underwriters. As a result, more
unable to fulfill their financial obligations
underwriters are entering the market and
have been caught short. However, several
increasing the market capacity, such as
new Asian bulker operations have been
Atrium entering Lloyd’s Singapore with
set up and there has been considerable
Richard Young. Following the resignation
sale and purchase activity in the smaller
of Richard Yeo from the Argenta managed
containerized sector over the summer
syndicate AMS 1965, Paul Hunt was
months. Specialist ‘Lay Up Managers’ have
installed as Active Underwriter. Also,
emerged and the old insurance ITC Port Risk
Argenta 2121 set up their own syndicate
Clauses have been dusted off for those who
with Scott Sykes moving from London as
are either cost cutting or taking advantage
Head of Underwriting. Other moves to note
of the current low vessel values ahead of the
include the departure of Mark Trevitt from
future upswing.
Travellers; Said Khan moved from Watkins
The mid summer rally in the dry markets to Amlin, to be joined by Colin Robinson who
had looked promising but lay up locations in moved from broking to Amlin to become the
South East Asia are still in high demand. The new cargo Underwriter. Nick Sansom returns
southern Singapore coastline is inundated to P&I underwriting, replacing Robert
with record tonnage of all types awaiting Drummond at the Standard Club, who moves
charter. Such laid up vessels mean one thing back to London.
to insurance underwriters: less premium.
Of the top ten insurers in Singapore (by
Low vessel values continue to do nothing to
Gross premium written) there are four who
rally investment income and although there
major in marine: ACR, First Capital, AXA and
is much talk of increased claims the annual
now Lloyd’s Asia. First Capital are by far the
IUMI rally for substantial premium is likely
largest hull underwriters and AXA by far the
to go unfulfilled again. The results of this are
largest cargo underwriters. It is difficult to
obvious to all, but continued competition
judge the overall market facultative capacity,
and capacity in the insurance markets means
especially given that some underwriters
brokers continue to achieve preferential
are now far more cautious with line sizes.
terms despite some owners’ poor results.
However, capacity is such that it would now
Mathew Cannock of Catlin, and Chairman be possible to place a USD 80,000,000 hull
of the newly formed Lloyd’s Asia Marine and a USD 400,000,000 cargo risk in the
Committee, suggests that Lloyd’s Syndicates Asian market.
here have become more realistic about their
Willis Marine has strengthened its teams in
written premium expectations over the
both Singapore and Hong Kong: Ian Pettican
past twelve months. In 2009 there has been
(ex Allianz) and Cheryl Tan (ex Marsh) have
a notable reduction in the number of new
joined the Cargo team. Darren Rowland
start ups. Despite this, Catlin are further
moved from London to Hong Kong.
increasing their hull operation in Singapore
with another underwriter joining shortly. In such a challenging market it is difficult to
Many of the syndicates prefer writing Cargo provide an interim forecast: underwriters
business. As a result, the Asian market has say they need more money and owners,
seen some competitive decision making but looking for support in troubled times, simply
this year the larger cargo programmes have don’t have it. Hull leaders are likely to quote
been rated as competitively, if not cheaper, single digit rises for owners with marginal
in London. results but will demand substantially more
from those with poor records. Cargo is
Market leader Mike Davis, CEO of AXA
more flexible: the largest reduction in the
Corporate Solutions in Asia now runs three
cargo market this summer was 30% on
marine hub offices in Asia. He says, “It is true
good figures. So, a good broker is essential
that increased competition in the region
in order to take advantage of the available
has negatively affected the profitability of
underwriting capacity in Asia.
the (cargo) segment to the extent that some
of the newer and or more opportunistic
operations are reviewing their strategy,

Willis Airline Insurance Insight August 2009 Willis Marine Review November 2009 13
 piraCy

In the last 12 months there has been a well publicised surge in the
number of pirate attacks in the Gulf of Aden. In 2009 alone, there
have been over 130 reported pirate attacks off the coast of Somalia
and 28 ships have been seized. Although there was a lull due to
bad weather, since the southwest monsoon ended there has been a
resurgence in the number of pirate attacks. Furthermore, as many
vessels have recently been ransomed and released, it would seem
likely that the pirates will attempt more attacks to replace these
vessels.
Piracy is not confined to the Gulf of Aden. There has been an increase
in reports of pirate attacks in Brazil, Nigeria, Malacca Straits,
Thailand, Vietnam and the South China Sea. Notably, the number
of reported attacks is far less than the number of actual attempted
attacks. Some commentators believe that the success of the Somali
pirates has inspired criminal elements globally; while others argue
that piracy is very much a local problem, driven by local issues, the
most significant of which is poverty.
Nigeria is another African piracy hotspot. In the Niger Delta attacks
are often led by the group MEND (Movement for the Emancipation of
the Niger Delta). The groups are very well armed and well-connected:
it is suspected that they have contacts within the oil and shipping
industry. Yet the situation in Nigeria is more stable because there is a
semi-functioning state. The Nigerian navy work together with private
security to protect vessels. Although the types of attacks in Nigeria
are very different from Somalia, they are still a form of piracy and are
further evidence of this global phenomenon.
Piracy is constantly evolving. Somali pirates have now adapted
to the safety measures taken by ship-owners, the introduction of
the Internationally Recommended Transit Corridor (IRTC), and
the fact that the crew are often worth more than the cargo. Also,
modern pirates have taken advantage of modern technology. Pirates
communicate with radios and mobile phones, they use modern
weapons, and they can even use the internet to evaluate the worth of
their ‘booty’.
Since the adoption of the IRTC pirates have attacked vessels further
out at sea, over 800 nautical miles off the coast of Somalia and East
Africa, as well as in the Red Sea, the Straits of Bab El Mandeb and off
Oman. In fact in the East Somali Coast/Indian Ocean region, data
from Maritime & Underwater Security Consultants (MUSC) shows
that 75 attacks have occurred in 2009 – a 625% increase from the 12
reported attacks in 2008. By attacking in a variety of locations and at
extreme ranges, pirates avoid the Combined Maritime Forces (CMF).
Also, at these distances the Masters of the vessels are lulled into a false
sense of security and reduced alertness and readiness.
Most attacks occur in the early morning or evening. Small fast boats
(skiffs) approach a vessel and then attempt to board the ship with
ladders, grappling irons or poles. The pirates are armed with assault
rifles (AK47s) and rocket propelled grenades. Skiffs are capable of
speeds of between 20 and 40 knots. When not being used the skiffs
are often towed behind mother ships. Often the mother ships look like
fishing vessels and the pirates use designated fishing areas as cover.
Thus, it is often difficult to tell the difference between fishermen and
pirates. Alternatively, the skiffs can be launched from the beach.

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Marine Insight
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November 2009
“Piracy is not confined to the Gulf of Aden. There
has been an increase in reports of pirate attacks in
Brazil, Nigeria, Malacca Straits, Thailand, Vietnam
and the South China Sea. Notably, the number of
reported attacks is far less than the number of
actual attempted attacks. Some commentators
believe that the success of the Somali pirates has
inspired criminal elements globally; while others
argue that piracy is very much a local problem,
driven by local issues, the most significant of which
is poverty."

Most attacks occur in the early morning or evening. Small
fast boats (skiffs) approach a vessel and then attempt to
board the ship with ladders, grappling irons or poles. The
pirates are armed with assault rifles (AK47s) and rocket
propelled grenades. Skiffs are capable of speeds of between
20 and 40 knots. When not being used the skiffs are often
towed behind mother ships. Often the mother ships
look like fishing vessels and the pirates use designated
fishing areas as cover. Thus, it is often difficult to tell the
difference between fishermen and pirates. Alternatively,
the skiffs can be launched from the beach.
The pirates have been most successful against vessels
that are travelling at a slow speed and have a low
freeboard. Other factors that make crews and vessels
vulnerable are where there has been inadequate planning
and procedures; where the vessel is in a visibly low state
of alert and where a slow response by the ship is evident.
In situations where the crew have responded rapidly and
have prevented the pirates from boarding, the pirates
have often given up quickly, and attempted to find an
easier target.
Since the NATO and EU counter-piracy missions were
launched in the Gulf of Aden, there have been several
foiled pirate attacks thanks to the presence of the navies.
If the navies arrive in time, then the mere presence of a
helicopter can deter the pirates, but there is not always a
navy vessel close enough to respond.
The area off the coast of Somalia and Kenya combined with
the waters of the Gulf of Aden equals more than 1.1 million
square miles. Thus, a navy vessel will not always arrive in
time and once the pirates have seized a vessel there is no
easy way to regain it. In such situations, the crew of the
vessel are the first line of defence.
There are multiple examples where the crews’ actions
have foiled an attack. In May 2009 the DUBAI PRINCESS
managed to hold off pirates with water cannons until the
nearest navy vessel arrived. Such incidents demonstrate
that with basic preparation and training it is possible to
significantly reduce the chance of a successful attack.
Some have argued that such anti-piracy training should be
considered standard for the crew prior to a Gulf of Aden
transit, so that the vessel be considered ‘seaworthy’. In
The Marine Insurance Act (1906), Section 39 provides the
following definition: “A ship is deemed to be seaworthy
when she is reasonably fit in all respects to encounter the
ordinary perils of the seas of the adventure insured.” Thus,
it could be claimed that anti-piracy training is required for
the vessel and crew so that they are ‘deemed fit’ to meet
the perils of the Gulf of Aden. Such training motivates the
master and crew and has proved to be the best defence
against pirates. Training and drills, as highlighted in the
“Best Management Practices to Deter Piracy in the Gulf
of Aden and off the Coast of Somalia Feb 09” mean that
the crew are ready to respond. As highlighted earlier, such
responses mean that the pirates often withdraw their
attack in search of an easier target.
Simple physical measures can also deter pirates. Options
include: water cannons, barbed wire, and greasing or
electrifying handrails. The crew can be provided with
equipment such as Kevlar jackets and simple detection
equipment. Minor adjustments can help dramatically.
For example, most attacks are from aft, yet this is where
radars often have a ‘blind spot’. Such vessel hardening
is not excessively expensive and can prove to be a very
economical investment, especially when the worst case
scenario is considered.
Another measure that many ship-owners have considered
is armed guards on board. However, most Underwriters
warn against using armed guards and it may in fact
prejudice ship-owners’ insurance cover. There is a risk
that armed guards will fire upon innocent fishermen.
Apart from the unnecessary loss of life, this would cause
complications for the ship-owners and raise serious legal
issues. Moreover, there is also a risk that by using arms, the
level of violence will escalate and the pirates will use ever
more potent weapons. There are also several legal issues
with carrying arms on board: Flag State and Port State
restrictions and licensing requirements.

Willis Airline Insurance Insight August 2009 Willis Marine Review November 2009 15
 Once a vessel is taken, there are various costs incurred,
among them: consultant fees, transport of ransom, lawyers
and counselling for the crew. Obviously, the ransom is the
most publicised cost. Recently, negotiations with pirates
have been drawn out for longer. In the example of the
HANSA STAVANGER, the pirates held the vessel for four
months and changed their negotiator several times, often
reneging on agreements and increasing their demands
Ransoms have tended to range from USD 500,000 to USD
2 million. However, with high profile vessels such as the
SIRIUS STAR, the pirates have demanded more. Reports
suggest that USD 3 million was paid for this Saudi oil
tanker in 2008.
Another cost that should be considered is the Loss of Hire
or Earnings. A normal Loss of Hire insurance policy only
covers a Loss of Hire due to physical damage. Therefore,
piracy is unlikely to be covered.
Most costs are usually covered under a ship-owners’
Hull and Machinery, War, or Protection and Indemnity
policy. Previously ship-owners have recovered money as
a ‘General Average’ expense from cargo, though the case
of the MALASPINA CASTLE has now challenged this
assumption. In this recent case, the Hangzhou
Cogeneration Import and Export Co, China had engaged
Navalmar’s vessel MALASPINA CASTLE to ship a cargo
of iron ore to China. The vessel was hijacked by Somali
pirates while en route to China and was released after
payment of a USD 1.8 million ransom. The ship-owner
faces an additional cost of USD 2 million for negotiating,
delivering and insuring the ransom in transit as well as
potential claims from the vessel’s crew.
Ship-owners generally pay the ransom and additional
costs upfront and then seek pro rata reimbursement from
all parties involved under the law of General Average.
This principle equitably apportions costs resulting from
voluntary losses incurred to save a vessel in distress. In the
case illustrated above, Hangzhou is disputing its
share of the total costs. Even when there is cover, there
have been cases where there is a significant delay and it
has taken longer than a year for underwriters to reimburse
the insured.
In order to avoid such conflicts and ensure cover, many
ship-owners have chosen to take out specific coverage for
the risk. This additional cover not only brings peace of
mind but also ensures that there are no gaps in cover.
Willis has worked with Special Contingency Risks Limited
(SCR) and Maritime & Underwater Security Consultants
(MUSC) to provide a product called Vessel Shield™. This
product not only covers ship-owners for the ransom
payment and all additional related costs, but it also seeks
to mitigate the physical security risk as well, putting in
place wide-ranging measures to train the crew, protect the
vessel and plot the safest possible route through areas of
pirate activity.
Although Vessel Shield™ counters many of the problems
that ship-owners and their vessels face due to the threat
of piracy, it does not solve the problem of piracy itself.
Piracy in the Gulf of Aden is inextricably linked to the
problems of Somalia. The failed history of the US and UN
peacekeeping missions in Somalia and the lack of political
will means there is no impetus for intervention.
Nor is there any urgency for action: as the pirates in the
region are proving to be commercial opportunists and are
predominantly peaceful. However, in September 2009 off
the Somali coast, there was an incident where the captain
was shot dead because he refused to change his course. It
is likely that this will remain an isolated incident and that
pirates will refrain from violence because they are well
aware that executing hostages makes payment of ransom
far more difficult to secure. Therefore, the saga of piracy
and the instability in Somalia is likely to continue.

"Vessel Shield™ counters many of the problems

that ship-owners and their vessels face due to
the threat of piracy"

Willis16Airline
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Insurance
Marine Insight
Review August 2009
November 2009
 contributors

Editorial Committee
Richard Close-Smith
Catherine Cartwright
Katherine Parsons

Contributors
Alistair Rivers
Andy Bugler
Ben Abraham
Katherine Parsons
Lewis Hart
Neil Macnaughtan
Nigel Brunning
Paul Harcombe
Richard Close-Smith
Trevor McGarry
Aidan Meldrum

Willis Airline Insurance Insight August 2009

Willis Limited Brian Fuller
Willis Marine One World Financial Center
Contacts and Addresses: 200 Liberty Street, 7th Floor
New York, NY 10281-1003
Alistair Rivers Tel: +1 212 915 8888
Andy Bugler
Neil Macnaughtan Jim Currier
Suite 200, 505 Union Station
The Willis Building 505 Fifth Avenue South
51 Lime Street Seattle, Washington, 98104
London EC3M 7DQ Tel: +1 206 386 7400
Tel: +44 (0)20 3124 6000
Fax: +44 (0)20 3124 8223 Veit Metzroth
Suite 900, One Bush Street
www.willis.com San Francisco,
California, 94104
Tel: +1 415 981 1141
Jim DeLeeuw
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Suite 2200B, Novi
Michigan, 48375
Tel: +1 248 735 7580
Bill Rose
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Suite # 301, Fairfax,
Virginia, 22030
Tel: +1 703 591 0093
Willis Limited, Registered number: 181116 England and Wales.
Registered address: 51 Lime Street, London, EC3M 7DQ.
A Lloyd’s Broker. Authorised and regulated by the Financial Services Authority.
7853/11/09
Nigel Brunning
Suite 1600, The Poydras Center
650 Poydras Street, New Orleans
Louisiana, 70130
Tel: +1 504 581 6151
Lewis Hart
78 Shenton Way
# 23-02/03
Singapore, 079120
Tel: +65 6221 9877
Patrick Chow
3502 The Lee Gardens
33 Hysan Avenue
Causeway Bay, Hong Kong
Tel: +852 282 70111
Xiao-Jun Lin
10/F, UC Tower, 500 Fushan Road
Pudong New Area Shanghai
200122, China
Tel: +86 21 3887 9988
Claudio Brichetto
Piazza Dante, 7
Genova
Italy
Tel: +39 0105 46711