Gallagher Hull and Machinery Marine Insurance Global Report July 2023: Expert Summary

Gallagher Specialty's latest marine insurance report, Hull & Machinery Insurance Market Update H1 2023¹, outlines key trends and analysis of factors to be aware of over the coming year. The good news: in spite of the potential for claims inflation, premium cost remains relatively stable. The bad: political and economic instability mean conditions are highly vulnerable and could change overnight.

While reinsurer renewals in this market have been difficult this hasn't had a direct flow-on to insurer premium pricing for marine clients, despite potential cost increases due to claims inflation and rising reinsurance costs.

"The key thing for owners to consider at this point is where the market will likely be in 12 to 18 months," says Mark Rudman, Gallagher Head of Marine in Australia. "While we are seeing some flattening in the market with inflationary pressures easing, the global macro environment still remains challenging."

The issues that will influence hull and machinery insurance availability and terms, Mark believes, include:

• whether inflation will push the loss ratios back to a level which makes hull business unprofitable
• if the increased cost of reinsurance and bigger net retentions starts to bite
• if we see an increased frequency of serious claims
• if the trend of fewer major incidents is generally reflective of higher safety standards across the industry
• how a downturn in the buoyant shipping markets impacts on the overall performance of the global fleet.

Marine insurance market analysis: key insights

Stable premium costs

Extra capacity and increased appetite generally in the market have been enough to dampen any concentrated increase in rates, and the pressure on reinsurance renewals has so far had little impact on the direct market.

A continued reduction in major casualties has also contributed to flat premiums.

Number of losses down

Shipping losses hit a record low in 2022 with only 38 total losses of large ships reported globally, down from 59 the previous year. This is the lowest number in the 12 year history of the report, according to the Allianz Global Corporate & Specialty SE Safety and Shipping Review 2023².

"We expect more fallout from the US credit crunch and consumer demand diminishing as China's exports have come down significantly — one of the largest contractions in modern times — in large part because the US, Japan, Germany and India are shipping less for the same reasons," Mark says.

Machinery damage and higher incidence of fires

The potential for major fires³ on container ships due to incorrectly declared cargo remains a risk the industry is struggling to manage. Similarly the risk associated with lithium batteries on car carrying vessels is another area of concern.

The perilous risk exposures for marine operators

War risks

There haven't been any recent attacks on shipping but the claims associated with vessels which were blocked in Ukraine were significant and contributed to the reinsurance market largely excluding Russia, Ukraine and Belarus.

"Visits to Black Sea ports are expensive, but trade continues and insurance is required," Mark comments. This can involve recent changes to terms in key policy clauses concerning cover for vessels visiting political hot spots and perils such as war, piracy or terrorism.

Dark fleets

Vessels engaged in activity which is in breach of sanctions may have substandard insurance or potentially no insurance at all. These may be older vessels from less well known flag states.

The potential impact of a major oil spill from an uninsured vessel is serious because ultimately there may be no-one to pay the clean-up and salvage bill. Even on a smaller scale the lack of insurance for these vessels would have an impact on the chances of any recovery for an innocent party if a collision did occur. Adding to this risk the use of AIS (automatic identification system) spoofing seems to be on the increase.

Piracy resurgence

After a year on year decline in piracy activity in West Africa there has been a sharp increase in incidents including hijacking of vessels and kidnapping of crew⁴.

"Concern for crew safety is becoming more and more prevalent as a genuine risk factor for underwriters to consider," Mark notes.

How Gallagher can assist marine operators

The Gallagher specialist Marine team advises marine clients in navigating insurance and risk market volatility and changing conditions, and in providing timely responses and necessary information for assessing the global macro environment — which is an integral part of the Gallagher Marine service offering.

"While widespread reductions in premium are not on the table, some fleets that have performed well over a number of years may start to see rewards in underwriting terms.

"Our strong relationships with underwriters and long term view of the composition of a hull placement is generally the most effective way to approach the market, and we encourage owners to bear this in mind," Mark says.

View the Report