Cargo update: A stable market in an unstable world

The cargo market is stabilising for now. But as the war in Ukraine intensifies and ports and global supply chains reach breaking point, it’s unlikely we’ve seen the last of tough conditions.

Read on to get our view of the market and the key challenges insurers, brokers and clients are up against.

The current cargo market

New players in 2021 help steady the ship

The London cargo market continued to stabilise in 2021. The average rate rise decreased from around 23% at the beginning of the first quarter to around 3% at the end of the last quarter.

Following two years of hard market conditions, insurers tried to sustain the large rates of the previous 18 – 24 months, but new entrants to the market made it impossible for them to do so.

This doesn’t mean a return to the lows of the 2016 soft market, but there is more certainty around pricing and more options for insureds, especially where there are large turnover changes. The market is starting to see the benefit of rising commodity prices and economic recovery stimulating growth.

There are several new entrants to the market, including:

• HDI
• Starr
• IQUW Lloyd’s Syndicate
• Ocean
• Navium
• Syndicate 4321 (Beazley-backed ESG Lloyd’s Syndicate).

Many insurers are now writing increased lines

It’s now more achievable to place a vertical limit of USD 700,000,000+ in the London market at far more favourable pricing than years gone by.

Primary placements and small to mid-sized risks are flat, but larger programmes can achieve improved pricing. It’s just a case of restructuring excess layers, so that underwriters are comfortable with their attachment point. Clients are then more accepting of the price they get, and underwriters can be satisfied with both price and structure.

There were a number of losses in 2021, but the majority of London insurers believe that while these losses were damaging, most insurers benefitted from remediation carried out on previous years. Had insurers been writing on the same terms and pricing prior to 2017, the impact from attritional losses would’ve been far greater.

In recent weeks the Cargo Market has experienced two notably large losses: The Walmart fire of 16 March 2022, which estimated to be USD190,000,000. The fire and subsequent sinking of the of the Felicity Ace, which estimated to be EUR200,000,000. These losses are likely to slow down the softening of the market as we expect insurers to try to maintain as much rate as possible.

Supply chain disruption

2020 pushed supply chains and ports to their limits

At the start of the coronavirus pandemic, it was unclear what the impact of lockdowns and border closures would have on the world economy. Shipping lines took a cautious approach and started withdrawing capacity – a practice known as ‘blank sailing’.

But cargo volumes and demand for container goods stayed strong, so freight rates naturally rocketed week after week. In a world soon hampered by pandemic-related restrictions, there was only so much demand and volume global ports and supply chains could take. This disruptive storm then pushed freight rates even higher.

2021 dug the crisis deeper

Sadly, 2021 didn’t bring the respite shippers were hoping for. Port congestion and supply chain bottlenecks are now commonplace and are affecting virtually every region in the world.

The COVID-19 vaccine rollout early in the year did little to ease seafarers and port labour shortfalls. Instead, the supply chain crisis deepened, as cases of COVID-19 forced some Chinese terminals to temporarily close.

The chain of chaos will take a long time to undo

Fewer truck drivers and a lack of warehousing space mean import ports are still facing major challenges to clear the boxes from site quickly enough. Ocean carriers are waiting to enter ports. Sailing schedules are in disarray. And these inefficiencies are stopping workers from accessing container equipment.

In the busy Christmas period, nearly 100 ships were stranded off the shores of Long Beach and Los Angeles waiting to berth.¹ It’s meant container shipping companies are severely short of box equipment, which continues to drive freight rates to record highs. The delays are now overspilling to airports and railway lines, as the pressure to move goods across the mainland continues to mount.

Freight rates and container shortages ramp up risk

The market has seen an increase in attritional losses around perishable goods and supermarket foods going into California. Another growing concern for insurers is that the increase in freight rates and lack of containers has meant companies have increased the amount of high-value goods they’re shipping in each container. Which has increased the insurers’ exposure for each shipment.

This is particularly true for pharmaceuticals – these products are susceptible to theft and it’s also critical to manage their temperature, so the risk is that much higher. While you can manage these two elements of risk with strong operating procedures, it’s impossible to risk manage against third-party drivers causing road traffic accidents. It’s a conundrum that shows just how complex supply chains can be, and exposes those tricky areas of risk that are so difficult to protect.

The war in Ukraine

More shipping, port, and supply chain upheaval

Russia’s invasion of Ukraine on 24^th February 2022 has put even more strain on global supply chains. Over 100 cargo ships are stuck either in or around Ukrainian ports, as the country’s military suspended commercial shipping at its docks after Russia’s invasion.²

The UK has banned Russian ships from calling on its ports, while Maersk, Ocean Network Express, Hapag-Lloyd and Mediterranean Shipping Company (MSC) have temporarily suspended shipments to and from Russia (apart from food and medicine).³

Commercial carriers come under attack

Several commercial carriers have come under fire:

• “Helt”, an Estonian-owned cargo ship sank after an attack. Four crew members were evacuated and two are still missing.⁴
• “Namura Queen”, a Panamanian bulk carrier and “Millennium Spirit”, a Moldovan bunker tanker have both reportedly been hit by missiles.⁵
• “Banglar Samriddhi”, a Bangladeshi-owned cargo ship was attacked, killing one of its crew members.⁶
• “An-225 Mriya”, the world’s largest cargo aircraft has also been destroyed by a Russian attack.⁷

Lloyd’s and global cargo insurers are pulling back coverage

It’s obvious that travelling across the Black Sea is fraught with danger. The Joint War Committee of Lloyd’s and the London Company Markets have already designated war risk areas in Ukrainian ports.

Cargo insurers worldwide have issued Notice of Cancellations for war, strikes, riots and civil commotions in Ukraine and areas in these surrounding territories:

• Russia within 200km of the land border with Ukraine.
• Belarus within 200km of the land border with Ukraine.
• Ukrainian and/or Russian waters in the Black Sea and the Sea of Azov.

Insureds operating outside of Ukraine ports are able to buy back coverage, with rates varying from insurer to insurer. But with the situation being so volatile, quotes are currently only valid for 24 hours and provide coverage for just 7 days.

Commodities shortages and spiralling prices

615,000 businesses worldwide rely on Russian and Ukrainian suppliers, with over 90% of these in the USA.⁸ For now, there’s enough in reserve to mitigate any short-term disruption, but if the conflict persists it won’t be long until demand outweighs supply.

Russia and Ukraine account for a number of major global exports:

• 29% of wheat
• 19% of corn
• 80% of sunflower oil⁹

The situation is causing commodity prices to soar, and they’re expected to spike even further. Many of the poorer countries around the world are all heavily reliant on Ukrainian grain.

It’s no secret Russia is one of the three top producers of oil and accounts for around 10% of the world’s oil supply.¹⁰ Europe alone relies on Russia for about a third of its total oil imports. Cutting off that supply has meant prices have already hit a seven-year high, and they’re still rising.

Hurricane and tornado season

Hurricane season 2021 – third most costly on record

Experts suggested that the 2021 hurricane season would have between 12 – 18 named storms. In reality, it produced 21 named storms, being the third most active and expensive hurricane season on record.¹¹

Hurricane Ida was not the strongest storm of the season, but it was both deadly and destructive as it tore through Jamaica, Colombia, Cayman Islands, East Coast and The Gulf Coast of the US. It contributed to 115 fatalities, causing an estimated USD 75.25 billion damage.¹²

Almost all oil production on the Gulf Coast shut down, including the Colonial Oil pipeline. All of these factors drove up the oil price. While the cargo market felt the effects of the hurricane, the impact was not as severe as when hurricanes Harvey, Irma, and Maria hit in 2017.

Tornadoes are becoming more prevalent

On 10 December 2021, an extra-tropical cyclone, referred to as the quad-state tornado, wiped through Arkansas, Missouri, Illinois and Kentucky, leaving a vast amount of death and destruction in its wake. The loss amount from the disaster is estimated to come in around USD 3 billion.¹³

Historically, the highest frequency of tornadoes in the USA occurs in Texas, Louisiana, Oklahoma, Kansas, Nebraska, Iowa and South Dakota. Research and market losses suggest that Tornado Alley has now expanded eastward and southward.¹⁴

This is having an impact on the insurance market because east of the Mississippi, the populations are bigger and there’s more infrastructure for tornadoes to destroy.

Tornadoes cause more deaths per year than earthquakes and hurricanes combined, and storms creating tornadoes are more than the annual insured losses of hurricanes and tropical storms combined.¹⁵

Building designs need to give tornadoes more consideration

Tornadoes can completely destroy structures in their paths, while other buildings and infrastructure close by remain unaffected. While developers and architects regularly consider other hazards for building designs, they don’t put nearly enough emphasis on tornadoes. Even in the most tornado prone states.

However, the National Institute of Standards of Technology has developed maps that indicate wind speed, and has stated what certain buildings should be able to withstand in miles per hour. The American Society of Civil Engineers is now giving tornadoes some much needed attention and is releasing new building codes in 2022.¹⁶

Insurers are looking even deeper into their exposures

Similarly, over the last few years insurers have been looking at using geo information to try and better understand the damage dynamics of these events, so they can model the risk more accurately.

From a policy wording perspective, London cargo insurers have developed and continue to use the JCC Catastrophe definitions. They allow insurers to aggregate for tornado and straight line winds, making sure the market stays sustainable and can cope with these losses that are showing up more regularly.

Gallagher plays a part in industry alliance helping to tackle forced labour

How the wrongs of the past can remind us to do right today

Between 1761 and 1807, Britain was the leading slaver nation, responsible for transporting 40% of African slaves across the Atlantic.¹⁷ These people were reduced to ‘goods’ and traded like any other form of cargo, and The Lloyd’s Market was the place where ship owners and businesspeople came to insure them.

Lloyd’s has now publicly apologised for its role and has commissioned research to investigate its connection even further.¹⁸

But it’s not just an issue for Lloyd’s to face alone – as members of the industry, we all have a duty to recognise what went wrong in the past and ensure we do everything we can to drive out any exploitation that remains today.

Slavery still plagues our global supply chains

It’s nearly 200 years since the Slavery Abolition Act in 1833, but modern slavery sadly still exists. Anti-Slavery International estimates paint a sobering picture:

• 40 million people are trapped in modern slavery worldwide.
• 1 in 4 of them are children.
• Almost 3 in 4 are women and girls.¹⁹

16 million of these people are victims of forced labour in the global private sector. But it’s probably much more. That figure doesn’t account for victims of state-imposed forced labour, who are still likely producing or manufacturing goods that flow through our global supply chains.

Anti-slavery clauses will help root out forced labour practices

Insurance is a key cog in the global supply chain machine – without the cargo market, for instance, goods can’t be shipped from A to B. So the due diligence process that’s part and parcel of insuring a client and their goods offers a significant opportunity to root out modern slavery practices.

Fidelis and the Joint Cargo Committee have brought the marine cargo insurance industry together to tackle forced labour and modern slavery within supply chains. Policy clauses now make it compulsory for insureds to fulfil all relevant legal and regulatory standards related to forced and child labour.

The insurance market can make a real impact

Charles Mathias, Director of Underwriting at Fidelis, says:

“When we speak to advocates like Anti-Slavery International, they’re passionate about the importance of financial services in addressing this criminal trade worth $150bn a year. If goods can’t be insured they can’t be exported, so there is a real impact that insurers and brokers working together can have on this issue.”

Independent Anti-Slavery Commissioner Dame Sara Thornton praised the initiative in Insurance Insider at the end of last year: “This is an excellent initiative because it gets to the heart of logistics, covering all kinds of transport, shipping and warehousing.”²⁰

Collaborating towards a slave-free future

We’re seeing more and more high profile cases where businesses are now holding their supply chain to account. Dyson recently terminated a relationship with a key supplier after exposing unacceptable labour practices at their factories in the Far East.²¹ And fashion retailer Boohoo face being banned from US exports, as activists continue to campaign against slave-like conditions in one of their UK factories.²²

By coming together and aligning policies and standards, the insurance market can expose similar cases, and play their part in freeing people around the world from slavery and forced labour.

Some final thoughts

Our expectations for the months ahead

We anticipate insurers will look to hold rates and/or premium where possible on primary layers, but alongside restructures on excess layers or re-layering programmes, clients will be better off overall.

It’s still not possible to replace large vertical limits – clients should work with their underwriters to maintain sustainability within the market, so that we don’t see a return to the unpredictability of recent past.

The expectation is that insurers will hold firm when it comes to coverages and will not go back to writing coverage extensions that cross classes. It’s also likely that they won’t want to reduce deductibles to pre-2017 norms.

Your top tips for renewal

• Check the layering structure of your insurance programme at the start of renewal.
• Keep providing underwriters with comprehensive renewal information.
• Meet up with your underwriting panel in person where you can, especially on larger, more complex risks.

On a final note, while there’s a lot of new capacity available, insureds and local brokers will do well to remember those insurers that remained on risk and partnered with them during the hard market. During those times where capacity was at its lowest. Those are the relationships worth holding on to for the long term.