Marine market responds to stressed catastrophic property coverage

A recent Wall Street Journal story proclaimed, “As Hurricane Season Begins, Disaster Insurance Runs Short.” Indeed, the stark headline in the July 10 article mirrors the market reality: There is a severe lack of available property insurance for catastrophic risk, because of heightened hurricane activity during the past two years.

The infamous Hurricane Katrina accounted for historic losses — irrespective of damage sustained from the chain of severe hurricanes that began with Charley in August 2004 and continued through Wilma in October 2005. Consequently, very large property programs with substantial cat exposures are finding it extremely difficult to obtain sufficient capacity in the marketplace, particularly those with renewal dates later in the calendar year.

This post-Katrina industry crisis has expanded beyond U.S. shores to affect coverage availability and pricing conditions in the Caribbean and the Yucatan Peninsula, and will likely continue to affect renewal periods through 2007. And this year’s hurricane outlook is no more promising than that of the previous two seasons. Increasing numbers of companies, unable to secure even adequate levels of coverage, are faced with programs carrying numerous exclusions, high deductibles and unprecedented pricing.

The marine market, although not immune to severe weather and other catastrophic occurrences, has not suffered to the extent of the mainline commercial property sector. As such, industry players have sought to fill gaps in coverage by revising the solution for meeting cat coverage market demands. Marine markets are offering a viable supplemental choice for stock inventory by employing stock through-put programs (STPs), which provide a more favorable coverage option that, in essence, fill the void left by traditional programs.

Stock through-put programs are not entirely new vehicles, having been used for some two decades. Moreover, STPs can trace their origin further back to a program known as manufacturer output policy, or MOP. Available for more than 40 years, MOPs were originally developed as an alternative option providing seamless coverage through every level of the manufacturing process, from raw materials to warehouse distribution.

Today’s STPs have emerged as a viable vehicle for companies looking to secure cat exposure coverage on more favorable terms, especially companies looking to mitigate huge increases in premiums for cat exposures (typically wind and earthquake risk). STP programs are not only being used within the United States, but are being underwritten worldwide through a marine cargo facility for a diverse range of companies seeking mid- to large-size coverage limits on an aggregate basis.

STP terms can and should be structured to meet the specific needs of a company, but generally encompass an ocean cargo program along with inventory coverage that spans a business’ progression including the raw materials stage through processing, manufacturing and transporting to the end delivery point. STPs can be written to address a range of coverage limits. In each situation, the stock through-put coverage offers a program of totality with attractive rates and deductible options for cat exposures.

The reinsurance market’s response to STPs validates the program’s viability. The marine market, with the exception of offshore Gulf oil rigs, was not as affected from a treaty reinsurance perspective as was the property market. As such, there remains a great deal of available capacity in the cargo market that can be offered for stock through-put programs (although some underwriters are beginning to fill their cat capacity as the year progresses).

Recent estimates suggest that it is possible for a single company to obtain $200 million-plus of capacity for a stock through-put program. Alternately, industry developments indicate that only an estimated $100 million to $150 million of capacity is available industry-wide for traditional property cat coverage.

Marine underwriting is an industry specialty that offers many distinct program components to meet a growing diversity of coverage needs, such as risks associated with shipping concerns, vessel inventories and related manufacturing companies. It is appropriate that this dynamic sector has substantially expanded the use of stock through-put programs as an innovative vehicle to augment the ever-expanding gap in cat exposure coverage options that is affecting so many of today’s corporations.

Gary R. Moore is a principal at Integro who leads the Marine Practice. He is an insurance brokerage professional with more than 35 years of industry experience in the United States and London. Phone: 212-295-5570. E-mail: gary.moore@integrogroup.com.

Topics Catastrophe USA Property Hurricane Manufacturing