Like life itself, insurance began in the ocean, eventually spawning the various land-based descendants we’ve come to know. While those terrestrial variants-auto, homeowners, commercial liability, among others-now comprise our notion of what the industry is all about, their single ancestor, ocean marine, remains a viable line of coverage, distinct in many ways from other property and casualty areas.
Ocean marine insurance has existed in various forms since around 3,000 BC in China. In 1255, ocean marine premiums were utilized for the first time in Venice to protect against piracy, spoilage and other losses. Lloyd’s of London issued the first actual ocean marine insurance policies as we more or less know them today in 1688. The U.K. ultimately codified laws and regulations pertaining to ocean marine insurance through the Marine Insurance Act of 1906, which proved the biggest influence shaping international marine insurance laws since.
Business or pleasure?
Modern ocean marine insurance covers property damage and liability to both goods being shipped and the vessels containing them. The coverage can be divided, like other property/casualty areas, into commercial and personal lines. Commercial marine insurance consists of several types of coverages. Cargo policies, the largest segment, cover loss or damage to goods being shipped, while hull policies cover vessels shipping the goods. There are two types of hull coverage: bluewater hull, pertaining to oceangoing vessels, and brownwater hull, which covers ships and boats on rivers and lakes. Protection and Indemnity (P&I) insurance covers liabilities between ship owners.
Marine policies are also written for offshore oil rigs, marinas, shipyards, and piers. Different lines of ocean marine coverage appeal to different clients; importers and exporters usually buy cargo policies, while ship owners more often purchase hull and liability insurance.
Personal ocean marine policies have the same coverages, but pertain to yachts, pleasure crafts and other boats not used commercially.
Hardening P/C markets
Like virtually every other property and casualty line of business, the ocean marine market isn’t as soft as it used to be. But that doesn’t necessarily mean it’s hardening as drastically as, say, the homeowners market in Texas or the workers’ compensation market in California. To be sure, economic recession and the events of Sept. 11 have affected ocean marine along with the rest of the industry. One should bear in mind, however, that this line of insurance has been around for some 5,000 years, and the differences between it and other property/casualty lines make for different opportunities and setbacks.
According to the American Institute of Marine Underwriters (AIMU), a trade organization whose member companies write about 90 percent of marine business in the U.S., ocean marine premium totaled about $11.5 billion in 2000. The member organizations reported a combined ratio of 101.9 percent, compared to 110 percent for the property/casualty industry as a whole that year. Direct written premium rose 7.2 percent for ocean marine in 2000, compared to 6.4 percent for the rest of the industry.
Dierdre Littlefield, chairman of AIMU and senior vice president of special lines for the Americas at Swiss Re, explained how hardening markets don’t necessarily mean hard times for ocean marine. “I really think that the ocean marine market was really well positioned to benefit from this hard market, and also for the flight to quality because the U.S. marine market turned the corner faster than the property/casualty industry as a whole,” she said. “In each of the last five years, AIMU members have reported combined ratios lower than the entire property/casualty business. I really think that this should continue for 2001 and perhaps into 2002.”
Littlefield also pointed out ocean marine’s sustained premium growth: “The marine market has also increased premium growth more quickly than the property/casualty industry in the last couple of years….We actually had a faster growth rate in 2000. I think the 2001 results will also reflect double-digit growth for marine once they’re in, as well as 2002, which should be on par with, if not even greater than, the property/casualty business.”
A unique animal
Differences in the way the ocean marine market performs compared with the rest of the property/casualty market can be attributed to differences in the nature of the coverage itself and how it’s regulated. According to Littlefield, ocean marine is “global in scope. It involves the movement of goods internationally…. It’s very different from a static risk, like a building in the property area. It’s very dynamic.
“Ocean marine is less regulated than property/casualty business,” Littlefield continued. “You’re obviously dealing in international trade, so you’re dealing in goods that are moving around the world. The more individual state regulation you have, the more difficult it would be to continue the flow of U.S. commerce…. It’s more regulated on a federal basis than a state basis.”
Another major difference of ocean marine, according to Littlefield, is that the coverage involves “cargoes or vessels that are making ports of call throughout the world, so it involves different cultures, different infrastructures, different laws—a unique animal.”
Terrorism and recession
Despite the regulatory and operational distinctions ocean marine has from other property/casualty lines, the Sept. 11 terrorist attacks and the current economic recession have had marked effects on the coverage, as they have on other coverages. Ray Markley, president of Huntington Beach, Calif.-based cargo insurance broker InsureCargo Insurance Services Inc., noted that although the ocean marine market hardening is clearly not as severe as other property/casualty lines, there are noticeable differences in two areas.
“One is, right after the events of Sept. 11, war risk insurance, which is a component of a cargo policy—it’s increased relatively substantially from where it was,” Markley said. “A component of war risk is called Strikes, Riots, and Civil Commotion (SRCC)—that’s where you’d find terrorist acts coverage, or marine insurance risks. That rate went up on average anywhere from 50 percent to over 100 percent.”
Markley continued, “The other part of the marine equation is storage risks. That’s where you might have your cargoes… at some warehouse location, where they become inventory. A lot of those inventories are insured on cargo policies.… Those risks increase substantially because they’re often tied with the property insurance marketplace. Usually under a cargo policy, storage risks can be insured for relatively reasonable premium.” Storing cargoes in warehouses, however, exposes them to catastrophic peril risks such as earthquakes, windstorms, and floods.
“Because of capacity decreasing out there for those kinds of risks,” Markley said, “we find that that catastrophic peril restriction clause comes over to the cargo, and the marine insurance side is restricted.”
Capacity—drying up or not?
As for capacity, Markley indicated that it’s shrinking the fastest in the area of catastrophic perils. “That is really drying up very quickly. That’s really affected the reinsurance marketplace.… There was a little hardening of the marine market because of certain target commodities for most of 2001, but Sept. 11 just changed the entire insurance landscape.”
AIMU’s Littlefield mentioned, however, that rising SRCC rates don’t necessarily mean capacity is shrinking – war risk coverage is fundamental to ocean marine insurance: “War risk is something… actually sanctioned by the U.S. government. If merchant fleets and cargo shippers couldn’t get war risk insurance, then it would have brought commerce to a screeching halt during WWI and WWII.” Littlefield explained further, “It’s slightly different in the marine marketplace in that war risk is a covered risk. There are variations in terms of the definition of terrorism and how terrorism is being handled, but it is clearly not what we’re seeing in many of the property/casualty covers—a total exclusion. It’s handled differently because of the different nature of marine insurance.”
Caroline Lucas, an ocean marine underwriter in the Texas region for Fireman’s Fund McGee Marine Underwriters, a subsidiary of Allianz’s Fireman’s Fund in San Francisco that provides cargo, hull, marine liability and inland marine coverage, also noted that rising war risk rates haven’t affected capacity so far. “Most of the lines are hardening. Cargo is still not as hard as the other markets have been—there’s still a lot of competition for cargo. Because we have the marine company separate [from Fireman’s Fund], our capacity is still available,” Lucas said. “We are actively seeking new business. Most of my competition—I know they have started raising rates. I know they have broken out the war rates, whereas before some of the rates were inclusive. We now quote on both marine rates and war and SRCC rates —that is the trend.”
Personal lines—not hardening enough
Ocean marine personal insurance includes coverage for yachts, motor boats and other pleasure craft. While personal marine policies consist of many of the same coverages found in commercial ocean marine, the personal market isn’t exactly following an identical trajectory.
Scott Schneider, president of Middle Island, N.Y.-based personal ocean marine insurance provider Bruce V. Schneider Associates, explained the differences between the two markets. “For the last three years, underwriters have been trying to get rates up [in the personal lines yacht market], he said. “Up until this year they’ve really been unsuccessful…. The hardening in commercial ocean marine is 18 months ahead of personal ocean marine.
“So for about a year, commercial has been going up in rate,” Schneider continued. “This year, with reinsurance treaties and with heavy losses, not to mention the events of Sept. 11, these have all helped to solidify these companies’ positions… who want 20 to 40 percent rate increases. On the ocean marine personal lines side of that, this year we’re seeing rates anywhere from 6 to 20 percent higher, with probably the bull’s eye being right around 9 to 12 percent from last year. I haven’t noticed any markets really going away, though.… You still seem to have all the capacity, but you do have rates hardening.”
Risks on and off the high seas
The exposures intrinsic to ocean marine insurance are as unique as the coverage itself. Cargo, the most oft-written ocean marine line, is highly vulnerable to theft, as well as other risks.
“You’re exposed to all types of weather,” explained Lucas of Fireman’s Fund. “You’re exposed to piracy…. Ocean freight has to be hauled by a lot of people, and the loading and offloading is extremely vulnerable to losses…. We are watching the commodities—the types of commodities we’re covering. We are watching our origin and destination countries, and we are especially watching domestic moves after cargoes get to destination. That seems to be where a lot of the theft is occurring.”
InsureCargo’s Markley echoed Lucas’ explanation regarding theft. “Containers happen to get stolen between the port and the warehouse,” he said. “Instead of arriving at the warehouse for de-vanning, they are redirected to the trucker’s yard. A lot of theft occurs there, and some policies, therefore, say they’ll only insure on a direct route and unload at the warehouse—otherwise, no coverage.”
Both Markley and Lucas made mention of target commodities—goods that can be stolen and then quickly resold. “Target theft commodities,” Markley said, “may be anything related to the insides of a computer—microchips, motherboards or hard drives. There’s also the telecom arena. We have cellphones, pagers. And also high value clothing and apparel…. Those are certain commodities that have really been impacted. The theft on these items has been high.”
In an effort to contain risk of theft, Markley said ocean marine carriers are simply excluding it from policies. “We’ve had a lot of insurers tightening up that exposure by excluding it entirely. Especially if you move down into Mexico because the theft there is such a problem,” he noted.
Ocean marine and technology
Like other lines of insurance, ocean marine is beginning to utilize technology to reduce risk and improve efficiency.
CNA Marine has developed an automated cargo insurance system, OMNI, to help reduce cargo theft for its clients. The company recently launched its third release of the system, which is available to clients via the Internet.
Vice President Bob Schauer said each release has actually made the system more robust.”This last release really focused on the required cargo reporting like warehouse storage, and exhibitions,” he said. “Some customers have things based on units. They get a rate per container ship, not based on the value of the goods. We really have all the entire aspect of a cargo insurance policy on the web.”
According to Schauer, one of the purposes of OMNI is to capture all the information about the shipment before it leaves. “The key to theft is loss control,” he said. “You have to have your loss control guys. A lot of this is simple—you use certain kinds of tape, packing. The fact that these container ships are huge is a problem. There are a lot of containers that have to get loaded and taken off. Some are exposed longer than others. The guy that is first on and last out is least exposed as opposed to the guy who is last on and first out.
“Traditionally, those containers are pretty non-descript so it has to be an inside job,” Schauer continued. “So that’s important to know who is handling the goods along the way. California, Texas, New York and Florida stand out just due to the sheer volume of stuff that is going through those ports. I’m sure everybody has the problem, but those stand out due to the size. It is a problem everywhere. What we’re trying to do is provide loss control and also those target commodities—price it and clause the risks up so we can cover ourselves. The customer doesn’t want to hear that it was under their deductible. They want to hear that the loss control has been done and put in place.”
Fireman’s Fund McGee Marine Underwriters, on the other hand, has developed Internet-based certification for its cargo clients, according to Lucas. “In international cargo, you’re dealing with International Terms of Sale which spell out who’s responsible for what,” she explained. “Many of them require certificates of insurance. These are specific insurance certificates covering each specific shipment.
“There may be a letter of credit involved,” Lucas continued, “in which case a bank has specific wording or coverage it’s requiring. So these insurance certificates are very important because that’s how these people get paid.”
Fireman’s Fund McGee currently has an online issuance system for these insurance certificates, which otherwise require time-consuming paperwork. Lucas said that the company expects to have a new and improved system, FOCUS, up and running later this year.
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